Greetings and welcome to the BrightSpire Capital Inc. First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. You may begin.

Good morning and welcome to BrightSpire Capital’s first 2023 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 end over the call, 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-K 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, 2023 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 2023 GAAP net loss attributable to common stockholders of $4.1 million or $0.03 per share, distributable loss of $11.5 million or $0.09 per share and adjusted distributable earnings of $34.5 million or $0.27 per share. The company also reported GAAP net book value of $10.41 per share and undepreciated book value of $11.74 per share as of March 31, 2023. With that, I would now like to turn the call over to Mike.

Thank you, David. Welcome to our first quarter 2023 earnings call. And thank you for joining us this morning. In my remarks today, I will focus on a few key financial highlights, market conditions and our near term objectives. Andy will provide an overview of our asset management developments and then Frank will discuss our first quarter financial results. Starting off with some financial highlights. For the first quarter, we reported adjusted distributable earnings of $0.27 per share. Importantly, our loan book, which is 97% floating rate, continues to benefit from higher base rates and our dividend coverage is now at 1.35x. Our dividend yield on current market pricing is approximately 14%. While share buybacks would be highly accretive, we continue to have a strong bias toward maintaining liquidity and reduced leverage during this uncertain period. Over the past 12 months, we have reduced leverage by approximately 15% from 2.3x to the current level of just 2x. Our current leverage is among the lowest in our public peer group. This quarter, we recorded a $0.32 reduction in undepreciated book value, primarily driven by net increases in our General CECL reserves as well as several specific loan level reserves. Andy and Frank will provide more details on this. In terms of liquidity, as of today, we are at $424 million of which $259 million is unrestricted cash. We expect to utilize a portion of this cash in the coming quarters as we shift certain loans from their current financing arrangements. In the coming quarters, we also expect to pick up liquidity as a result of certain asset payoffs and resolutions. During the quarter, DigitalBridge completed a secondary offering of their remaining holdings of our stock. We thank them for their support as shareholders and for their assistance and leadership in the…

Thank you, Mike. And good morning, everyone. Throughout the first quarter the BrightSpire team remained focused on asset and portfolio management, we expect this to be the case for the foreseeable future. The combination of our vertically integrated asset management team and high touch approach gives us the ability to identify and address potential challenges early. Our team has deep experience working with borrowers dating back to the Great Financial Crisis, when this team was responsible for managing portfolios of CRE debt acquired from the FDIC and other financial institutions. As an example, throughout the course of any given year, we have interim maturities which require the borrower to purchase an interest rate cap and, in many cases, meet certain extension hurdles. We believe the best outcomes are derived from timely and open communication. For 2023, we are in the fortunate position of only having four final maturities, accounting for approximately 4% of the total portfolio. During the first quarter, we received $101 million in repayments and partial paydowns across four investments. This was in line with our expectation, as we expect loan repayment volume to remain relatively low for the next couple of quarters. Now I would like to highlight a few updates within the portfolio. The office real estate sector has experienced persistent work from home dynamics. As we discussed during our last call, a significant portion of our office assets are located in high growth, drive to work markets with granular rent rolls and current in place cash flow. The challenges we have experienced within the portfolio to date have largely been confined to pre-COVID loans in major central business districts, where office attendance remains low and vacancies and sublet space are at record highs. During the quarter, in cooperation with our Long Island City borrower, we…

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 today, and that our first quarter 2023 supplemental financial report and investor presentation are available on the Investor Relations section of our website. For the first quarter, our adjusted distributable earnings were $34.5 million, or $0.27 per share. First quarter distributable loss, which includes $55 million of specific loan reserves on three loans, was $11.5 million, or $0.09 per share. Additionally, for the first quarter, we reported total company GAAP net loss attributable to common stockholders of $4.1 million, or $0.03 per share. GAAP net loss also reflects the $55 million of specific loan reserves. Quarter-over-quarter, total company GAAP net book value decreased from $10.77 per share to $10.41 per share. Undepreciated book value also decreased from $12.06 to $11.74 per share. The decline is primarily driven by increases in our CECL reserves, net stock award activity and the FX translation related to our Norway office net lease asset. This decline was partially offset by a onetime gain from dispute resolution proceeds related to a Los Angeles mixed use project and adjusted distributable earnings in excess of dividends declared. The first quarter adjusted distributable earnings of $0.27 was flat to the fourth quarter. We earned higher than expected modification income during the first quarter and also benefited from the increase in the benchmark interest rates. When adjusting for repayments nonaccrual loans mentioned earlier, as well as the beneficial impact of rising interest rates continue to have on our portfolio, our adjusted distributable earnings quarterly run rate is closer to $0.24 per share. Turning to our dividend. For the first quarter, we declared a dividend of $0.20 per share in line with fourth quarter dividend.…

[Operator Instructions] Today's first question is coming from Sarah Barcomb of BTIG.

Hi, everyone. Thanks for taking the question. So, first of all, I appreciate the easy quarter-over-quarter risk rating comparison in the presentation, so thanks for that. On the topic of risk ratings, we've seen some discrepancy among the peer group with respect to risk rating migration in the quarter, and some companies are applying a one or a two on their more stable loans versus the standard three rating that you and some other peers typically apply. We're also seeing, again, relatively stable ratings despite higher rate fall and credit uncertainty during the quarter and modest CECL reserve increases. So with that said, could you just take some time to talk about the BrightSpire philosophy toward risk ratings and CECL reserve migrations?

Hi, Sarah. This is Mike. I'm sure the operator is cringing when she heard you say, take some time to answer that question, so I don't want to be too long winded on something like that. First of all, I think the watch word for us is to avoid surprises. We do not want to see loans go from a three to a default. And we think that in this market, especially a tough market, credibility is key. And a way to partly establish credibility is through your risk ratings and your disclosures, because that's the best way to telegraph to investors what they need to basically underwrite the company. While there'll always be legitimate, unexpected negative outcomes that occur that even we will be surprised at, you need to have earned credibility in order to get a pass when those things do occur. And as you said, like some others, we provide risk ratings and the changes on our risk ratings on every single loan. We do not utilize summary tables. We do not give you the risk ratings on the Top 15 and a summary of the next 50. We give you a risk rating on every single loan. And as I said, we know and acknowledge that others in the peer group do that. We are on the side of being more conservative in our risk rankings. And as we said in the prepared remarks this quarter. We had three performing loans that we felt there was some increased risk around and we downgraded those loans to a four. All those loans are current and each one of them could have a positive outcome in the coming quarter. But we felt, given the increased risk profile, some borrowers are behind on their business plan. Some borrower may…

Yes, I really appreciate all the color there. And I agree that the loan by loan risk rating is much more important than a weighted average number on the portfolio. And then just one more quick follow up from me on a different topic. So you recently announced that new $50 million stock repurchase program. Could you talk about your thoughts with respect to stock repurchases at the current valuation discount on the common stock?

Yes, as we said in the prepared remarks, we've said this previous quarters, we had a secondary offering by DigitalBridge. We were asked to participate in that to assist with it. We have held firm. We believe that for the same reasons our stock is attractive at this level are the same reasons why you need to hold on to cash. And while it's very alluring and could be one of our best investments to buy back the stock so far below book value. And the implied losses are just epic in terms of what the market is imputing at the stock price current level, it is very compelling. But at this point, we still feel, given the uncertainty in the market and all the things that we said in the prepared remarks about the regional bank sector that right now protecting the balance sheet and being disciplined around that and not being impulsive around buying back the stock is more critical than the minor accretion you'll get by spending that money on buying back stock.

The next question is coming from Jade Romani of KBW.

Thank you very much for taking the question. I wanted to ask what you're hearing from the banks, warehouse line providers, repo providers. You made some extensive comments around the regional banks, but just wanted to get an update as to what you're hearing there.

We're getting telegraphed that those banks are in business. They want to see new loans; they want to grow that business. They get very, very favorable treatment in that business as well. The warehouse business, it's been a relatively safe business for them based on the haircuts that they get on these loans and so they're open. The problem is, I think, for them is they're not seeing a lot of activity. In fact, what we're hearing back is that the same bank that may have warehouse lines with several mortgage REITs or opportunity funds, debt funds, they're seeing the same loan from multiple sources. And they sense that there's a dearth of activity in the market by the fact that many, many of their constituents are focused on the same deal. So there's really not that much out there. I think that's frustrating for them. But they're open for business and it's been us and the market, our desire to be more conservative and maintain cash balances and the fact that there's just a dearth of activity out there. So despite the will that they have to be in the business and grow the business, even though the CLO market really isn't effective right now, there's been very little activity for them to benefit from, but so far very positive.

And so as this cycle unfolds, as we see some credit pressures growing, do you anticipate the warehouse providers, the repo lenders, to protect themselves, to become more defensive, require margin call? And are you surprised we haven't seen that as yet?

Look, first of all, again, back to almost the comments I made with Sarah. Transparency with your line lenders is so critical. If a line lender feels as though that someone is trying to smooth the rough edges out on a loan that could enter a very bad result. So we have a tremendous amount of dialogue with our line lenders almost on a daily basis. In this market, yes, loans can deteriorate and the reason for holding on to the cash is to make sure you can defend loans and as I said in the prepared remarks, in this coming quarter we expect to move loans off of some financing arrangements and have the cash to do so. We also expect more liquidity to come into the firm based on resolving loans. We have [inaudible] hopefully resolve. We have loans that we think are going to in fact pay off. Andy mentioned that on one of our large hotel loans there's a prospective buyer for one of the towers at the property which could lead to a substantial pay down on that partial pay down on that loan. So we think we'll be coming into more liquidity. But, yes, I think in this market you've got to be budgeting for that potential outcome. And that's why when we go back to the question about buying back the stock, we're refraining from doing that because we want to make sure that we are prepared and have enough cash to defend the balance sheet if we need to reduce the leverage on loans or move loans off of their current financings into cash before the result.

Next question. Last question for me would just be on the net lease portfolio, the owned real estate portfolio. What are your updated thoughts there? Is that a source of value? Do you think that the carrying value is in line with market values for there and is that a source of capital or do you think it's a meaningful contributor to earnings and something you want to keep longer term?

Well, they vary so we have some small net, not net lease, but real estate that we own and office buildings that are incredibly well leased in very good markets, throwing off very high cash flow, maybe something like $0.06 a share combined for two assets that actually have almost zero book value against them. So that's one example. That's very good. Then we have the larger one, which is the Albertsons Warehouse Distribution Center that we lay out in a lot of detail in our Q. We own those at circa seven cap. They are potentially merging with Kroger. And so there could be an upgrade in that rating to investment grade in the coming year. That is a source of liquidity. At one point in time, it probably was a source of a gain, but given where the market rates have gone and the diffusions is more than offset by the interest rate effect on the value of the property. But there's still a very good source of capital there that we can tap into probably anywhere between close to maybe $100 million of capital that we could tap into if we sold the Albertsons equity portfolio. But that is one right now that we do not have on the radar screen. The last one, the other big one, is we've documented that in great detail for over two years now in our MD&A filing, and that is the Norway net lease deal to the state oil company of Norway. And the issue there has nothing to do with the credit. It's a great credit. It's AA credit. It's the oil company of Norway. So it is the driver behind everything that is Norway. But the issue is that the term of the lease versus the maturity on the debt. The debt matures in 2025. The lease expires in 2030. We're in dialogue with the company on hold, waiting for them to respond to us about what their intentions are. About remaining at the property. And the value of that is dependent upon what the tenant wants to do. Hence why we gave substantial disclosure on that, I think over two years ago, Frank, on that deal, so investors could look at that and understand the risks that we see in the renewal of that asset. We do not have that risk in the other real estate that we own or the Albertsons deal. Quite frankly, the opposite. That lease is an incredibly long term lease. We wish that lease was a lot shorter. But in the Norway transaction, the issue is the remaining lease term relative to the maturity of the debt. Only five years lease term remains when that debt matures in 2025. And that's the issue.

The next question is coming from Matthew Howlett of B. Riley.

Thanks. Good morning. Thanks for taking my question. First, on the liquidity that you're preserving to buy out loans of financing, are you referring to the master purchase facilities with the banks or the two CLOs?

I would say both. I really don't want to comment on the CLOs because they are securities that trade in the market. So I would just say generally to buy back. I really don't want to comment on public securities, but I want to add to you that the fact that when people, when those in the peer group refer to non-mark to market financing, I will say that in some cases the CLO gives you a lot less flexibility than our warehouses. And this connects back to a question that we had about our warehouse lenders. Our warehouse lenders give us a lot of flexibility when we have to deal with loans. If you want to reduce a coupon, if you want to do an AB note, you can have that conversation with our warehouse lenders. The CLO is much more restricted. And so when those refer to, we have CLOs outstanding and this is non-mark to market, I would say accepting a loan default. In a loan default, you're buying that loan back in full at par. And so this whole notion about CLOs being non-recourse, non-mark to market, that's not the case if you ever want to issue a CLO again. So we will be moving loans out of their arrangements. It's well anticipated and we will utilize cash for that. But as I said in the prepared remarks and earlier, we do expect more cash to come in through some assets that we are expecting payoffs on and resolutions on. It'll just be some timing difference.

And you said you had $200 million of unrestricted cash. The rest is probably what restricted cash in the CLOs. Is that makes the difference?

We don’t that’s another misnomer, when we refer to liquidity, we refer to cash and we refer to our revolver and we always tell you which one is which. This whole notion about capacity in the CLO that is not liquidity. You can't take money out of CLO and use it to pay down a warehouse loan. You could only originate a loan or have a loan that's in another financing vehicle go into the CLO. So you could have a loan that's financed at a 70% haircut, a 70% advance rate with a warehouse lender and a loan pay off in a CLO, a different loan that may have had an 80 plus percent advance rate. And if that loan on a warehouse line is eligible for the CLO, you could move that into the CLO and net you'll get 10% more cash. But to refer to CLO reinvestment capacity as liquidity is just false.

Right. Well, what I'm leaning towards is how much are you willing to let the company, from a shareholder perspective, I think they're quite happy with you just deleveraging and at some point, buying back stock, right. I would say it's highly accretive. This discount to NAV is the most accretive thing a mortgage rate can do, is buy back stock 50% below book. But when you look at how much are you willing to let the company delever and at what point, what do you need to see to start originating again? Would you start, are you out there with rate sheets? Are you still talking to people? Just talk to me about where you think the portfolio, how much it could go down before you feel comfortable enough. And at what point would you start originating for buying back stock?

Okay, so I would say that in this type of market, the management team of a company's first duty is absolutely unequivocally to defend the balance sheet. I don't think anyone has seen market conditions quite like this, where we've had bank failures, foreign and domestic and other banks who are trading very poorly, and a debt ceiling coming up in June, which is more frightening than the debt ceilings that we've had in the past. There's a tremendous amount of uncertainty. So I think in this market, any management team’s number one priority, I would say number one through number five priorities are defending the balance sheet. How far will we let the deleveraging occur? We'll let the deleveraging occur for as long as needed to defend the balance sheet. Now, practically speaking, I would say that as we migrate through the year and we get to the end of the year and as I said in the prepared remarks where we see the Fed is starting to telegraph rates, coming down. Hopefully they don't do so in a panic situation. But rates coming down and we see the capital markets start to stabilize and we feel that we've gotten in a very good place where we've got through a lot of loan modifications as needed. Our warehouse lenders have been addressed, and we feel like there's some certainty around the need for cash. I think at that point in time, our first goal would be to deploy capital into new loans. If the stock is continuing to trade at this level, yes, I think we would absolutely consider buying back more stock at that point in time. I would say these things are probably more kind of fourth quarter, not second or third quarter, not second or third…

Look, I really appreciate how you're positioning the company and defending the company for shareholders. Thanks for answering that. Michael.

[Operator Instructions] The next question is coming from Matthew Erdner of JonesTrading.

Yes, it’s Matthew on for Jason. Thanks for taking the question. Could you talk a little more about the DC office and the foreclosure process? I guess as much as you can disclose there and then the probable outcome of converting it to residential. Are you guys planning on getting rid of it in a sale or taking control of it?

Andy, would you like to take that or you want me to, up to you.

Sure. Mike, we are in the process of foreclosing on the asset and that's obviously a public process. In terms of converting to residential, we do think this particular property has the potential to convert to residential as a result of the physical plan and the way the building lays out. It's a question as to whether we are the right folks to participate in that conversion process or rather sell the asset to somebody who may pursue that as a business plan. So that is a little bit of a to be determined outcome. But we think generally there's a good opportunity for a conversion to residential for this property.

Let me just add to that. We take very seriously that we had two loans that we had taken reserves against. One in Long Island. The DC loan. We did that in the previous quarter and then we did it again this quarter. And I want to make sure that we telegraph that we do not like a death by 1,000 cuts in terms of how you're reserving for loans. What happened on the DC loan is we marked it to a BOV as an office from, I think, $56 million to $39 million in the first train stop. And as we did more work, we realized that despite the location of the asset in a very good area and street in DC, the destiny as an office building would is very bleak. The vacancy rate for B office in that market is eye popping. And we began to do more work on this, and we realized that given the asset has small floor plates, it's a corner asset, windows on three side with the creation of windows on the fourth side, very easy. And we started dealing with those in the market that were doing these types of conversions. Because we want to be clear, very few office buildings can be converted to multifamily apartment residential. Very few, maybe single digits. This one is on a good corner in a great location. But the next train stop for that valuation was basically land plus concrete. So that is currently marked at about $150 a foot. And that's where assets are trading for development into apartments. So we went from the first train stop, $39 million from $56 million, because we evaluated at the low end of the BOV range for office. And a quarter later, as we spent time in the market, we said, this is not going to be an office. You're not going to invest CapEx in this property and run the risk that you're going to lease that property in what's, a 40% vacancy in B office space. So we think this is, we've done work with architects, we've done work with some operators in the market that are doing these very types of assets. And we are engaged in conversations with someone that could result in a partnership or sale of the asset once the foreclosure is completed, and that will be to an apartment conversion.

That's helpful. And then speaking on that same asset, is there a timeline that you would expect it to convert to an office or, I guess, two years or so or what's the general expectation for converting these?

And that's hence embedded in the pricing because anybody who does this will take a year, you're able to do it as a matter of right. 8% of the square footage would be dedicated to affordable. So it has to get factored into your potential rent income on the asset once converted and how many units you can get out of the asset. And then from there on, there is about a year's planning process. Part of that is not to get entitlement as of right, but really because we're in a historic zoning district. So there is some way in by city council as to what, in fact, you're to be doing with the property. And that could take about a year's worth of planning. And so anybody who buys this is going to be funding this asset for a year before they go out and get a construction loan and then recapitalize it as a development deal. So that one year period does affect the valuation, which we think we've put into this 27 that we have today.

Thank you. At this time, I would like to turn the floor back over to Mr. Mazzei for closing comments.

Great, thank you. Well, in closing, I want to again thank DigitalBridge and give a special thanks and shout out to Marc Ganzi, the CEO and Jacky Wu, the CFO, for their support and leadership. They're one floor above us in this building. We hope to see them often and we thank them for what they've done for us over the past years. We also want to again welcome our many new shareholders that took part in that secondary offering in Digital sale of the stock. And we look forward to having many more one on one meetings. Please do not hesitate to reach out to us, especially if you're a new shareholder. We'd like to meet you and understand what your goals and objectives are. We know that one of them is we want the price of the stock to converge with book value. We understand that. Thank you for joining us on today's call and we'll see you next quarter.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time. And enjoy the rest of your day.