Greetings, ladies and gentlemen and welcome to the BrightSpire Capital's Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a remainder, this conference is being recorded. I'd now like to turn the call over to your host Mr. David Palame, General Counsel.

Good morning, and welcome to BrightSpire Capital's second 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, August 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 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, I'll provide a brief recap on our results. The company reported second quarter 2022 GAAP net income attributable to common stockholders of $34.3 million, or $0.26 per share, and adjusted distributable earnings of $31.48 million or $0.24 per share. The company also reported GAAP net book value of $11.26 per share and undepreciated book value of $12.42 per share as of June 30, 2022. With that, I'd now like to turn the call over to Mike.

Thank you, David. Welcome to our second quarter earnings call and thank you for joining us today. Given the exceptional market volatility in this past quarter, I will focus my comments on market conditions as a segue into Andy's comments on capital deployment and portfolio activity. Finally, our CFO Frank Saracino will discuss our second quarter financial performance. Starting first with the headline. We had another quarter of earnings growth. Distributable earnings increased from $0.22 per share in Q1 to $0.24 per share in Q2, more than fully covering the quarterly dividend of $0.20 a share. The lending strategy that BrightSpire has undertaken since emerging from the pandemic was designed for challenging market conditions. Our portfolio is more diversified than ever before with an average loan size down from $50 million in 2020 to $35 million today. Over that same period, our Multifamily segment has grown from 30% to 52% of our loan portfolio and 80% of all new loan originations have been acquisition financing. Our middle market lending program targets higher population growth regions drive to work markets and value add asset level strategies. This portfolio strategy was designed to reduce large, loan risk concentrations, with a focus on assets whose underwritten NOI growth projections should outperform these rate increases. On our previous two earnings calls, I specifically referenced record levels of inflation and the federal reserves well advertised plans to increase interest rates. Rather than rehashing macro events of the last quarter, it will simply state that it is abundantly clear that these market dynamics have begun to permeate the economy. The capital markets reaction has been to shift into risk off mode brought on by these sharp interest rate increases. Just recently the treasury yield curve inverted to its widest spread in 20 years, while credit spreads…

Thank you, Mike and good morning, everyone. After averaging nearly $500 million of new originations in each of the five previous quarters, the pace of capital deployment has slowed as a result of the themes Mike highlighted. During the second quarter, the company closed on $306 million in aggregate loan commitments across nine newly originated loans, with an initial loan funding of $279 million. All of these investments are floating rate first mortgages on cash flowing assets. During the month of June, we did not close any loans. However, subsequent to quarter end, we have closed three loans for a total commitment amount of $91 million. During the second quarter, our loan portfolio grew slightly and currently stands at $3.8 billion and total assets of $5.3 billion. As highlighted last quarter, the number of loans quoted has declined. As a result, we are committing to fewer loans. As expected, our pipeline of actionable opportunities has declined as market participants adjust to the new normal, most notably higher interest rates in the associated implications. We anticipate a slow Q3 in terms of new originations, as we are quoting new loans on a highly selective basis. Counterbalancing the decline in new originations has been a slowdown in loan repayments. During the second quarter, we received $248 million in repayments across eight loans and one partial paydown. Given the macroeconomic environment, we now anticipate loan repayments for the remainder of the year to be approximately $200 million per quarter, significantly less than the $400 million to $500 million we anticipated at the start of the year. Being ahead of prepayments and deploying capital on a net basis was the focus going into 2022. At this point, we feel it more prudent to temporarily shift our stated business plan of deploying company liquidity, which…

Thank you, Andy and good morning, everyone. I would like to draw your attention to our supplemental financial report, which is available in the shareholder section of our website. The supplement continues to provide asset by asset details as does our Form 10-Q. For the second quarter, our distributable earnings and adjusted distributable earnings were each $31.4 million or $0.24 per share. Additionally, for the second quarter, we reported total company GAAP net income attributable to common stockholders of $34.3 million or $0.26 per share. GAAP net income includes the $22 million gain Andy referenced earlier, and is there for higher than distributable earnings and adjusted distributable earnings, which excludes this gain. Company second quarter GAAP net book value of $11.26 per share remained unchanged from the prior quarter, while undepreciated book value increased by $0.06 to $12.42 from $12.36 per share. The increase is primarily driven by share purchases and the asset sale previously highlighted, partially offset by an increase in our CECL reserves, FX translation related to our Norway office net lease asset and our annual ordinary course employee share grant. I would like to quickly bridge the second quarter adjusted distributable earnings of $0.24 versus the $0.22 recorded in the first quarter. The increase is primarily driven by the full quarter impact of loans originated during 1Q and the increase in the benchmark rates. Additionally, during Q2, we received a non-recurring prepayment fee related to a loan repayment. Adjusting for this one-time item and heading into 3Q, our adjusted distributable earnings quarterly run rate is closer to $0.23 per share. As of the remainder of the year, the rapid pace and level of deployment over the last 18 months, combined with slower than expected repayments has us well-positioned to maintain higher levels of cash while continuing to…

Thank you very much, sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from Eric Hagen of BTIG.

Hey, thanks. Good morning, guys. Hope you well. Is there -- maybe a couple for me here. Is there a minimum level of liquidity that you expect to operate with based on the comments you made in your opening remarks? How should we think about the dividend and the expectation for stock repurchases in light of those comments? And second, when you talk about the loan size coming down, what do you think is the advantage of that? Or why is it a feature that investors should be drawn to, especially in this environment? Does it speak at all to the quality of the sponsor or the financing that you're able to achieve when you make that loan? Thanks.

Hey, Eric. How are you? Good morning. It's Mike.

Good morning.

Thanks for your question. So, let me handle the loan size first. It's always been our focus to be in middle market, and to be at loan size, is that kind of range from the 20s into sub $100 million range. And the reason for that is, and based on the company's experience and based on our shareholder equity amount, that we felt that more diversification was a critical feature and risk management here. And so, bringing that average loan size down and it was very barbelled and as you know, the company historically has taken some very large write-downs on some very big loans. So, in this case, we're really trying to diversify the loan balance, so that no one loan can really have a big, big material effect on the company. It also helps us when we do securitizations with our diversification of a portfolio, and we realize that we're not in some of the larger loan MSAs. But quite frankly, we prefer the drive to markets for office where you're seeing higher occupancy rates of tenants. You're seeing in areas of Dallas, where there are 65%, 70% occupancy rates are tenants rates, but in places like New York City, San Francisco, you're seeing very low office occupancy rates. And so, we're concerned that you're in the bigger MSAs, you're going to do bigger loans. And we think those MSAs right now are also more risky, especially for office assets. With regard to the cash, we just -- as a mortgage REIT, you can't be all in, all the time because you perpetually long credit. So, we're monitoring the market. And quite frankly, Eric, a lot of our brothers are sitting on a lot of cash and they express it as dry powder. We're ready to move, take…

That's very helpful color. I appreciate that. If I could sneak in one more here. On the 2021 CLO, is there any room for reinvestment that you expect to manage there? Like as you supposedly delever again, based on kind of what you talked about in the opening remarks, is there a composition change to the leverage that we should anticipate to? Thanks.

No. There's no change in leverage that you should be looking at. We did not -- I did not address your question about the buyback. I'm going to let Frank talk about what we did there and what our thinking around the buyback is.

Yeah. So just to the buyback, look, I think is, we said, Eric, there's just a bias around the cash right now. And as we have clarity in the coming quarters, we'll look to be opportunistic as far as buying back our stock, but nothing planned at the moment beyond kind of where we are.

And we had an opportunity to buy back units from one holder at a price. And we took advantage of that. So, we didn't have to move the market. So, we were able to get something done at good levels in May. But as the market started to get a little bit crazy in June, you would've thought we would've stepped in to buying more, but we were seeing other things happening in the market, enormous spread widening and things like that, and a risk off in the market where we felt that we should pause for a minute. So, we can revisit and deploying cash. Eric, we can revisit the share buybacks when we get a little bit more visibility. We had a great window to buyback stock lower than we thought we could. And we'll see where the market goes. If the market improves, stock price improves and we're going to risk on, we'd much rather put the money out in loans.

That's helpful color. I appreciate you guys.

Thank you. The next question comes from Chris Muller of JMP Securities.

Hey, guys. Thanks for taking the questions. I'm on for Steve today. Can you talk about how loans spreads on new loans have changed over the last six months? And are you guys getting wider spreads on new loans compared to loans that are paying off?

Yeah. The spreads have widened. You're getting much wider spreads. You're probably out to a four handle in spreads for multifamily and wider for office and industrial. Depending on the leverage point, the banks, our bank counterparties have moved out. They are looking at the CLO market. We all are, and they've moved out probably solid hundred basis points in terms of cost of funds with the banks. The banks are also becoming a little bit more cautious as well. Some banks are actually out there syndicating their warehouse lines. But when you look at where we're quoting spreads today, based on where we can execute with the banks and CLOs and get our required ROE returns, effectively the borrowers between index spread and purchasing a rate cap, borrowers are at like 7%. And the world really doesn't work well at 7% after we've had 10 years of very garish monetary policy. So, I think, as Andy said in his prepared remarks, that we're all waiting for the new normal to take hold and figure out where that is. And so, being at 400 over, Chris, quite frankly, the amount of actionable lending at 400 over is far and few between. Where we could do something and one of my former colleagues, Brian Harris mentioned this, I think on his call is that there may be room for stretch mortgage lending, where you're doing more than 75%, 70% -- maybe 80%. And you can get that into your spread as opposed to doing mezz. In this market there's no room for mezz. There's no room for additional cost of funds. The cost of funds between index spread and caps has gone up so significantly that there's no room to add mezz at 12%. So maybe there's room to do stretch mortgages. But as I said earlier, the pipelines at the brokers, whether it's for transaction sales or refinancing, those pipelines have really dwindled. So, I think between now and September, you're going to see very little and perhaps after Labor Day, some of those transactions will put up their periscopes and come to market. But right now, I think it's going to be very slow for the next quarter.

Got it. That's helpful. Thank you. And then, on your comments about the banks, how are they reacting in terms of widening spreads versus just slowing lending overall from what you guys are seeing?

Well, widening spread is their throttle on the engine, right? So, by widening spreads, they're basically expressing to us that they want to be more cautious. And they're not jumping up and down saying, oh, gee, we can get stuff at 300 spreads. They're really kind of quoting those spreads to be more defensive and more selective. You have a lot of banks who have warehouse facilities that they're expecting to be unwound in CLOs. And they've got a lot of SASB positions that they're along, that they we're not able to execute on. So, the banks themselves are looking at their real estate positions and saying there's probably some indigestion there and they're expressing it to their borrowers, like, the commercial mortgage REIT by widening spread. So, it's not just a cost of fun thing. It's the banks way of expressing themselves that they'd like to be more cautious and they'd like to slow it down.

Got it. Helpful. Thanks for taking the questions.

By the way, when they look at AAA CLOs pricing at 275 over and they're advancing 80% cost of funds, the cost of funds in the CLO is probably somewhere in the 325 range based on the last execution. So, the banks see that for the entire stack down to BBB minus, that's a 330 level, 350 level. So, to be 80% on a whole loan, it makes sense that the bank should be in the low 300.

Got it. Appreciate the comments. Thanks guys.

Thank you. [Operator Instructions] Thank you. Ladies and gentlemen, we have reached the end of question-and-answer session. And -- apologies. We have a follow-up question from Eric Hagen of BTIG.

Hey, thanks. I thought I'd sneak in one more. When a sponsor goes to extend their loan, can you talk about any of the terms that may change when they explore doing that, or whether there's any thresholds that they need to meet from an operational standpoint for them to extend their loan?

Yeah. We could answer that. Andy Witt, would you like to address that please?

Sure. So, typically what happens is when a borrower comes back for an extension, there are certain covenants in the loan that they have to cover. And then, as part of the extension, we get a rate cap. So that's really the process. And those are -- those levels are determined on a loan by loan basis based on the underlying business plan at the time of underwriting.

Gotcha. That's helpful. Thanks for sneaking me in.

Thank you. Ladies and gentlemen, we have now reached the end of the question-and-answer session. I will now turn the call back over to Mr. Mike Mazzei for closing remarks.

Well, thank you. And we appreciate you attending today. We realize there were other competing earnings calls at the same time. So, thank you for your attendance. And we look forward to speaking to you again on our third quarter earnings call in November. Thank you.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect your lines.