Earnings Call Transcript - BRSP Q3 2021

Operator, Operator

Greetings and welcome to the BrightSpire Capital Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Palamé, General Counsel. Thank you, sir. You may begin.

David Palamé, General Counsel

Good morning, and welcome to BrightSpire Capital's Third Quarter 2021 Earnings Conference Call. We will refer to BrightSpire Capital as BrightSpire, BRSP or the company throughout this call. Speaking on the call today are the company's President and Chief Executive Officer, Mike Mazzei; Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially, including the continuing potential adverse effects associated with COVID-19. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-Q and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, November 3, 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 now I'd like to turn the call over to Mike Mazzei, President and Chief Executive Officer of BrightSpire Capital. Mike?

Mike Mazzei, President and Chief Executive Officer

Thank you, David. Welcome to our third quarter earnings call. I would like to start by wishing everyone well, and I thank you for joining us today. Starting off with some key financial highlights. For the third quarter, adjusted distributable earnings were $0.26 per share, up 30% from last quarter. Our current liquidity as of November 1 stands at $367 million, and our undepreciated book value per share is $12. The reduction in book value from the prior quarter reflects the write-off of the L.A. Mixed-Use mezzanine loan, which I will discuss in my remarks later. With respect to our dividend, I am pleased to report our Board of Directors has approved an increase in our fourth quarter dividend to $0.18 a share. This is up from $0.16 in the prior quarter and is the third increase since reinstating our dividend earlier this year. The increase is supported by the cost savings realized from the internalization of management and the continued successful execution of our overall business plan. Our goal is to further increase our dividend as we reach full deployment of our cash balances. Looking at our third quarter performance, we had a solid quarter in capital deployment, which Andy will discuss in more detail. At a high level, in the last 12 months, we have closed on or committed to 69 loans totaling $2.1 billion. Also, in the third quarter, our largest non-accrual loan, the San Jose hotel, has been reinstated to accrual status without loss. The borrower is emerging from bankruptcy, and the property will open as a newly rebranded Signia Hotel under Hilton's umbrella. During this last quarter, we have steadily increased our loan originations outside of Multi-family to include more middle-market office properties. Further, subsequent to quarter end, we have committed to a Multi-family mezzanine loan with a repeat borrower that has a strong performance track record with BrightSpire. Going forward, we will continue to selectively consider mezzanine lending opportunities, but only in situations where we have the wherewithal to fund the first mortgage, if necessary. For the remainder of 2021 and into 2022, our plan is to continue to redeploy company cash into new loan originations and substantially complete the rotation of our asset portfolio and liability structure with an eye toward issuing our third CLO. Finally, I would like to discuss the write-off of the remaining book value of $98 million in the mezzanine participation interest on the L.A. Mixed-Use property. As you may recall, we retained a junior mezzanine participation interest in connection with rescue capital that came in the form of a $275 million senior participation in that mezzanine loan. This was funded and controlled by a substantial third-party investor in September of 2020. The existing first mortgage, mezzanine and EB5 loans went into maturity default this past July. Just last month, we were notified that the same private investor in that senior mezzanine participation exercised their right to purchase the defaulted first mortgage loan. This mortgage had a loan balance of approximately $950 million and a fully committed amount of $1.035 billion. While the hotel at the property has efficiently opened to business, the sale of the hotel has still not yet been achieved. Furthermore, sales of additional condo units have also been non-existent. We have been in dialogue with the key parties regarding a possible restructuring and the situation remains very fluid. However, with this recent change in the ownership of the first mortgage, there is an increased likelihood of a mortgage foreclosure on the entire capital stack. While we have not yet received a formal foreclosure notice, we have been advised that this may occur. A foreclosure action would clearly result in a substantial negative impact on any potential recovery. This recent change in circumstances, along with continued stagnant property and condo unit sales has resulted in a write-off of the investment. Please refer to the past and current disclosures in our Form 10-Q for more details. Now, before turning it over to Andy, I would like to close by mentioning an important new addition to the BrightSpire Board. Last month, we announced the appointment of Kim Diamond as a new Board member. As a former founding executive of Kroll Bond Rating Agency and Managing Director at Standard & Poor's, Kim has more than 30 years of experience in commercial real estate and risk oversight. Following her appointment, the BrightSpire Board will now have five independent directors. We look forward to working with Kim and drawing upon her vast experience as we continue to grow our business. And with that, I would now like to turn the call over to our Chief Operating Officer, Andy Witt. Andy?

Andy Witt, Chief Operating Officer

Thank you, Mike, and good morning, everyone. My comments today will focus on BrightSpire's operational highlights and the ongoing execution of our plan to simplify the business while continuing to grow earnings. The company made substantial progress during the third quarter on a number of key objectives, including capital deployment and asset and portfolio management initiatives. We remain focused on managing the existing portfolio while continuing to deploy capital in our middle-market lending strategy. As previously reported, during the third quarter, we executed on the company's second managed CLO and the first under the BrightSpire Capital brand. Additionally, we continued efforts to resolve non-accrual positions, a number of which are included in the pending $223 million loan portfolio sale, consisting of five term investments across seven positions. We anticipate closing this transaction in late 2021 or early 2022. Early in the third quarter, the company successfully executed on its second managed CRE CLO. The $800 million CLO is collateralized by interests in 31 floating rate mortgages secured by 41 properties with an initial advance rate of 83.75% and a weighted average coupon at issuance of L plus 1.49% before transaction costs. The structure features a two-year reinvestment period and further diversifies our funding sources and reduces our cost of capital. Our first $1 billion managed CLO executed in October 2019 continues to perform and benefit from LIBOR floors. We have been actively replacing loans in that CLO, which at present is fully invested. Throughout the two-year reinvestment period, which ended October 19, 2021, BrightSpire replaced 13 loans for a total aggregate loan amount of $537 million. With the reinvestment window now closed on our first managed CLO, we have begun focusing on a third CLO, which we expect to execute in the mid-2022 time frame. Our originations platform remains active with a continued focus on the middle-market in high-growth geographies. During the third quarter, the team originated 18 senior loans with an aggregate commitment amount of $513 million, of which $458 million was initially funded. All of these investments are first mortgages on cash flowing assets, the majority of which are acquisition financing. During the third quarter, two loans paid off for a total of $179 million, resulting in positive net deployment of approximately $280 million. Subsequent to quarter end, we have closed on four investments for an aggregate commitment amount of $86 million. There are an additional 13 loans in execution with an aggregate commitment amount of $405 million, resulting in a total of 17 loans totaling $491 million to date, scheduled to close in the fourth quarter. We anticipate an uptick in loan repayment activity over the next several quarters for a number of reasons, including pent-up demand due to COVID, combined with the attractive relative rate environment and economic expansion. As previously highlighted, our portfolio is presented as three distinct segments: one, senior and mezzanine loans and preferred equity; two, net lease real estate and other real estate; and three, CRE debt securities. As of September 30, 2021, excluding cash and net assets on the balance sheet, senior and mezzanine loans and preferred equity is comprised of 90 investments and an aggregate at-share net book value of approximately $1 billion or 84% of the portfolio. The loan portfolio remains diversified in terms of size, collateral type and geography, given our recent originations activity. The portfolio has lower average loan balances with a higher focus on Multi-family and office properties. Looking ahead, the majority of the company's capital will be allocated towards this segment and more specifically to first mortgages. However, as Mike mentioned, we are starting to see mezzanine debt opportunities and are currently in execution on a Multi-family mezzanine loan. Net lease real estate and other real estate is comprised of 12 investments and an aggregate at-share net book value of approximately $153 million or 12% of the portfolio, in line with last quarter. CRE debt securities, a segment which includes CMBS and one remaining private equity interest, was comprised of six positions and an aggregate at-share net book value of $48 million or 4% of the total portfolio at quarter end. Subsequent to quarter end, we sold one position for $5 million of proceeds, resulting in a small gain. Eighty-nine percent of the pro forma remaining value in this reporting segment is associated with bonds subject to risk retention provisions through June 2022. At that point, we will explore a sale of the risk retention securities. In summary, we continue to make good progress in transforming our portfolio composition towards senior mortgage loans that deliver current and predictable earnings. Looking ahead, the execution of certain portfolio management initiatives, coupled with a strong fourth quarter loan pipeline, has BrightSpire well positioned to continue the positive momentum as we head towards the year-end. With that, I will turn the call over to our Chief Financial Officer, Frank Saracino, to elaborate on the third quarter results.

Frank Saracino, Chief Financial Officer

Thank you, Andy, and good morning, everyone. Before discussing our third quarter results, I want to mention that we expect to file our Form 10-Q today. In addition, I would like to draw your attention to our supplemental financial report, which is available in the Shareholders section of our website. The supplemental continues to provide asset-by-asset details as does our Form 10-Q. With that, let's turn to our third quarter results. We reported total company adjusted distributable earnings, which excludes realized losses and fair value adjustments of $35 million or $0.26 per share. We also reported a total company GAAP net loss attributable to common stockholders of $70.1 million or $0.54 per share and a distributable loss of $68.4 million or $0.51 per share. Both the GAAP and the distributable loss reflect the $98 million fair value adjustment associated with our mezzanine loan participation interest in the L.A. Mixed-Use property that Mike described in detail. During the third quarter, total company GAAP net book value decreased from $11.75 to $11.04 per share, and undepreciated book value decreased from $12.66 per share to $12. This change is primarily due to the fair value adjustment noted earlier. As Andy mentioned in his remarks, close of the loan portfolio sale transaction is anticipated in late 2021 or early 2022. We plan to utilize the proceeds from the transaction to pay off the GSAM preferred financing. The result of doing so is a net projected increase to our September 30, 2021 undepreciated book value of over $0.50 per share. This increase reflects the combination of recording the investment gains associated with the sale as well as our triple-net warehouse distribution portfolio reverting back to BrightSpire 100% at-share ownership. We have provided a narrative summary of this investment in this quarter's Form 10-Q. Looking in more detail at the third quarter adjusted distributable earnings. Quarter-over-quarter growth primarily reflects the company's appointment of idle cash, reinstatement of our largest loan to accrual status and the full realization of the cost saving benefits from the internalization of our management contract, which was completed midway through the second quarter. On an annualized basis, we anticipate generating operating cost savings of approximately $16 million per year or approximately $0.12 per share from the internalization. Turning to our dividend. Given our growth in adjusted distributable earnings, along with our improved operational performance and business outlook, we declared a dividend of $0.18 per share for the fourth quarter of 2021, up from $0.16 per share last quarter. The fourth quarter dividend is payable on January 14, 2022, to shareholders of record as of December 31, 2021. Moving to our balance sheet. Our total at-share undepreciated assets stood at approximately $4.4 billion as of September 30, 2021. Our debt-to-assets ratio was 61% and net debt-to-equity ratio was 1.6x at the end of the third quarter, up from 1.3x at the end of the second quarter. This increase was primarily driven by new loan originations. In addition, our liquidity as of today stands at approximately $367 million between cash on hand and availability under our bank facility. Looking at risk rankings and CECL reserves, our overall loan portfolio risk ranking at the end of the third quarter improved to 3.2 compared to 3.5 at the end of the second quarter. This change is primarily related to the borrower of our largest senior loan emerging from bankruptcy and reinstatement of the loan to accrual status as well as third quarter loan originations. And finally, our CECL provision was $43.7 million and represents approximately 1.3% reserved against our loans. This is essentially flat to the second quarter. That concludes our prepared remarks. And with that, let's open up the call for questions. Operator?

Operator, Operator

Our first question comes from the line of Tim Hayes with BTIG. Please proceed with your question.

Tim Hayes, Analyst, BTIG

Hey, good morning guys. First question around Century Plaza. I appreciate all the color in the prepared remarks and for being prudent with the write-down to zero. But Mike, can you maybe just walk through a scenario where you might have some recovery there? Now that the hotel is open, you had previously mentioned that there was a potential buyer lined up. I'm just curious what happened with those conversations and what it might take for you guys to see some recovery?

Mike Mazzei, President and Chief Executive Officer

Thanks, Tim, and thank you for the question. Can you hear me okay? This was a transaction that when I first joined the firm, I spent the first several months focused a disproportionate amount of my time on the rescue capital here. So this is a disappointment for us to have gotten to this spot. The underlying value of the asset is there. When I say there, I mean into our piece of the junior participation mezzanine as well—there's value there. Unfortunately, we do not have the capital and the wherewithal to play that through. Hence, why we brought the rescue capital in last year, albeit expensive. The backdrop also includes inflation and supply chain issues and replacement costs going up. So we really believe that there is value in our piece. But the culmination of the senior mezzanine participant buying the first mortgage for $950 million, which was the outstanding balance, along with the fact that the hotel sale has not yet been completed—I had said in my prepared remarks that the hotel sale would be critical—has not yet occurred. That sale would be at roughly $1 million a room for 400 rooms, which would significantly pay down the senior debt. We've also seen a lack of traction in sales and presales of condo units. With the acquisition of the first mortgage that happened in October and the delays we've had, it would be unreasonable not to anticipate that there's a foreclosure that's looming. That could be a binary outcome with a heavy bias toward foreclosure. We are in continued contact with the mortgage and senior mezzanine participant, which are the same party. Is recovery possible? There's value in our piece, but time and cost of funds matter. Based on what we've seen thus far, we think recovery is unlikely. There is a potential restructuring path with the private investor, where a UCC foreclosure is done. Because we're part of the mezzanine, we would be preserved in that process, and that may allow us to play through longer. But there is still a very high cost of capital imputed upon the asset now that the private investor owns the first mortgage. Discussions have stopped at this time; it doesn't mean they can't pick up later, but we've spent considerable time with them and have come to an impasse thus far. It is also possible that through a mortgage foreclosure there would be a public auction where third-party bidders could see that there is value beyond the senior mezzanine participation. But that would have to happen quickly because time and the cost of capital will weigh on the value of our piece. So it is possible that if there was a mortgage foreclosure and that moved along quickly, other bidders could step in and value the property beyond the senior participation, which could generate excess recovery. However, there are many variables that make that hard to predict. The takeaway is that lenders should not be in the mezzanine capital stack where they don't have the ability to fund the first mortgage and protect the position. That was the situation here, and this is the result. Does that answer your question?

Tim Hayes, Analyst, BTIG

Yes, definitely. I appreciate you walking through the different potential paths. So right now, it's at zero, so no economic impact to the financials going forward, which is good. Just wanted to get a sense for if there could be some upside. Now, just maybe turning to some of the other watchlist loans you've highlighted previously—Long Island City office, Claremont, Berkeley and the student housing portfolio—any updates to those assets worth passing along? Now that Century Plaza's at zero and the Fortress sale is under contract and Fairmont has been resolved, you don't have any more outside non-accrual. Just curious if you see any of these watchlist loans taking that spot or if there's any constructive updates to pass along?

Mike Mazzei, President and Chief Executive Officer

As we pointed out, the San Jose asset is now back on accrual status. We applaud the borrower's efforts to get through bankruptcy quickly and to keep funding the property, which is the reason we stuck by that borrower and did not charge default interest during that period. The borrower was funding, and we valued that. We've had situations where borrowers acted differently and our response was different; we've sold loans where borrowers were not helping address the issue. The other asset worth discussing is the Long Island City deals, both with the same sponsor. They are uncrossed. There is overall improvement in both assets. In one asset where we received a capital contribution from the borrower, there's been more retail leasing. In the other asset, there's more activity in the office. In the lesser occupied asset, the borrower did put up capital to fund negative carry. That was a loan we were considering selling, but the borrower came to the table with enough cash to fund the negative carry and we felt it made sense to work with the sponsor because over the next 12 months we expected far greater visibility into New York metro leasing versus selling the loan into current uncertainty. So we made a modification: a partial repurpose of some of our future advances. First, the sponsor's money will go ahead of us; then we'll repurpose some of our future advances to assist with negative carry on the back end. The sponsor will go ahead of us and fund future good-faith money for tenant improvements, if needed. We thought that getting another year's visibility in Long Island City, given the borrower's contribution, made a lot of sense. The second property has more occupancy to begin with and there is another lease in the works, so its negative carry is far less. The borrower has until February to discuss next steps with us. We are seeing positive activity there. The fact that the borrower put up money is meaningful, and we think 12 months of time will give us much more visibility than we have today.

Tim Hayes, Analyst, BTIG

Great, that's a good update. My last question around Fairmont, San Jose: when did you start putting that loan back on accrual? I'm curious how much interest income was recognized this past quarter from that asset and what we should expect next quarter.

Frank Saracino, Chief Financial Officer

Sure. Tim, it's Frank. The loan went back on accruing in September as it emerged from bankruptcy, and we picked up seven months of interest income in that recognition. That was about $6.8 million, or $0.05 per share. Going forward, we expect roughly $2.4 million a quarter from that loan, which is a little under $0.02 per share, and that's before financing. We are in the process of procuring financing for that loan at this point.

Tim Hayes, Analyst, BTIG

Good deal. We'll stay tuned on that. Thanks again for the time this morning.

Operator, Operator

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

Stephen Laws, Analyst, Raymond James

Hi, good morning. First off, appreciate the color on those assets that Tim went through. Thanks for the details. Andy or Frank, if you think about leverage and growth from here—you talked about the pipeline for us and generally said prepayments will probably pick up in the next couple of quarters—can you talk about the net portfolio growth expectation? And then maybe quantify what your leverage targets are assuming the majority of investments are in senior loans?

Mike Mazzei, President and Chief Executive Officer

Andy, do you want to touch on what we're experiencing in prepayments over the next few quarters and Frank can pick up the leverage piece?

Andy Witt, Chief Operating Officer

Sure. We've had relatively modest prepayments in recent quarters, and as we highlighted in the prepared remarks, we expect that activity to increase over the coming quarters. In the fourth quarter, we may see $200 million to $300 million of repayments. Going into next year, we anticipate higher prepayments on a quarterly basis. Our focus is to continue to add assets on a net basis to the portfolio, and we see our portfolio growing from where it is today to about $3.5 billion in loans here in the fourth quarter, somewhere in that neighborhood, and then continuing to grow throughout 2022. I'll turn it over to Frank for the impact on leverage.

Frank Saracino, Chief Financial Officer

Sure. As far as leverage, our debt-to-assets was at 57% last quarter and 61% this quarter. That will continue to grow into the fourth quarter. As we think into 2022, leverage could get into the high 60s and maybe touch 70%, depending on our ability to deploy capital and the timing of prepayments.

Stephen Laws, Analyst, Raymond James

Great. Appreciate the color there. Mike, you talked last quarter about some attractive suburban office, and you mentioned in your prepared remarks that you guys have been more active there. Can you give us more color—property type, geography—where you're seeing the most attractive investment opportunities and what we should expect to see increase in the mix of the portfolio going forward?

Mike Mazzei, President and Chief Executive Officer

First, let's talk about where we're targeting returns. Despite shifts across property types, we're still targeting low double-digit ROEs on balance sheet loans, and we hope to achieve above that—maybe another 100 to 150 basis points higher if we execute a CLO. We saw credit spreads continuing to tighten in the third quarter across other property types. Warehouse spreads with the banks also moved in and their advance rates have increased, keeping pace with the market. In Q3, we started to see Multi-family spreads tighten. Office property yields were in the mid- to high-3% range in many cases, and sometimes around 4%, depending on leasing at the property. Hotels are in the high-3s to high-4s. We're beginning to see activity in hotels— we've bid on a couple but haven't been successful. Multi-family demand remains strong; that's partly because there's been substantial CLO supply and issuance dynamics that have affected AAA spreads as we head into year-end, with LIBOR-related decisions affecting issuance and causing some spread movement. Underlying asset valuations: Multi-family rents have grown considerably in many markets. In acquisition deals we've done over the past year, borrowers are already pushing rents higher before renovation programs start. Replacement costs are up, exacerbated by supply chain delays, which is a headwind to new development and supportive of existing inventory, though it may extend borrowers' renovation timelines. We're not concerned on coverage for these loans today because debt yields provide coverage, but we do expect longer durations on some loans because borrowers may be behind on business plans due to appliance and labor shortages. Multi-family cap rates have compressed considerably; we're seeing some cap rates in the low 3% area and even high 2% in markets with double-digit rent growth. That cap rate compression is a concern given a more hawkish Fed outlook; we are pushing back on some Multi-family deals this quarter where valuations compressed too quickly. Regarding other property types, we're continuing to find value in middle-market suburban office markets—locations with a drive-to-work pattern rather than mass transit. Those markets provide attractive risk-reward and loan sizes that fit our preferred profiles, typically in the $50 million and below range. We're also starting to see more hotel opportunities, albeit competition is active for those assets.

Stephen Laws, Analyst, Raymond James

That's great color. Thanks for the comment.

Operator, Operator

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

Matthew Howlett, Analyst, B. Riley

Thanks everybody for taking my question. Mike, big picture—you're year-over-year into this transition and you've talked about getting the dividend up to peer levels and trading above NAV. How long do you think it'll take to 'light the cigar,' so to speak? Where are we—how far away are we? Some general color, please.

Mike Mazzei, President and Chief Executive Officer

We think 2022 is the year where that can happen. The basic strategy is straightforward: continue as a pure-play commercial mortgage REIT, deploy cash into first mortgages and selective mezzanine loans where we can defend and protect the position, and stay one step ahead of prepayment activity, which we expect to pick up. We're budgeting for increased prepayments, though they may not occur exactly as forecast. Given current valuation movements and pent-up credit demand, we expect more prepayments. That does not change our plan to get to our targeted positioning in 2022. We will also try to increase our average loan size, especially as we do more office work. Regarding the triple-net portfolio, we're holding the positions we have and added more disclosure on the Albertsons triple-net lease sale since that asset will revert back to BrightSpire 100% at-share ownership when the sale of assets to Fortress closes, likely this quarter or in early next year. We own that asset at roughly a 7% cap rate and it yields about an 11% ROE based on current debt in place, so we don't anticipate selling it now. There is also a CMBS in place with a defeasance payment that makes selling less attractive before maturity. Finally, the conduit/gain-on-sale business is not part of our 2022 budget. That market is currently tight and competitive, and we do not see it as a material contributor to 2022 earnings in our plan.

Matthew Howlett, Analyst, B. Riley

So you're thinking about reentering that business eventually, but not budgeting it for 2022?

Mike Mazzei, President and Chief Executive Officer

It is something to consider, but it is not part of our earnings expectation for 2022 given current market dynamics.

Matthew Howlett, Analyst, B. Riley

I know you get asked about your largest shareholder selling; anything you can give on the technical issue—what they've conveyed to you? Is there anything you could do, such as buying some of their stake back?

Mike Mazzei, President and Chief Executive Officer

The best thing we can do is perform, which should be reflected in the stock price. Their largest shareholder, TBRG Digital, has been supportive—they gave us the green light to proceed with internalization. They have stated publicly they are sellers of everything non-digital, so we expect further sales, but there's no specific timetable we are aware of. They reduced holdings by 13 million shares: about 10 million came from the secondary offering and approximately 3 million were embedded in the sale of other assets. They are down to about 35 million shares, give or take. Given the reduction, they may be more deliberate, though that's speculative. The fact that we're paying and increasing the dividend may influence their timing as well. Ultimately, our focus is to perform. Regarding buybacks, given where shares trade and that we just internalized management, we don't think a buyback is compelling now. We don't want to reduce scale and increase G&A as a percentage of equity. Our goals for 2022 are simple: deploy capital, grow earnings, and then consider buybacks if appropriate.

Frank Saracino, Chief Financial Officer

To clarify, post-secondary they were down to 38 million shares, but about 3 million shares are embedded in the wellness business sale that they completed earlier this year. That transaction will close at the beginning of 2022.

Matthew Howlett, Analyst, B. Riley

Great, thanks a lot. Appreciate it.

Operator, Operator

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

Steven Delaney, Analyst, JMP Securities

Hey, good morning, everyone. Thanks for taking my question. Cap rates—we're hearing about compression everywhere, and Mike you alluded to it with respect to Multi-family. When we look at the plan for going forward and simplification around the bridge loan business, it raises the question of the net lease and other real estate portfolio of about $700 million. Could you comment specifically on that large $300 million asset in Norway, given the uniqueness and size—could you find a strong bid for it given it has a nine-year duration?

Mike Mazzei, President and Chief Executive Officer

Owning an asset in Norway is not something we spend a lot of time doing; it's unique. The important disclosure point is that we have a 15-year lease financed with a 10-year debt maturity, and I believe that debt comes up in about 2025—so there's a five-year lease overhang that needs to be addressed. We should not sell that asset before working with the tenant/borrower to extend the lease or otherwise structure a mutually beneficial transaction that allows us to extend financing. There would likely be a bid for the asset given the tenant's credit—this is effectively their world headquarters for a major company—and the tenant has performed well, particularly with energy stocks doing well this year. We have hedged the euro exposure for about another 2.5 years, and that hedge has been effective. We'll look at extending the hedge if it becomes favorable. But from a timing perspective, addressing the lease extension and refinancing closer to 2025 makes sense before seeking a sale.

Steven Delaney, Analyst, JMP Securities

Great. That's wonderful color. Lastly, in a broad sense, hotels seem to be coming back into favor with opportunistic and stressed buyers returning to the sector. We're seeing loans trade at par and properties selling. How are you feeling about the hotel sector as you look at your hotels and the market generally? For the right property, debt yields can be attractive versus Multi-family and office.

Andy Witt, Chief Operating Officer

On the hotel sector, we are seeing a rebound. Performance at hotels in our portfolio is improving. On the origination side, we've started to look at select opportunities in hospitality and have become more active in that space. We haven't closed on any of those origination opportunities yet, but there are compelling spots, and we'll look to do more there.

Steven Delaney, Analyst, JMP Securities

Thanks, Andy. Appreciate the color. Stay well.

Operator, Operator

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

Mike Mazzei, President and Chief Executive Officer

Thank you all for joining us, and we look forward to speaking again at the end of quarter four. Have a good day.

Operator, Operator

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