Brightspire Capital Inc (BRSP) 2021 Q4 法說會逐字稿

Greetings. Welcome to BrightSpire Capital, Inc. Fourth Quarter 2021 Earnings Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to David Palame, General Counsel. Thank you. You may begin.

Good morning, and welcome to BrightSpire Capital's Fourth Quarter and Full Year 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 Chief Executive Officer, Mike Mazzei; President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino.

Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-Q and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, February 22, 2022, and the company does not intend and undertakes no duty to update for future events or circumstances.

In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. And before I turn the call over to Mike Mazzei, Chief Executive Officer of BrightSpire Capital, I'll provide a brief recap on our results.

The company reported fourth quarter 2021 GAAP net income attributable to common stockholders of $81 million or $0.63 per share, and distributable earnings of $22.9 million or $0.17 per share. Excluding realized gains and losses and provision for loan losses, adjusted distributable earnings for the fourth quarter of 2021 was $36.1 million or $0.27 per share. The company reported GAAP net book value of $11.22 per share and undepreciated book value of $12.37 per share as of December 31, 2021.

With that, I'd now like to turn the call over to Mike.

Thank you, David. Welcome to our 2021 fourth quarter and full year earnings call. I would like to start by wishing everyone well and I thank you for joining us today. I will provide a high-level overview of the BrightSpire team's accomplishments in 2021 as well as our key objectives as we look ahead to 2022.

Earlier this year, our Board of Directors elected to purchase the firm's management contract to become a fully integrated, internally managed company. This structure provides for a more transparent organizational model with improved alignment between the company and our shareholders. All operational functions are now under one roof, and we are delivering annualized G&A cost savings of $16 million or $0.12 a share.

Post internalization, we rebranded under the BrightSpire flag, and we hired 11 professionals across all areas of the firm, bringing our total headcount to 55 people. In addition, we have added further experience, leadership and diversity to the BrightSpire Board of Directors with the additions of Cathy Long and Kim Diamond, along with the elevation of Cathy Rice to the position of Chairwoman.

We are very pleased with the team's efforts in 2021 in transforming the BrightSpire portfolio. We actively managed and sold select pre-COVID-19 assets, which also resulted in paying off our COVID-19-related preferred equity financing at the end of the year. We further evolved our portfolio by pruning select nonstrategic assets while ramping up mortgage loan originations.

During 2021, we originated 64 loans totaling $1.9 billion. In doing so, we grew the loan book to $3.5 billion and further diversified by reducing average loan size to $36 million from $48 million. In addition, we made other improvements in our portfolio by resolving higher risk and nonaccrual loans while substantially increasing our exposure to newly originated first mortgages on multifamily properties, the result of which improved our average risk rating to 3.1% from 3.7%.

We were also active on the liability side of the balance sheet, issuing an $800 million CLO in the third quarter. And most recently, earlier this month, we rightsized and extended our corporate revolver. The culmination of this activity has resulted in significant growth in adjusted distributable earnings for the full year 2021, which enabled us to reinstate our quarterly dividend and grow it throughout the year to $0.18 per share for the fourth quarter.

Looking ahead to 2022, the BrightSpire team has successfully positioned the firm to be a pure-play commercial mortgage REIT, focused on first mortgages backed by high-quality assets and sponsors. Going forward, this business model will generate current and predictable earnings to support our dividend. After all of this effort over the past 2 years, the mission for 2022 has finally been narrowed down to net deployment of capital and growing assets. To maintain and grow earnings, we need to substantially deploy the remaining cash on hand while staying ahead of loan repayments by increasing our origination volume from 2021. This year, we will also continue our focus on closing the gap between our current stock price and our depreciated book value.

Now let me briefly touch on current market conditions. Over the course of 2021 and into 2022, the overall commercial property markets have continued to stabilize. Within that macro context, there has emerged several important trends. Notably, performance has varied by property type and by region. Multifamily has been a clear win. While regionally, there is a continued population migration out of higher taxation states, the most notable wins there have been Florida, Texas and Arizona. While some CLO rating agencies generally give more credit to larger MSAs, we at BrightSpire are not ignoring the continued trend of population and income growth in more localized regions. This thesis holds true not just for multifamily properties. We have also been targeting office properties in these regions where population growth exceeds the national average, where taxes, lifestyle and commuting are more appealing than any larger cities.

While overall rent growth in 2022 has been very impressive, we are now also facing inflation rates at their highest levels in 40 years. The Fed has been very clear about its plan to aggressively increase interest rates in order to subdue inflation. Therefore, we need to be mindful that rent growth may eventually decelerate and cap rates may gradually adjust to the new rate environment.

On the loan pricing side, despite fixed income investors increased appetite for more defensive, shorter duration and floating-rate bonds, the recent heavy new issuance calendar for CRE CLOs has led to spread widening over the last 60 days. Therefore, we've been adjusting our loan pricing accordingly.

In closing, I am very grateful for the hard work and dedication of the BrightSpire team. We are delighted to have reached this inflection point, and I'm confident we will succeed in meeting our objectives for 2022.

And with that, I would now like to turn the call over to our President, Andy Witt. Andy?

Thank you, Mike, and good morning, everyone. 2021 was a transformational year for BrightSpire. We set out to simplify the business and grow company earnings. During the fourth quarter, BrightSpire continued to execute on its business plan, focusing on capital deployment and portfolio management.

During the fourth quarter, the company deployed $490 million in aggregate loan commitments across 17 newly originated senior mortgage loans. On the portfolio management front, most notably BrightSpire completed the $223 million sale of 5 co-investments across 7 legacy positions. The proceeds from this transaction were used to retire the 5-tax preferred financing entered into in June of 2020. Completing these transactions goes a long way towards further simplifying our balance sheet.

Our originations platform remains active with a continued focus on middle market and high-growth geographies. During 2021, the team originated 64 loans in an aggregate commitment amount of $1.9 billion. All of these investments are floating rate first mortgages on cash flowing assets, the majority of which are acquisition financing often with repeat borrower relationships.

During the fourth quarter, we received $138 million of prepayments across 2 subordinated loans and 1 partial senior paydown. Subsequent to the fourth quarter, we have closed 7 investments for an aggregate commitment amount of $303 million. Currently, there are an additional 12 loans in execution with an aggregate commitment amount of approximately $355 million, resulting in 19 loans totaling $658 million of aggregate commitments that have either closed or are in execution so far during first quarter of 2022. As Mike noted in his prepared remarks, our primary focus in 2022 is the net deployment of cash on balance sheet and staying ahead of prepayments.

Throughout 2021, our stated goal has been to simplify the portfolio by focusing on senior mortgages with in-place cash flow generating current and predictable earnings. Following are a couple of data points highlighting the portfolio transformation.

During the fiscal year 2021, we grew our loan portfolio by 46% from $2.4 billion to $3.5 billion, while reducing our average loan size from $48 million to $36 million and reducing the overall risk rating from 3.7 to 3.1. We increased multifamily exposure from 34% to 52%, reduced development exposure from 16% to 4%, reduced PIK loan exposure from 7% to 2% and reduced nonperforming loans from 6% to 0%. Senior loans now constitute 96% of our loan portfolio, up from 86% a year ago. And multifamily and office are 85% of the portfolio, up from 68% a year ago.

Our investment portfolio is presented as 3 distinct segments: 1, senior mezzanine loans and preferred equity; 2, net lease real estate and other real estate; and 3, CRE debt securities. As of December 31, 2021, excluding cash and net assets on the balance sheet, senior mezzanine loans and preferred equity is comprised of 98 investments with an aggregate gross book value of $3.5 billion and a net book value of $1 billion or 82% of the portfolio. Although gross deployments was positive quarter-over-quarter, net book value for this segment remained relatively flat, primarily as a result of 2 sub debt positions paying off.

Net lease real estate and other real estate is comprised of 12 investments with an aggregate gross book value of $873 million and a net book value of $190 million, 15% of the portfolio. This segment of our portfolio grew as a result of paying off the preferred financing, this ultimately increased BrightSpire's ownership position to 100% of the at-share value in the triple-net industrial portfolio.

CRE debt securities, a segment, which includes 4 remaining CMBS positions, all subject to risk retention provisions through June 2022 and 1 remaining private equity interest, has a gross and net book value of $41 million or 3% of the portfolio at year-end. We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across 5 primary banking relationships totaling 2.05 and 2 outstanding CLOs totaling $1.8 billion. As of today, availability under warehouse lines stands at approximately $904 million.

Early in the third quarter of 2021, the company successfully executed on its second CRE CLO featuring a 2-year reinvestment period. The $800 million CLO is currently collateralized by interest in 33 floating rate mortgages with an initial advance rate of 83.75% and a weighted average coupon at issuance of L plus 1.49% before transaction costs.

Our first $1 billion managed CLO executed in October 2019 had an initial advance rate of 83.5%. Now that the reinvestment window for the CLO is closed, it will function like a static CLO with each loan payoff resulting in a reduction in the advance rate and increasing the go-forward cost of funds, which currently stands at 82.8% and SOFR plus [1.61%]. We are now focused on a third CLO that we expect to execute in the mid-2022 time frame.

In summary, we continue to make good progress, building our pipeline of new investments and executing our business plan. Looking ahead, the focus is simple, deploy excess liquidity on balance sheet in order to grow earnings and support increasing dividend payments.

With that, I will turn the call over to our Chief Financial Officer, Frank Saracino, to elaborate on the fourth quarter and full year results.

Thank you, Andy, and good morning, everyone. Before discussing our fourth quarter and full year results, I want to mention that we expect to file our Form 10-K later today. In addition, I would like to draw your attention to our supplemental financial report, which is available on the Shareholders section of our website. The supplement continues to provide asset-by-asset details, as does our Form 10-K.

As previously mentioned, this quarter concludes a remarkable year with strong results across our key metrics. For the fourth quarter, we reported total company adjusted distributable earnings, which excludes realized gains and losses of $36.1 million or $0.27 per share. We also reported full year adjusted distributable earnings of $0.87 per share. Additionally, for the fourth quarter, we reported total company GAAP net income attributable to common shareholders of $81 million or $0.63 per share and distributable earnings of $22.9 million or $0.17 per share. The GAAP net income reflects the $52.9 million net gain associated with the co-invest portfolio sale.

This includes the combination of recording the investment gain associated with the sale and a gain on related hedge positions, offset by tax payments related to these gains. Distributable earnings mainly reflects a $13.2 million realization of our previously recorded unrealized loss on mortgage loans and obligations held in the securitization trust and excludes the impact of the co-invest portfolio sale.

During the fourth quarter, total GAAP net book value increased to $11.22 from $11.04 per share, and undepreciated book value increased to $12.37 from $12 per share. This increase is primarily due to the combination of recording the net gains from the co-invest portfolio sale and our triple net industrial distribution portfolio. We're bringing back to BrightSpire 100% ownership as a result of repaying our 5-pack preferred finance.

Looking at more detail at the fourth quarter adjustable distributable earnings. The results primarily reflect the following: First and foremost, the company's continued deployment of idle cash. During the fourth quarter, we originated 17 new loans totaling 490 and 19 new commitment. In addition, the company recorded income from a nonrecurring profit participation and equity kicker related to the repayment of the mezzanine loan and a preferred equity investment, respectively.

Profit participation income or an equity kicker reflects our receiving a portion of the gain generated from the borrower sale of the underlying collateral. This typically occurs concurrent with repayment. Additionally, both repayments occurred during the last week of December, resulting in our ability to recognize a full quarter of interest income related to these unlevered investments. Adjusting for these onetime items and their associated late December repayment, heading into 2022, our adjusted distributable earnings quarterly run rate is closer to $0.22 per share.

As Andy mentioned in his remarks, our investment strategy focuses predominantly on floating rate versus mortgages. This positions the earnings from our loan book to generally be positively correlated with rising interest rates. When interest rates dropped in 2020, our income benefited because of the LIBOR floors associated with our in-place loans.

We entered 2021 with a weighted average senior loan LIBOR of 185 bps and with portfolio turnover throughout 2021, it declined to 88 bps at year-end. As such, core income has become substantially less material to our result.

An illustrative 75 bps increase in the benchmark rate would reduce earnings by approximately $0.03 per share annually based on the in-place portfolio today. However, with incremental portfolio turnover, we expect to experience continued payoffs, particularly related to loans within the money LIBOR floors. As those floors roll off, the portfolio is positioned to benefit from a rising interest rate environment.

Turning to our dividend. Given our growth in adjusted distributable earnings, along with our improved operational performance and business outlook, we increased our dividend 4x during 2021, paying out a well-covered $0.58 per share for the year. For the fourth quarter, we paid a dividend of $0.18 per share versus $0.16 per share in the third quarter. Going forward, consistent with our commercial mortgage REIT peers, we will declare our dividend approximately 2 weeks prior to quarter end with our first quarter 2022 dividend announcement expected in mid-March.

Moving to our balance sheet. Our total at-share undepreciated assets stood at approximately $5 billion as of December 31, 2021. Our debt-to-assets ratio was 63% and debt-to-equity ratio was 1.9x at the end of the fourth quarter, up from 1.7x as of the end of the third quarter. This increase was primarily driven by new senior loan originations.

Our liquidity as of today stands at approximately $434 million between cash on hand and availability under our bank revolving credit facility. As Mike noted, earlier this year, we amended the terms of our revolver with our bank syndicate. The new terms include a rightsizing of the facility to $165 million with an accordion feature enabling it to extend up to $300 million. Importantly, the borrowing base on the new facility is better suited for our current investment strategy as we're able to secure improved advance rates and favorable concentration limits on certain assets. Overall, we believe this new arrangement will provide us the liquidity and flexibility we need to manage and grow our business for the foreseeable future.

Looking at risk rankings and CECL reserves. Our overall portfolio risk ranking at the end of the fourth quarter improved to 3.1 compared to 3.2 at the end of the third quarter and 3.9 during the depths of COVID. The quarter-over-quarter change reflects the impact of the co-invest portfolio sale as well as loan resolution. Additionally, an improved outlook in other loans resulted in 12 risk ranking uplifts. Only 2 loans were downgraded from the third quarter, one of which has since been resolved.

And finally, our CECL provision was $35.8 million, a reduction of approximately $7.9 million in the prior quarter and $2.7 million from December 31, 2020. This represents approximately a 0.96% reserve against our loans, which is down from 1.3% in the third quarter and 1.6% from December 31, 2021. In addition to certain asset repayments and resolutions, the lower CECL reserve reflects our borrowers continuing to execute their business plans and other improvement in our collateral performance metrics.

That concludes our prepared remarks. So with that, let's open up the call for questions. Operator?

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

First question, just around the dividend. Look, I know that you're on different schedule now with declaring it. I know it's a Board decision. But Mike, you made some comments in the press release about expecting to continue to grow it. I know that kind of the run rate going forward is about $0.22 of adjusted EPS versus $0.18 quarterly dividend, off to a nice start in the first quarter with some portfolio growth. So just if you can maybe put into context how you, at the management level, think about the trajectory of the dividend, would certainly be helpful.

Let me have Frank touch on that, and then I can follow through.

Sure.

Sure. Tim, for -- look, we factor in the increase of our run rate earnings, our new originations, the fully realized G&A savings from internalization. And then we look at the coverage we're getting from adjustable distributable earnings and obviously, our net cash flow. Origination volumes that are for payments continues. This has potential to increase our run rate earnings and allow us to recommend an increased dividend to our report.

So really, Tim, it's where we are right now is our expectations are that we will increase the dividend in 2022. But right now, we're at that inflection point where it's originations and net deployment, and we do have some prepayments coming in. What we had experienced during COVID was a stall effectively in prepayments. And so now what you're seeing are the assets that were expected to pay off during that time frame are starting to pay off now. And what we're also experiencing is given, as I made in the prepared comments, we've had really a robust impressive growth in rents. In fact, some of our value-add borrowers are actually experiencing rent growth before they actually initiate the programs. And so we are starting to see some loans in the -- that are post-COVID loans potentially pay off.

And so right now, our asset managers are away from doing the hand-to-hand combat on loan modifications that they did during COVID, are really staying very close to every borrower and trying to gauge if any of those loans are paying off. And so that's really where we need to stay ahead of it, to see if any of the loans that were put in place post-COVID are paying off because they're way ahead of their business plans. And that's the balancing act that we're at right now. The economy is doing very well. And so loans aren't going out for the initial term of 2 to 3 years, they're actually paying off earlier.

And so I think what we need to do in terms of maintaining and growing that dividend is we need to do more originations than we did last year. Last year, we did $1.09 billion, 64 loans. We probably need to grow that average loan size a little higher. And we need to do about 10% to 20% more in loan originations than we did last year, depending on how fast the prepays come in and how fast these business plans are accelerating.

That's helpful, guys. I appreciate it. Maybe just a couple of questions around that. Do you feel confident in the platform's ability to originate 10% to 20% more loans going up in loan size, probably helps you out a bit, but while also maintaining the credit parameters that you want to? I mean, I know it's pretty competitive out there, and you guys have done a good job growing through increasing competition. But just wondering if you still think you can maintain the asset quality and grow the portfolio, the amount that you're targeting?

Yes and yes, we think we can do that. We did 64 loans pretty seamlessly this year in many ways, starting off as a new organization with my arrival 2 years ago. So yes, we think we have the capacity to do that. Our pipeline for the first quarter is looking pretty solid. And I do think we have to try to do some larger loan sizes. We are trying to balance, as I said, path of growth, rating agency preference for larger MSAs. So when you get to those larger loan balances, sometimes it gets more competitive than spread, but they can benefit your CLO.

I will say that we did not do much at all below SOFR plus or LIBOR plus 300%. And some of our competition did that. And with spreads widening the way they did in this first quarter, you may see some CLOs getting less than 11s ROE, because they had loans, substantial amount of loans that were below the 300% threshold despite their advance rates. And so we're really trying to keep an eye on making sure that if we do a CLO, that we get additional lift beyond what our warehouse lines are providing us in terms of ROE. So we're trying to balance that, but that's what we do.

Got it. And I mean when you originate a loan today, are you assuming that CLO takeout? I guess that's the target. But do you still think going a little bit tighter on spread going higher loan balance, if you have to put that on repo for a bit, can you achieve the ROEs that you're looking for?

Yes. When we originate a loan, we are looking at both executions. We're looking at the warehouse line to make sure it's giving us an adequate ROE on the warehouse line, and we're not doing an execution that is substantially through our ROE targets on the warehouse line with anticipation that CLO spreads will tighten. We're looking at current CLO spreads all the time and looking at adequate ROEs on the warehouse line first and foremost.

Okay. Got it. And then just one last question, and I'll hop back in the queue, just around repayments. And I know they're tough to predict, but I think we saw a couple of multifamily loans, one in Arlington, Texas, one in Jersey City, upgraded to a 2. Are those signs that those loans might be getting kind of ripe for repayment? And then also if you're having some newer vintage loans repaid, do you expect you could benefit from some nice prepayment income this year as well?

Andy, do you want to talk about some of the upgrades? And there may be a correlation there. Let me let Andy address that, and I'll pick it up if there's anything left to say.

Yes. Thank you, Mike. In terms of repayments, this year, we're expecting somewhere between 300 and $400 million of repayments each quarter. And that's really as a result of looking at the underlying business plans, how they're tracking to underwriting and what the borrower's plan for the asset is. So we do anticipate repayments. It's something that we're constantly looking at. And yes, when you do see our risk rankings tighten up a little bit, that's evidence of borrowers being ahead of business plan and the assets performing. So that could be an indicator of increased prepayments going forward.

Our next question is from Steve Delaney with JMP Securities.

Andy, congratulations on your well-deserved promotion to President. So obviously, bridge loan demand across the board has been really strong throughout most of 2021, and as you said, early this year. I'm just curious, the Fed is going to be in play here, Mike. And whether we get 100 basis points or 150 basis points, we would get something meaningful. Just generally, just based on past experience in these markets and this type of borrower, a lot of acquisition buyers, property buyers. What's the psychological and bottom line impact on the Fed in play and taking rates up pretty aggressively over the next 12 to 18 months?

Thank you, Steve, for your question. Well, that is such a dynamic question in terms of -- you've got a yield curve flattening here as well. And so that -- the Fed is going to increase rates. You've got a number of factors like inflation. Some inflationary pressures have nothing to do with interest rates. It has to do with some of its supply chain. Some of it is the demand for energy, the lack of energy production and gasoline prices factor into everything that we touch every single day.

On our side, generally speaking, rates going up, you'd see some economic slowdown. You would see a deceleration potentially in rents. And you may -- as I said in my prepared remarks, may affect cap rates. Some borrowers may decide to go fixed rate, if they can. But that's not the sector we're playing and we're playing in the value-add sector.

We are seeing areas of the economy where I mentioned the states that were winners. Arizona has probably seen some multifamily price appreciation like almost no other state except for Texas and Florida. But I think they may even be the leaders where we're seeing properties that have doubled or more in value.

Having said that, the other fact of the matter is, we've all been reading that there's generally a lack of housing units, single-family and multifamily. And Arizona is a market. There are certain sections of Arizona, swats of it, whether they are just under house. So we're seeing property values that have doubled. But we're seeing, as we make a new loan on those, we're seeing debt yields that are very significant. We just quoted a deal in Arizona where the going in debt yield is 5%. And that property has some serious property appreciation in the last several years alone. We're seeing most of that property appreciation, not necessarily in the high A-quality properties, the more in the moderately priced workforce housing being C-quality properties, where there could be an upgrade in rents in terms of the comp set in the market. But we are being very mindful of it. We're concerned about it. Trees don't grow to the sky, and we're focused on that.

So generally speaking, as I said in my comments, there may be a deceleration, still some rent growth, but a deceleration in rent growth and adjustment in cap rates. Quite frankly, based on my answer to Tim's question, we would welcome a little bit of a deceleration in NOI growth because the assets would stick around a little bit longer, and we'd enjoy the benefit of having them on balance sheet for 2, 2.5 years as opposed to having them on balance sheet for 15 months. So that's something that we would look forward to.

Away from that, I'll also mention that we are doing more, and I'll let Andy comment on this in terms of -- Andy, why don't you -- if you can make mention of how much we've done in office and non-multifamily of late versus multifamily?

Sure. So throughout the course of 2021, 71% of our activity was in the multifamily sector. And if you look at our latest quarter, actually 52% was office. So we are starting to do more in the office sector. And looking forward, as we look into Q1 and our pipeline, we're seeing some other asset classes, industrial as well. So we're seeing a broadening out generally of the asset classes that we're focused on and where the opportunity set is moving. So that is moving.

Appreciate the color. And just one final thing for me. You guys may have noticed that iStar sold its large net lease book to Carlyle for $3 billion. Obviously, it's a very stable, consistent, predictable source of revenue for you. So I'm not so much thinking that you didn't see that. You saw that as a core asset is what I want to confirm and unlike the 5-investment portfolio. But could you comment -- you carried it at a depreciated book value and rightly add the depreciation back to your book value calculation. Do you expect just looking at where things are trading there that there is unrecognized value? You're not marking it to market, but do you think that there is value in that portfolio that exceeds your depreciated basis?

So the short answer is yes. There are 2 different, very different assets there. We've spoken at length about the industrial asset, which is the Albertsons -- 2 Albertsons facilities. And we're almost at a, I think, in excess of a 7% NOI. And that deal is one where the financing is until 2028, and I've mentioned this before that really it's the defeasance. You really need to lose the CMBS loan for that to trade at its best value. And given that we've got 5 years left, I think we're a little early there. Having said that, it is a core asset given it's industrial, it's U.S.-based, it's food anchored in its tenancy, it's got a long-term lease, it's throwing off in excess of 11%. Right now, the recurring earnings are a huge benefit for us. And so that is something that we would consider in a couple of years from now when that defeasance didn't weigh as heavily on the transaction. But yes, there is a lot of locked up potential value in that asset just based on where we own it.

The other asset is a non-U.S.-based asset. It is the Ecuador headquarters in Stavanger, Norway. It's a AA-rated tenant. It's a 2030 expiration on the lease. We've got the currency hedge, I believe, Alex, for about another 2 years. He's nodding. He said, yes. That's a yes. And we've got that hedged out at NOK820, and it's roughly around $9 today. So we hedged it well. And that is one where the debt matures in 2025. We're getting about a mid-9s ROE on that at this point with the hedge in place. And that is something, I think, where we would more revisit when we get closer to the debt maturity, and the game there would be to see if we can extend with the tenant such that we can get a better shot at refinancing those proceeds out and have less dilution at maturity in 2025.

So I would really ask shareholders to look at both of those assets as bookends. One, we have a tremendous amount of value. And the other, we add value in, but there may be dilution and we'll get to 2025 and look to see if we can extend that lease where we can get that refinancing in place. And listen, we sold our non-U.S.A. assets to Fortress. Equinor is the last one we have. And quite frankly, if we can get that lease extended closer to maturity, that might be an asset that we sell given it's non-U.S.-based.

Yes. Well, certainly, there's certainly not assets that you have any trouble sleeping at night when you've got those on your books. So I appreciate everybody's comments.

Our next question is from Stephen Laws with Raymond James.

I think you've touched a little bit on this, Mike, in your -- and Andy, in your answer to Steve Delaney's question. But kind of thinking about the volumes, it looks like the portfolio mix, I think I saw in the supplement, Office is largely unchanged, but multifamily has grown significantly at the expense of all the other property types. Is that simply kind of what you talked about, multi-families, where you're seeing most of the transaction volume? Is it the focus on the CLO financing and you're looking at getting multi in office assets to put in those CLOs? Or are there other things that were pushing you away from hotel or retail or other property types that you really haven't done much of the past few quarters?

It's a little bit of both of those things. We try to balance CLO execution and what the CLO market wants. Andy, why don't you give some more context there, and I'll follow through.

Yes. So I think what you've seen in our underlying portfolio is more exposure to multifamily, and that's been a function of a couple of things: 1, a strategic initiative to get more exposure to the asset class; and 2, it's really been where the majority of the investment sales have been. And you did touch on the CLO market. A lot of what's happening there is very skewed to the tune of about 80% multifamily and most of the offerings. So that seems to be where we're seeing the opportunity.

That being said, in Q4, we saw some more activity on the office front and some of the other asset classes like hospitality are starting to become more attractive as there is more visibility post-COVID. So it's been a function of, 1, wanting to get exposure, and 2, where the opportunity has been.

Great. And Andy, just kind of thinking about the balance sheet, where you're operating. I think leverage, you mentioned ex-securitizations is kind of 1.9x now. That's up from like 1.1x, I believe, or 1x flat at the end of last year. Kind of where do you see that going? Where are you comfortable operating the portfolio for that metric?

Yes. So we do see -- go ahead, Frank.

You want to take it, Andy?

No, Frank.

Thanks. So Stephen, so we're at where we could be. We're at 1.9x today, and we see that increasing over the course of the year. And based on our projections, could get as high as 2.4x. And that would kind of put us in line with where the comps are trading. But that kind of -- is kind of a high side is where we see that ratio going to.

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

First one just for you, Mike. On closing this discount to the stock price and undepreciated book or NAV or however you look at it. I'll ask again, why are buybacks considered if there is significant runoff? And I know you want to grow originations, but why wouldn't that be looked at as a source of excess capital to repurchase shares here?

First of all, thank you for your question, and welcome to the call. I don't think buying back 1 million shares or $5 million of stock in the quarter is really going to move the needle. The management team, when DBRG executed its secondary offering, the management team stepped up and bought shares at roughly collectively [9.5%] price. Right now, I think -- and we don't -- we can't speak for DBRG. They are our largest shareholder. They will address this holding in their call. I think that is an overhang on the share price for sure. Whenever we get to that [10%] level, we seem to pull back. Obviously, dividend yield is going to be a big driver of that as well, which we're working on, on our part.

With regard to DBRG, it's a very unique scenario where you have somebody who is a potential seller. They've sold already, the 10 million odd or 9.5 million shares this past year. So our expectation is they may come back to the market again. Right now, I would tell you that DBRG has been incredibly supportive of this team here at BrightSpire, and we appreciate and look to earn that support every day from them as our largest shareholder. We have increased our dividend 3x in 2021. So objectively speaking, we've taken less of the opportunity cost factor out of the hold element for DBRG. So perhaps they can be -- again, I can't speak for them, but perhaps they could be more deliberate and they're thinking about when they would execute more of that secondary, if they so choose to do so.

I think there is -- the potential opportunity for us is rather than buy back 0.5 million shares here or there as to whether or not DBRG does come to market again with another secondary. And then we would have to look at ourselves and our balance sheet in terms of can we participate should that event occur. And we would look at a number of factors. One, right away, what is the cash on the balance sheet? Do we have enough liquidity to do so and participate how much would they be selling and what amount would they be left with if they chose to do another secondary? And then most importantly, it would be pricing.

So right now, I would say the business plan is we're going to move ahead, deploy cash on balance sheet into balance sheet loans, balancing net deployment, as we said, that's the #1 focus. And if and when DBRG raises their head to do a secondary, I think at that point in time, we would contemplate whether we could do something larger than just buying small amounts of shares back during any quarter. So I think we would wait for that opportunity to happen. If it does that, we can reassess toward the end of the year, depending on where the stock price is.

Well, first of all, I'm pleased to hear that the company would consider something like that. I mean on the subject of pricing --

Again, I want to emphasize. I'm sorry to interrupt you. I want to emphasize, we have no information. We do not speak for the company. What I'm saying here, these are just my own thoughts from the outside looking in. They've sold in 2021. They are very supportive and have been supportive of this management team, and we are paying a dividend. So that beats not paying a dividend. So we've taken some of the opportunity, staying cost out of holding it, but now the ball is with them as to what they may decide to do. We don't have any information as to that.

No, just to follow on that, I mean, in terms of hypothetically, I know pricing is issue, but if they sold anywhere near the last deal they did, wouldn't it not be significantly accretive to you to repurchase those shares given your NAVs is $12.5, $13?

It really depends on pricing, but we would look at that math. And if the opportunity was there and our balance sheet had the liquidity in place, we would consider it. But we can't make that call until that situation arises.

Great. Look, I'm glad you addressed it. I appreciate the comments, and you certainly won't speculate, but certainly good to hear that the company got capacity to do that. On that note, just to hit you with 2 things. First, you mentioned last quarter about capital capacity. I know you're being -- you look at things every day, but where are we in terms of the perpetual preferred market? We've seen that come out with some of your peers. Would BrightSpire look at that if they needed capital? And then the last one is on operating expense guidelines. I think there's a real potential here to you guys to shine on the expense ratio given the internalization. Any guidance? I think you said you up to 55 people. Just where can you tell us in terms of guidance where that should run at for 2022?

Okay. I'll let Frank take the expense question and I'll start off with the preff. If Frank wants to add to that, he can. We've looked at the preff. But given the cash we have on hand, I don't think that is something we would consider until Q4 or Q1. We do acknowledge the fact that interest rates rising could affect rates in the preff market and the value add of doing a preff could diminish during the course of the year. But right now, that would not be accretive to our earnings if we did a preff just to have the capital, especially given how much net cash we have on balance sheet and the expectation for repayments.

And then again, I would venture to say another driving factor in that will be what DBRG does or doesn't do with its holdings. So that's another factor in the equation. But I would say all in, do not expect a preff from us during the course of the year. That would be something we would look at potentially, as I said, year-end or beginning of 2023. And Frank?

And then on the expense side, we had spoken to the $36 million run rate or $9 million per quarter, which we achieved during the year. That will tweak up a little bit as we go into the year and go through pay increases and D&O insurance and everything else. But we're going to stay around that $9 million, $9.2 million per quarter kind of on a cash basis run rate.

So in other words, no significant hiring to achieve origination expectations?

I don't think anything that would materially move that number.

Our next question is from Derek Hewett with Bank of America.

Congrats on the quarter. Most of my questions were already addressed. But could you provide some additional color on that Houston multifamily loan that was resolved in January? And specifically, was it resolved at the year-end carrying value?

Okay. That was a student housing deal. It was part of a 3-pack 3-property cross-collateralized loan where the borrower was liquidating assets one-off, and that was the last remaining asset. The net result on that was a $1 million loss versus book. And does that factor in the CECL, Frank? Then there was a reversal of CECL included in that.

Yes, that's correct.

So net was a $1 million. Thank you for joining the team, by the way. Thank you.

We have now reached the end of our Question-and-Answer Session. I would like to turn it back over to management for closing comments.

Well, thank you for everyone joining us today, and we look forward to speaking again in May for our first quarter earnings. Have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.