Brightspire Capital Inc (BRSP) 2022 Q1 法說會逐字稿

Greetings, and welcome to the BrightSpire Capital's First Quarter 2022 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to David Palame, General Counsel. Thank you. You may begin.

Good morning, and welcome to BrightSpire Capital's First Quarter 2022 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, May 3, 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 reconciliation to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported first quarter 2022 GAAP net income attributable to common stockholders of $27.7 million or $0.21 per share, and distributable earnings of $28.8 million or $0.22 cents per share. There were no realized gains and losses and no provision for loan losses during the quarter, so adjusted distributable earnings for the first quarter of 2022 was also $28.8 million or $0.22 cents per share. The company reported GAAP net book value of $11.26 per share and undepreciated book value of $12.36 per share as of March 31, 2022. With that, I would now like to turn the call over to Mike.

Thank you, David. Welcome to our first quarter earnings call, and thank you for joining us today. Given the exceptional volatility over the past several months, I will focus my comments on market conditions, while Andy will provide additional details regarding our deployment activity and balance sheet, and then Frank will discuss our first quarter financial performance.

As a continuation of our momentum from Q4, loan originations during the first 4 months of 2022 remained very strong. This has given us a solid head start in meeting our origination goals for the year. On a year-over-year basis, our loan book has increased 36% to $3.8 billion, and assets have grown 24% to $5.2 billion. On our fourth quarter call I referenced the Fed's intentions to aggressively increase interest rates in response to 40-year high inflation rates. As the quarter progressed, the Fed's impact on interest rate and credit markets became more acute. The public equity markets also have been very volatile, and April was NASDAQ's worst month since 2008.

Since our Q4 earnings call, we have seen short-term treasury yields rise about 150 basis points, along with the continued widening of credit spreads. We at BrightSpire have been responding to these market dynamics by also widening our lending spreads. We also mentioned that property cap rates would need to adjust to reflect current interest rate expectations. And additionally, while multifamily rent growth may generally continue to increase due to housing supply constraints, we do however expect a deceleration of rent growth, given the affordability impact from overall increases in the cost of living and negative wage growth.

This confluence of factors has begun to manifest themselves across the commercial real estate debt market. For instance, the cost of a 2-year interest rate cap which is required for floating-rate loans has increased approximately 5x in the past quarter. Further, commercial mortgage CLO credit spreads have widened about 45 basis points. A AAA-rated CLO that sold for plus 175 today will probably have an all-in yield of 3.5% by July and over 4% in the fall. Therefore, we think CLO credit spreads should tighten over the coming months as the Fed's actions reduce the current differential between 1-month SOFR and the 2-year treasury.

The result of this overall increase in the cost of capital has caused current transaction metrics to become a bit more challenging. This is because there has been a lagging effect in the commercial real estate investment sales market. This is especially the case for multifamily assets that were recently brought to market and did not fully reflect these quickly changing market factors. We were still seeing some multifamily acquisition cap rates in the low mid- to 3% range, along with an insufficient cap rate distinction between geographical markets and asset quality. But that has begun to change as lenders and property buyers push back on valuation metrics. And this reverse feedback loop works to reset pricing expectations over the coming months.

This transitory period could temporarily taper origination volumes, but may also present some unique lending opportunities, especially for nonbank lenders. Concurrently, these volatile market conditions could also result in a slowdown of loan payoffs in our own portfolio, which we are monitoring closely. Also worth noting, there are tens of billions of CMBS conduit loans set to mature in 2023. Many of these loans may be open to prepayment later this year. Therefore, these upcoming maturities could provide bridge loan lending opportunities later in 2022 as well.

In closing, I would like to emphasize that our origination head start in the first 4 months of the year allows us to be more selective as the market recalibrates. And finally, we continue to expect loan originations of about $2 billion for the full year, and we are planning to execute our [third] CLO financing during the third quarter.

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. BrightSpire continues to execute its business plan focused on net deployment in middle-market opportunities across high-growth geographies. During the first quarter, the company committed to $589 million in aggregate loan commitments across 17 newly originated loans with an initial funding of $481 million. All of these investments are floating rate first mortgages on cash flowing assets as well as one multifamily mezzanine loan with a repeat borrower relationship. During the first quarter, we also funded $20 million of advances on existing loans, and received $224 million in repayments across 5 loans. This resulted in approximately $275 million of positive net deployment in our loan portfolio, growing the loan portfolio to $3.8 billion and total assets to $5.2 billion.

While we made solid progress on net deployment in the first quarter, our originations activity has tapered as a result of adjusting to the market conditions Mike highlighted in his prepared remarks. Subsequent to the first quarter, we have closed 4 investments for an aggregate commitment amount of $128 million. Currently, there are an additional 6 loans in execution with an aggregate commitment amount of approximately $203 million, resulting in 10 loans totaling $331 million of aggregate commitments that have either closed or in execution so far during the second quarter of 2022.

The weighted average spread on closed and in execution senior loans during 2022 is SOFR plus 363. During the second quarter to date, we have received $98 million in repayments, including the payoff of one mezzanine loan. As for the remainder of 2022, our primary focus is the net deployment of cash on balance sheet and staying ahead of prepayments. Year-to-date, we have seen approximately 900 investment opportunities totaling approximately $50 billion in investment value.

Put that in context, it represents the most significant deal flow we've seen post COVID, and it is a 152% increase in first quarter year-over-year volume. Despite the substantial pipeline of investment opportunities, we have experienced a slowdown in the number loans we've quoted over the past several weeks. As of March 31, 2022, excluding cash and net assets on the balance sheet, senior and mezzanine loans and preferred equity is comprised of 110 investments with an aggregate gross book value of $3.8 billion and a net book value of $1 billion or 82% of the portfolio. During the first quarter, we grew our loan portfolio by approximately 8% from $3.5 billion to $3.8 billion. The average loan size is $34 million, and our risk rating is 3.1%, same as last quarter.

Exposure to multifamily currently stands at 54%. Senior loans now constitute 96% of our loan portfolio, and multifamily, office and industrial comprise 85% of the loan portfolio. The weighted average LTV of our senior loans is 69%. And 72% of the collateral is located in markets that are growing at or above the national average growth rate. Net lease real estate and other real estate is comprised of 10 investments with an aggregate gross book value of $825 million and a net book value of $184 million or 15% of the portfolio. CRE debt securities, a segment which includes 4 remaining CMBS positions, all subject to risk retention provisions through June 2022 and one remaining private equity interest has a gross and net book value of $41 million or 3% of the portfolio.

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 billion and 2 outstanding managed CLOs issued in 2019 and 2021 totaling $1.8 billion. As of today, availability under our warehouse line stands at approximately $714 million. At present, 50% of our loan collateral has been contributed to CLOs with the remaining 50% on our warehouse lines.

Our 2019 CLO has a total collateral balance of $951 million. The reinvestment window for the CLO has expired. And as such, each loan payoff will result in a reduction in the advance rate and the increase in the cost of funds. We anticipate collapsing the CLO at some point over the next year, the timing of which will be dictated by loan payoff velocity and market conditions. As for the CLO we issued in 2021, we continue to actively manage the investments. At present, we have our sights set on a third CLO that we are targeting for the third quarter of 2022.

In summary, during the first quarter, we have made meaningful progress deploying capital on a net basis. Looking ahead, our focus remains on prudently deploying excess liquidity on balance sheet in order to grow earnings and support increasing dividend payments. Now I will turn the call over to our Chief Financial Officer, Frank Saracino, to elaborate on the first quarter results.

Thank you, Andy, and Good morning, everyone. Before discussing our first quarter results, I want to mention that we expect to file our Form 10-Q later this week. 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-Q.

For the first quarter, our distributable earnings and adjusted distributable earnings were each $28.8 million or $0.22 per share. During the quarter, we did not record any realized gains or losses, and therefore distributable earnings and adjusted distributable earnings were equivalent. Additionally, for the first quarter, we reported total company GAAP net income attributable to common stockholders of $27.7 million or $0.21 per share. During the first quarter, total company GAAP net book value increased slightly by $0.04 to $11.26 from $11.22 per share, while undepreciated book value decreased by just $0.01 to $12.36 from $12.37 per share.

I would like to quickly bridge the first quarter adjusted distributable earnings of $0.22 versus the $0.27 reported in the fourth quarter. The decline primarily reflects the income and nonrecurring profit participations related to the repayment of a mezzanine loan and a preferred equity investment respectively. Both investments were unlevered. Additionally, both repayments occurred during the last week of December, resulting in our ability to also recognize a full quarter of interest income related to these investments.

As of March 31, the weighted average floor in our portfolio was 70 basis points, down from 159 bps in March 2021. It is also worth noting that less than 1 month into the second quarter, 1-month LIBOR has already increased to approximately 80 basis points. With that, our earnings are now positively correlated to rising interest rates. We provide more data in our supplemental financial report, but an illustrative 200 bps increase in the benchmark rate from the March 31 spot rate would add roughly $5 million to our annual earnings or about $0.04 per share. All else being equal, this translates to an ROE increase in our loan book value of approximately 53 basis points.

Turning to our dividend. Given our adjusted distributable earnings performance for the first quarter, we declared a dividend of $0.19 per share versus $0.18 per share in the fourth quarter. This equals an 89% payout for the first quarter.

Moving to our balance sheet. Our total at-share undepreciated assets stood at approximately $5.2 billion as of March 31, 2022. Our debt-to-assets ratio was 65%. Our debt-to-equity ratio was 2.1x at the end of the first quarter, up from 1.9x as of the end of the fourth quarter. This increase was primarily driven by new loan originations. In addition, our liquidity as of today stands at approximately $431 million between cash on hand and availability under our bank revolving credit facility.

At present, we believe our financing ranges provide us with 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 loan portfolio risk ranking at the end of the first quarter was 3.1 and unchanged from the prior quarter. We added 17 loans during the quarter and had 5 loans payoff. One of the payoffs was a $37 million senior loan with a 5 risk rank. Additionally, 2 loans experienced a quarter-over-quarter change in risk ranking. First, we upgraded 1 loan to a 3 from a 4, noting the same loan repaid in April. Next, we downgraded a $12 million New York hotel mezzanine loan from a 4 to a 5. And finally, our CECL provision was $34.9 million, a reduction of approximately $900,000 from the prior quarter. This represents approximately 85 basis points reserved against our loan, which is down from 96 basis points in the fourth quarter. In addition to certain asset repayments and resolutions, the lower CECL reserve reflects our borrowers continuing to execute their business plans and other improvements in collateral performance measures.

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

(Operator Instructions) Our first questions come from the line of Eric Hagen with BTIG.

Can you maybe go into some detail from the opening remarks when you say that CLO and commercial credit spreads could tighten as the Fed raises interest rates? And maybe more generally, just how you expect CRE asset values to respond to Fed hikes going forward?

Welcome to the call, Eric. Thanks. It's Mazzei. So generally speaking, when you look at short-duration assets where fixed income investors want to be, the CRE CLO paper has widened considerably. But with the Fed hikes, you're going to see absolute yields on that paper increase dramatically over the next ensuing months. As I said in my prepared remarks, you could see overall yield on CLO paper getting to 3.5% to what could be a tier duration instrument or less. And then, going out into the fall, that could be over 4%. And so the short end of the curve needs to catch up. I think that while there's a little bit of a risk off in the fixed income markets and you're seeing rates rising as equities are falling, which is not usually the case, I think you will see appetite for CRE CLOs increase as the overall yield improves over the coming months. I personally think that CLO AAAs are among the cheapest fixed income instruments out there for investors.

So we would expect appetite to increase. We're faced with a lot of supply coming in the next quarter, but we're looking at third quarter. So we think by then CLO spreads will tighten, but we'll make a decision at that point. With regard to real estate valuations, again, in my prepared remarks, interest rates go up, it affects valuations everywhere, whether equity markets or real estate. I appreciate that inflation is higher and replacement costs for assets are higher. And so from a replacement cost perspective, the value of real estate is improving. But from a cash flow perspective, interest rates are affecting that and cap rates need to move. And there is a lag typically in the investment sales market, as I said in my remarks, and we're starting to see that happen now. So we would expect cap rates to start to edge up. And otherwise, investors who are buying properties are getting negative returns if this interest rate environment continues to go up and cap rates stay where they are.

That was really good. Liquidity on the balance sheet looks healthy. I guess, how can you -- how would you describe or how would you maybe frame thinking about new loan commitments versus the option to build some liquidity on the balance sheet going forward?

Well, we've been operating with a lot of cash. We've had a lot of loans pay off, some loans that were made post COVID had paid off right after their prepayment penalty lapsed because the owner-operators were way ahead of their programs and their ability to increase rents. So we're still on a path to try to deploy as much capital as we can by the end of the year. And the plan, as we always have said, is to hold about $100 million of cash on balance sheet, so that if we need to move assets in and out of financing vehicles that we have the wherewithal to do that. So the goal is to still get the cash down to about $100 million. We did have a lag in the pipeline, as Andy and I discussed, as we were pushing back on deals over the past 30 days, waiting for the market to kind of recalibrate.

So given the head start we had, we need to pick it up again during the course of the late spring and the rest of the year. And the goal again is to get down to about $100 million. We also still have something that we do not control, which is our largest shareholder, DigitalBridge. We have looked at examining doing something there with a potential share buyback. But again, this is in their hands. They own the stock. There's no timetable from them. Our expectations, as they've said on their own calls, that they will act responsibly and very deliberately in what they do with our stock. They've been very supportive of the company thus far. But if there's an opportunity there, should digital decide to come to the secondary markets and sell some of the BRSP stock, we could use some capital for that. But again, we don't control that outcome, and we're going to try to deploy capital into loans as best we can and not anticipate that that happened.

(Operator Instructions) Our next questions come from the line of Steve Delaney with JMP.

I'd like to start off with a question to Frank. You mentioned the $12 million New York City hotel loan that was moved to 5 from a 4. I'm curious if you have, at this time, is there a specific reserve on that loan at this time?

No. Steve, it's Frank. No, there's not. That is still captured within our CECL reserves.

Got it. And is the loan nonaccrual or on cost recovery? Or are there payments being made?

The loan is not on cost recovery or nonaccrual, and payments are being made.

Payments are being made. Okay, great. All right, that's good to hear.

Steve, it's Mazzei. Given it's a New York City asset and New York City hotel, the CECL did capture those nuances in the calculation. So the CECL there is larger than a typical CECL, for instance, on a new loan. So there's more of a substantial CECL against that because of what the underlying asset is in the model. There is a government agency that does utilize the hotel at this time and has been supplying cash flow to the borrower to pay debt service. And there's been a lag in that payment. Our expectations are when that agency catches up, that the borrower will catch up and be able to meet its extension criteria, but that was not the case at quarter end. We were…

Got it. Okay. All right. And my second question is, I'm just looking at the statement of operations on Page 24. The $10.3 million of other gains, can you break that down? I recall you mentioned there was a net lease asset sold and then one other real estate assets. So I'm curious whether that $10.3 million includes both of those items.

This is [Alex]. Yes, that line item, the $10.3 million includes the gains on the 2 real estate sales noted in the supplement.

Okay. And did you break those, is that broken out anywhere? I guess, net lease, we know what that is, I think something was described as an other real estate asset. Can you give us some clarity on what -- other than the net lease, what the other asset, the nature of that asset?

Yes, that was a hotel asset that we sold during the quarter at the end of the program, and we realized a GAAP gain on both of those assets.

Okay. Now the hotel, that was -- had you taken that back? Was that an REO property?

Yes. Yes…

Our next question is coming from the line of Derek Hewett, Bank of America.

Could you talk a little more about your near-term funding plans? Are you just looking to issue your third CLO at this point? Or are you also potentially exploring other sources of funding, including unsecured debt?

At this point, we're not exploring unsecured debt. We're not exploring a pref. The game plan is to issue the third CLO that would pay down our warehouse facilities. We typically experience a slightly larger advance rate on the CLO by a couple of percent than what we were getting on the warehouse line. So if spreads cooperate, there would be some accretion there in the ROE if we did a CLO issuance. Overall, there's a possibility that we issue a pref at the end of the year. This really depends largely on what happens with the DBRG stockholdings and if there's an opportunity there for us to participate in that. But other than that, other than the CLO potentially increasing some of our warehouse facilities by a couple of hundred to several million dollars, but that's it. No expectation of doing unsecured at this point.

Okay. Great. And then, I'm not sure if you mentioned it in your prepared remarks, but any update on that mixed-use mezzanine loan, I think it's #109.

The LA mixed use loan?

Yes.

Yes. No update there. We wrote that to 0 several quarters ago. It's public record that we filed a complaint with the holder of the mezzanine lender position and have -- that document is public. We are waiting to hear a response from that complaint. And as far as I know, nothing really is happening at the asset level. The hotel was supposed to have been sold last summer. That did not get completed. And I have no information about the hotel being on the market yet again. So time is not our friend or anyone's friend in that development if assets are not getting sold. So I think things have been still moving slowly, but I have no official color.

There are no further questions at this time. I would now like to turn the call back over to management for any closing comments.

Thank you for joining us today. We look forward to speaking to you again for Q2 and early August. Have a good day.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.