Brightspire Capital Inc (BRSP) 2021 Q2 法說會逐字稿

Greetings, and welcome to the BrightSpire Capital, Inc. Second Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Palame, General Counsel. Thank you, sir. You may begin.

Good morning, and welcome to BrightSpire Capital's Second 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 potential adverse effect of and heightened risks 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, August 4, 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?

Thank you, David. Welcome to our second quarter earnings call. I would like to start by wishing everyone well, and I thank you for joining us today. The company's momentum from last year has carried into 2021 and continues to build. We are rapidly deploying capital into our more focused investment strategy while we resolve specific assets and execute on key business objectives. And in doing so, we have grown earnings and our quarterly dividend.

Today is our first earnings call as BrightSpire Capital. On behalf of the BrightSpire team, we are very excited about our company's rebranding following the internalization of our management and operating functions. Right out of the gates, we issued our first CLO under the BrightSpire name in July. We announced the sale of 5 co-invest assets. And today, we announced an increase in our quarterly dividend to $0.16. With respect to the internalization, BrightSpire is rapidly becoming a fully operational standalone company and is on track to realize the anticipated cost savings from this transformative event. As previously stated, we believe being an internally managed company is simply a better structure for shareholders. As the company grows its equity base, our shareholders will benefit from increased scale and operating efficiencies. The internally managed structure is a more transparent organizational model with improved alignment between the company and our shareholders.

Turning now to some key financial highlights. For the second quarter, we had adjusted distributable earnings of $0.20 per share. Our liquidity as of August 2 stands at $381 million. Our undepreciated book value per share for the second quarter is $12.66, down from $12.84. Our book value this quarter was negatively impacted by the transaction we entered into to sell certain assets that no longer fit our business model. However, when all aspects of this transaction are completed, the net result will be substantially in line with book value. Frank will provide greater detail in his remarks.

With respect to our dividend, as I mentioned, our Board of Directors has approved an increase in our third quarter dividend to $0.16 a share. This is up from $0.14 in the prior quarter and is the second increase since reinstating our dividend earlier this year. The increase is supported by the cost of savings realized from the internalization, the continued successful execution of our overall business plan, as well as the improved return on equity we have achieved as a result of our recently issued CLO.

During this last quarter, we have continued to steadily redeploy capital into floating rate first mortgage loans. Since commencing new originations in the fourth quarter of 2020, we have closed on or committed to 50 loans totaling over $1.5 billion. While much of our lending activity has been our multifamily properties, we are beginning to see increased loan demand in other property types as the pandemic continues to wind down and investment sales activities increase. This is especially the case in office properties where we are seeing good risk/reward opportunities, given that the middle market suburban office sector has been less impacted from the pandemic than most CBD office.

For the remainder of 2021, our plan is to continue to redeploy company cash into new loan originations and further rotate our asset portfolio and liability structure with an eye toward issuing our third CLO. We will also look to close our recently announced asset sale transaction and utilize those proceeds to pay off the preferred equity financing the company completed in June of 2020. Finally, we will continue to focus on resolving any remaining nonearning or underperforming assets.

In closing, BrightSpire is well on its way to evolving its asset base into a pure-play portfolio of first mortgage bridge loans that can deliver current and predictable earnings. We remain confident that the successful execution of our stated business plan throughout the remainder of 2021 will lead to additional growth and stability in both our earnings and our dividend. I would now like to turn the call over to our Chief Operating Officer Andy Witt. Andy?

Thank you, Mike, and good morning, everyone. My comments today will focus on BrightSpire's operational highlights and continued execution of our business objectives. As Mike underscored in his remarks, we have made meaningful progress on a number of fronts, most notably, entering into an agreement to sell a portfolio consisting of 5 co-investments, executing on a managed CLO, and continuing to originate new senior mortgages. Last month, the company entered into a transaction totaling approximately $223 million to sell 7 loans associated with 5 co-investments. This transaction accelerates the disposition of longer-dated equity-oriented investments that are no longer core to our strategy. Upon completion, the total transaction is expected to be substantially in line with the combined carrying value for these assets. 4 of the 5 investments included in the sale serve as collateral for the preferred financing the company executed in June of 2020. As such, we anticipate using the proceeds from this transaction to retire this financing.

In July, the company successfully executed on our second CRE CLO. The $800 million managed CLO is collateralized by interest 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 149 before transaction costs. The structure also features a 2-year reinvestment period. The transaction further diversifies our funding sources and reduces our cost of capital while generating approximately $49 million of liquidity for new originations opportunities. Additionally, our existing $1 billion managed CLO executed in October of 2019, continues to perform and benefit from LIBOR floors at the underlying loan level. We have also been replacing loans in that vehicle as the reinvestment window remains open through October of this year.

Our originations platform remains active. During the second quarter and through today, the team has originated 25 new senior loans with an aggregate commitment amount of $729 million. All of these investments are first mortgages, the majority of which are acquisition financing on cash-flowing assets. As highlighted last quarter, the investment portfolio is now presented as 3 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 June 30, 2021, excluding cash and net assets on the balance sheet, senior and mezzanine loans and preferred equity is comprised of 75 investments in an aggregate at share net book value of approximately $1 billion or 83% of the portfolio, up from 81% last quarter. 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 multifamily and office properties. We anticipate allocating the majority of our capital towards this segment of our portfolio and more specifically to senior mortgages as we continue to build company earnings.

Net lease real estate and other real estate is comprised of 12 investments and an aggregate at share net book value of approximately $157 million or 13% of the portfolio, in line with last quarter. CRE debt securities, a segment which includes CMBS and one remaining private equity interest, is comprised of 6 positions and an aggregate at share net book value of $48 million or 4% of the portfolio, down from 6% at last reporting. During the quarter, the company sold 4 CMBS positions related to one B-pieces transaction for net proceeds of $29 million. The majority of the remaining value in this reporting segment is associated with bonds subject to risk retention provisions through June 2022.

Pro forma for the previously highlighted portfolio sale, nonaccrual assets in our portfolio will be reduced to loans associated with 2 significant investments. The 2 remaining investments include the $165 million San Jose, California hotel senior loan and preferred equity investment and the $98 million LA mixed-use loan. The San Jose hotel loan was placed on nonaccrual during the first quarter of this year after the borrower closed the hotel and filed Chapter 11 bankruptcy. We expect the borrower to emerge from bankruptcy in the third quarter, at which time the loan would become a performing senior mortgage investment. With respect to the LA mixed-use loan, it has passed its July 9 maturity date and the lending group is in discussions with the borrower. This loan will remain on nonaccrual. Additional information on these and other specific loans will be included in the asset-specific summary section of the company's Form 10-Q filing.

In summary, the company has made substantial progress rotating the portfolio composition towards loans, and more specifically, senior mortgage loans. We will continue to remain focused on the existing portfolio while building and executing on a pipeline of new originations opportunities in order to drive earnings growth to support increasing dividend payments to shareholders. With that, I will turn the call over to our Chief Financial Officer, Frank Saracino, to elaborate on the second quarter results.

Thank you, Andy, and good morning, everyone. Before discussing our second quarter results, I want to mention that we expect to file our Form 10-Q tomorrow. 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 supplement continues to provide asset-by-asset details as does our Form 10-Q. With that, let's turn to our second quarter results.

We reported total company adjusted distributable earnings, which excludes realized losses and fair value adjustments of $27 million or $0.20 per share in the second quarter of 2021. We also reported a total company GAAP net loss attributable to common shareholders of $19.7 million or $0.15 per share and a distributable loss of $27.1 million or $0.20 per share. The GAAP net loss attributable to common shareholders of $19.7 million and a distributable loss of $27.1 million reflects our recording of $54 million in fair value adjustments. These adjustments are primarily associated with 2 items. First, the July announcement to sell certain co-investments. I want to highlight that GAAP accounting principles require us to value each individual investment at the lower of cost or market. As such, 3 investments with allocations below carrying value resulted in a second quarter fair value write-down. Additionally, there are 2 investments with expected gains relative to their carrying value that will be recognized at closing.

The second item is the sale of 4 CMBS positions related to 1 B-piece transaction, which resulted in a realized net loss of approximately $22 million. I want to note that $31 million was already recorded as an unrealized loss, and as a result, there was a gain of $9 million relative to our most recent markdown basis.

During the second quarter, total GAAP net book value decreased from $11.98 to $11.75 per share, and undepreciated book value decreased from $12.84 to $12.66 per share. This change is primarily due to the fair value adjustments associated with the sale transaction.

As Mike and Andy both mentioned in their remarks, with the close of the sale transaction, we plan to utilize the proceeds to pay off the 5-pack preferred financing. The result of doing so is a net projected increase of over $0.50 relative to our June 30, 2021 undepreciated book value. This increase reflects the combination of recording the investment gains associated with the sale as well as the result of the remaining asset under the 5-pack preferred financing reverting back to BrightSpire 100% ownership.

Looking in more detail at the second quarter adjusted distributable earnings, the quarter-over-quarter growth primarily reflects the company's significant deployment of idle cash during the first half of the year, including a full quarter's impact of first quarter originations of $475 million as well as contributions from the $402 million invested in the second quarter. We also started realizing the cost saving benefits from the internalization of our management contract which was completed on April 30.

On a run rate basis, we continue to anticipate generating operating cost savings of approximately $16 million per year or approximately $0.12 per share.

Turning to our dividend. Given our growth in adjusted distributable earnings, along with our improved operating performance and business outlook, we declared a dividend of $0.16 per share for the third quarter of 2021, up from $0.14 per share last quarter. The third quarter dividend is payable on October 15 to shareholders of record as of September 30, 2021.

Moving to our balance sheet. Our total at share undepreciated assets stood at approximately $4.3 billion as of June 30, 2021. Our debt to assets ratio was 57%, and net debt-to-equity ratio was 1.3x at the end of the second quarter, a slight increase compared to the first quarter. This increase was primarily driven by new loan originations. In addition, our liquidity as of today stands at approximately $381 million between cash on hand and availability under our bank credit facility.

Looking at risk rankings and CECL reserves, our overall risk ranking at the end of the second quarter improved to 3.5 compared to 3.6 at the end of the first quarter. This change is primarily related to the improved performance of certain loans and second quarter loan originations which have a day one pre-rating. Our CECL provision was $42.9 million and represents approximately 1.4% reserve against our loans. This is a quarter-over-quarter increase of $1.2 million and is primarily driven by new originations. That includes our prepared remarks. And with that, let's open the call for questions. Operator?

(Operator Instructions) Our first question comes from Tim Hayes with BTIG.

This is [Ethan] on for Tim. My first question would be, you guys have made significant progress on your strategic initiatives since the end of the first quarter by completing internalization, increasing capital deployment, divesting nonaccrual loans and raising the dividend. I just want to kind of get a feel for how you guys rank your strategic initiatives today. What's your greatest focus and how quickly do you think you'll be able to accomplish those goals?

Thank you for joining. We realize there are a couple of calls going on at the same time. Thank you for being here. With regard -- this is Mike. With regard to the rest of 2021, as we kind of pretty much said in the remarks, the goals are to continue to deploy the cash balances we have on the balance sheet today. I think we were projecting getting somewhere down to about $125 million of actual cash and then figuring out how much we think we need to manage liquidity from that point forward. We're also trying to revolve away from multifamily and look for other opportunities. The property types, we think those opportunities will present themselves as investment sales activity, especially in other property types, are expected to pick up dramatically as we get into Q4.

So perhaps different property types and some more structured, highly structured transitional loans to add incremental ROE around the edges. The overall plan, though, is to continue to evolve the portfolio toward more of a, as I said in the remarks, a pure-play commercial mortgage REIT portfolio. So continue to do first mortgage loans and on transitional assets with an eye toward potentially executing our third CLO. And then this asset sale that we've undertaken here, that will also further move the portfolio because as those assets move off and these new first mortgages come on, that kind of counts as a full game there because we've got assets that are coming off that are more development, predevelopment type non-income-producing assets versus the first mortgages we're putting on today.

So continued portfolio evolution toward more of a pure-play commercial mortgage REIT are the goals. Issue the third CLO, increased earnings, as we said, and hopefully, the dividend will follow and the stock price will follow as well. And then I think if everything fell into place, potentially toward the end of the year we could look at what we could potentially do around more capital, whether maybe that's a small pref equity issue to increase the capital base and to really more fully maximize the benefits of being internally managed. Whereas we said in the remarks, as we grow the capital base, we're no longer paying that external management fee of a point and a half and kick or above a pref return. And so all of that falls to the bottom line. So those are kind of the basic goals I would say between now and the end of the year.

All right, great. And my next question is, the weighted average risk rating for you guys improved slightly quarter-over-quarter and the CECL reserve as a percentage of the portfolio declined. Can you just touch on any notable loan upgrades or downgrades this quarter and what drove those changes?

Yes. I mean we had -- I don't think it was one notable loan. We had 5 loans that went from a 4 to a 3 and one went from a 3 to a 2, all kind of small moving and was kind of offset by some new loans coming on. But there wasn't any one particular loan that moved drastically.

I think you're seeing generally, as the pandemic improves, albeit we're all concerned about the Delta variant spike, but generally as the economy has improved and the pandemic has improved in terms of its effects on the economy, we were very -- we felt it was appropriate to add higher risk ratings going into the pandemic, and I see you're starting to see some of that, if you will, melt away as we emerge from the pandemic.

Thank you. Our next question comes from Stephen Laws with Raymond James.

Mike, I guess to follow-up on that, it kind of seems like across the group it's kind of 2 ways to go, I guess, right? You can do the multifamily/industrial/life sciences that fits well into CLOs on lighter transitional stuff or some are looking at taking more ROE on some stuff that maybe doesn't go into CLOs. So kind of wanted to get your thoughts on the mix there and kind of what is that incremental return you need to start looking at loans that maybe don't fit into a CLO? I know you said in your prepared remarks, you're targeting or thinking about a third CLO, so I know that is a focus.

Steve, thank you for joining us. Thanks for the question. This is Mike. Okay. So we -- I think there is a selective amount of capital that we would use for non-CLO assets. We've had some very good experience in some mezz loans that we've created that were behind some development loans. I think the key there is to make certain that any mezz loan we do is behind a senior loan that either we're doing the senior loan and laying it off or it's a senior loan that we can step in and fund and cure, i.e., something that we would have done directly but have chosen just to do the mezz.

So we'll look for those more selective transactions. And we do think that we'll see more of those opportunities as investment sales pick up. Overall, when we entered the market in Q4, multifamily and lending spreads in general were very robust. We've seen over the past several quarters loan origination spreads have probably come in a solid 50 basis points to the low 300s. However, commensurately with that, we have seen the bank lines improve as well. So the advance rate on the warehouse lines have come in roughly 5, in some cases 10 points, depending on the deal. And in terms of spread, lending spreads, those spreads have come in somewhere between 25 to 40 basis points. In addition to that, our AAA on our CLO executed at a rate of LIBOR plus 115.

The only spreads that were better than ours in the market were spreads that were 100% multifamily, not only in the first pool, but in the reinvestment parameters as well. And those priced a nickel to a dime higher. But we priced best-in-class for a mixed pool of assets. The advance rate was also very good at close to 84%. So while we've seen the compression in some lending spreads, we've also seen a compression on the liability side as well. And to give you an example, the loans that we originated post-COVID that we started in the fourth quarter of last year are closing. We probably saw those ROEs improve several hundred basis points from warehouse line into the CLO. A lot of that is attributable to the advance rate being 84%.

Going forward, we are seeing the level of interest in multifamily has been enormous, and it's reflected itself in the valuations of the underlying assets. We are seeing our borrowers/investors starting to acknowledge that and pull back. And while multifamily valuations have been supported by the lack of building, population growth, wage growth, and we're lending materially in the path of growth in the south, so we're seeing that demographic shift is also giving us a lot of support in valuations. We are starting to see some pushback from investors on valuation, and you're starting to see us push back on credit.

And I will say that consistently across the line, we're noticing other lenders are drawing the line in the low 300s. And finally, what I'd say -- on multifamily. So finally what I'd say is, it really comes down to investment sales. What we're hearing from the brokerage community is that there's a backlog, that assets are coming to market now and will be coming to market after Labor Day most notably. So we are expecting to see a dramatic uptick in investment sales, and we're hoping that in that, we'll see a lot more opportunity in more diverse lending away from the multifamily sector.

Great. Thanks for the detailed color there, Mike. Frank, I had a couple of questions around the kind of expenses under the internal structure to specifically, kind of how do I think about noncash comp, equity comp, if it's running kind of maybe an average of $5 million a quarter in the first half of this year? Under the internal structure, how do I think about that line item going forward? And the second one is any onetime expenses in 3Q we need to account for around the CLO? Or are all of the expenses related to that deal able to be amortized over the life of the transaction?

Thanks, Steve. So I'd answer the first question, the equity compensation that's being -- that's running through that's getting adjusted out of distributable earnings, that amount will remain constant. The equity award that we received at the beginning of the year, that should be consistent kind of going forward into future years. So I think that's kind of a number you can use right now. As far as onetime items for 3Q, the CLO and those other costs will be amortized over a period of time, so that really won't move the needle, but not expecting any onetime abnormal expenses for 3Q.

Our next question comes from Matthew Howlett with B. Riley.

Mike, I really like the comments in terms of maybe accessing a nondilutive preferred at the end of the year. So can we assume that you're going to be sort of deploying all your excess cash by the end of the year, and you could look to access some preferred equity towards the end of the year?

I think there's something that -- first of all, welcome to the call. Thank you for the question. I think that's something that we absolutely can have an eye toward. When you look at how far we've come in terms of evolving the portfolio, the internalization, the CLO, all the things that we've accomplished, we'll probably look at doing something with our bank line at the end of the year in terms of extending that. So I think at that point in time, towards the end of the year, we'll look at the capital structure and see where the stock price is and see what we can do.

The goal is, the whole point of being internally managed, is to reap the benefits of those economies of scale. So first and foremost, we want to grow earnings, grow the dividend, and hopefully the stock price follows suit. We can't dictate that. We hope it does. And if we can get there, then other doors will open, and we'll look at that. And at that point in time, when we get down to about $100 million, $125 million of cash, we have to start thinking about other ways to stay active and expand the balance sheet. So that may come through a press that we do at the end of the year.

Yes, we'll absolutely consider that. And again, I think I want to expand on this, that the advantage of being internally managed is the operating scale with our equity base. So an externally managed generally does preferred equity. Many times, that gets included in what's calculated for the management fee. So for us, if we issue that, we get the cost of capital benefit by not paying that management fee, and that scale really inures to our benefit. So we will have an eye to look at that at the end of the year, yes.

So you said there's really no additional, in terms of the excess capital, putting it to work, there's no really additional overhead that you need to incur if you raise an extra capital?

That's correct.

I mean you have a pretty big balance sheet. I mean I know you referenced small, but any idea sort of how much range of what you could issue? I mean I've seen sub-6% rates and stuff has been coming out. Any idea what -- I'm sure you're getting inundated with calls from the investment bank. Is there any idea on where the market is for you?

We understand where the market is, but at this point, I would say that we are suspending our judgment until we get through the initiatives for this quarter. Right now, we've got a number of assets that we think we're working on that are going to transition this quarter, which are key. We've got the sale that we've agreed to that we'd like to see if we can get that accomplished this quarter, depending on the machinations that have to go on there. And I think once that dust settles, we'll be in a much better position to assess whether or not we want to add capital.

We look forward to that. And then just moving back to the -- on the low comp, with the sale of the remaining 2 assets, are we going to pick up the sort of $0.24 we lost in the second quarter? Could you just walk me through that again?

Are you asking about the -- related to the transaction?

Yes.

Yes. So we're -- what I said in my prepared remarks is we're going to pick up about $0.50 or greater on our book value, on our depreciated book value. And it's a culmination of the gains as well as the one asset in the GSAM 5-pack that will now come back to 100% ownership. So we'll get over $0.50 back.

Oh, great. You said a $0.50 addition to the $12.66. Great. Thank you for clarifying that. Then I guess...

If you look back at the previous quarters, you'll see that when we executed that last year, the book value was reduced by assets being contributed to this preferred equity structure vehicle. And now that we're underwinding that, we're recapturing some of that back. Some of it was taken away via a write-down of an asset in previous quarters, which we stated. But the balance that Frank is referring to, that gets repatriated back to us once that preferred structure is collapsed.

It's like in an SPV and you get it back when you retire it?

That's right. Because many of these assets that are involved in this sale, as Andy said, are also involved in that preferred equity financing vehicle. That's why you'll see the proceeds from this sale used to collapse the entirety of that vehicle.

And just for GAAP accounting, you've elected low comps. You couldn't recognize it on June 30?

Correct. Under GAAP principles in this type of transaction, you have to take the lower cost of markets, which is why we have the write-downs and we'll get the benefit of the gains when we close.

Great. We'll definitely adjust for that. And I guess just the last question, with the stock at the discount to what's even now greater than a 30% discount to undepreciated sort of pro forma book, you've been asked the question on buybacks, I don't want to beat a dead horse, but could you look to -- you have this triple net lease portfolio that we've seen strong bids in the marketplace, some people announcing some one-off sales at gains. I mean could you do something strategically where you sell, you repurchase stock, you tender for common shares? It just doesn't make any sense for the group where it is, and I know we all know the peers, many of which are externally managed. For you guys, I know you've just internalization, you're getting -- the street is getting used to the story, but is there anything you could do to return capital via buybacks and do something strategically between -- over the next few quarters?

I think at these levels, and given the ROE we had in the CLO, that deploying the capital into new loans and growing the balance sheet is the goal. And buying back stock at these levels is probably a lower ROE versus where we can execute return on equity in a CLO. And again, I want to emphasize the whole point of being internal is that we want to grow the capital base. And at this point in time, we made an investment for roughly $0.80 a share, $100 million to buy back the manager to improve the overall operations of the company and the efficiencies of the company. Now we want to take a step forward and try to grow the capital base so we could enjoy those efficiencies. And a stock buyback at these levels I think versus our competing use of capital, doesn't make sense for that and for the other reason that the operating scale is important to us.

Right. Look, it makes complete sense. I think you said the ROEs are well over 11% of the CLOs, and I know you want to get bigger and flex your...

The ROE and the CLO, I mean there are loans in there that have floors from -- that were let's call them pre-COVID loans, so we could establish the vintage. And those really contributed highly to the ROE. But if you just -- that's why I mentioned, if you strip out those and you just focus on the post-COVID loans, we saw a 3-handle move in the ROE on those loans to something that's in the mid-teens. And so when you look at the stock price today and what the buyback and how the buyback affects your ROE, accretion to book, versus deploying that capital and growing the balance sheet, I think the preference is to do the latter.

(Operator Instructions) Our next question comes from Steve Delaney with JMP Securities.

Congrats on the progress on the balance sheet cleanup and also the rebranding. I think it's a very important step for you and we really like the new name. It's got a -- BrightSpire has sort of an aspirational feel to it, to my ear anyway. Just one thing, because a lot has been covered, but your current debt-to-equity leverage, 1.3x at June 30, clearly, you're in transition, but that's a very low level relative to peer group where you would normally see 2.5x to even 3x debt to equity. The CLO obviously does a lot because you're initially close to 5x leverage there. But looking maybe forward a couple of quarters or early next year, where do you think that settles in if you do a third CLO? What should we, in terms of modeling, what should we think about as far as a range around debt to equity, including the CLOs, of course?

It's Frank, I'll take that. So look, as we continue to deploy the cash on our balance sheet, we expect that level to grow somewhere into the 60s. And depending on -- particularly I'm thinking more debt to assets. And as we continue to put that money to work, and obviously, if we do pursue some type of office as Mike previously mentioned, that will help drive some of the numbers, but we expect these numbers to move closer in line with our peers.

And Steve, we also have -- this is Mike. How are you? And thank you for your optimistic view of our name. We greatly appreciate that. You got a lot of smiles in the room.

Now you've got to live up to it, right? Yes.

It's an interesting process to rebrand. Virtually every name is taken. But I also would point you to -- we have a number of unencumbered assets on the portfolio. So as Frank said, it's not just deploying the cash. It's -- and as I alluded to earlier, we're focused on this quarter on getting those assets back. For instance, one in particular, one of the larger ones, the San Jose hotel, that deal is, that loan is going to have a bankruptcy confirmation hearing. The borrower is endeavoring to pull that out of bankruptcy as quickly as possible. We expect that to happen this quarter.

And in doing so, that loan, which is now completely unencumbered at call it $70 million, $75 million, including the pref that we have with it, will do 2 things. One, we'll have an accruing asset again, a loan that's reinstated as current. And then secondly, we'll have a loan that we can finance. So there'll be more cash that comes out of that that we can utilize to originate loans. So you'll see our leverage tick up, one, as we utilize cash on the balance sheet, and two, as we resolve some of the unencumbered assets, as I allude to them, underperforming or non-earning assets, and repatriate that capital to turn it into new loans.

Our next question comes from Jade Rahmani with KBW.

I wanted to ask if you still view the CMBS conduit business as attractive and something you want to create?

Thanks for the question. We haven't -- we have the tools to do it. We haven't looked at it this year. The goal for the year has been to really turn the portfolio more toward, as we would say, a pure-play commercial mortgage REIT, where we have first mortgages and more consistent earnings. We will have an eye toward that, that is something we can do. I will tell you, in looking at the landscape, looking at the issuance in the CMBS market and taking note that a substantial amount of the issuance was in SASB and CLO versus conduit CMBS, that market is very competitive right now.

There's not a lot of product. We do hope that as we get into the fourth quarter and first quarter that investment sales pick up and that will generate the demand for CMBS conduit product. But right now, being a late entrant to that market and seeing how competitive it is, I don't see us doing that in 2021. It is something that we reserve the right to do, and certainly have the people, with our Chief Credit Officer, George Coke, and myself and our Head of Capital Markets, Matt Heslin, we have the ability to do that.

But right now, we don't see it for 2021. We still see enough ahead of us in just evolving the portfolio into a pure-play that will check that box and look at that in 2022. And hopefully, the market will be a little bit more open, and there'll be more demand for credit there. Right now, it's probably ranking third in terms of the issuance. Like I said, I think SASB is probably double what CMBS conduit has been, and that's a complete inversion from what it's been historically in other years.

Okay. Appreciate that. When you mentioned transitional loans with more structured component, are you talking about construction loans? Are you talking about heavily transitioned loans? What are you referring to there?

Well quite frankly, the multifamily loans that we've been doing, they're pretty easy and straight down the middle. It's exterior work, it's interior, kitchen, bath, washer, dryer, dishwasher. It's pretty I would say very light transitional and easy to monitor. So I think as you move into office, where there's more tenant roll or maybe repositioning of assets with CapEx, we'll look to do more of that. And as I said earlier, Jade, we have had some good success in multifamily development, where we've done mezz behind construction loans.

In the cases where we've had real success, it's been loans where the loan size of the construction loan is something that we could have done directly in terms of the size and scope of the loan, but we chose to do the mezz. So maybe smaller deals. But I would say that that's probably a little bit further down the list in terms of highly structured. I think we want to evolve away from construction at this point and just maybe move into office and industrial where the rent roll and the CapEx at the property are let's say more value add, more transitional than the modest transitional that we've been doing with multifamily.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Well, thank you for joining us today on our first BrightSpire Capital earnings call, and we look forward to seeing you at the end of the third quarter. Thank you for joining us today.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.