Greetings, and welcome to the Conference, BrightSpire Capital’s Fourth Quarter 2023 Earnings Call. At this time, participants are in a listen-only mode. A 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 to you David Palame, General Counsel. Thank you, David. You may begin.

Good morning and welcome to BrightSpire Capital's fourth quarter and full year 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 hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements, which are based on management's current expectations, 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, February 21, 2024, 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. Finally, during the call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike.

Thank you, David. Welcome to our fourth quarter and full year 2023 earnings call, and thank you for joining us this morning. I'll start by giving a brief update on the fourth quarter and what we anticipate for this year. Then I will turn the call over to Andy for more specifics on the portfolio. Let's first turn to BrightSpire's results. For the fourth quarter, we reported GAAP net loss of $16.3 million or $0.13 per share, DE of $25.4 million or $0.20 per share, and adjusted DE of $35.9 million or $0.28 per share. Our dividend coverage for the fourth quarter was 1.4 times. Now let's briefly discuss the financial markets. While the Fed has been back pedaling on the timing of rate cuts, it is now clear that the hire [ph] for longer policy has come to a close. This pivot has caused a significant risk on in credit spreads, long duration bonds, and big tech. Even office rates have come off their lows from several months ago. The 10-year treasury yield initially dropped over 100 basis points and is currently about 75 basis points lower versus the October earnings call. In the commercial real estate debt markets, CMBS AAA's have tightened by roughly 50 basis points, and we saw a very strong investor demand for the first CRE CLO print of 2024, which was also an actively managed structure. The CLO cost of funds has tightened roughly 75 basis points over the past four months. Furthermore, most of our line lenders have expressed interest in increasing their warehouse balance sheets for new loans. And for good reason, as through this cycle, these banks have seen their best credit performance in this segment of their lending portfolio. For commercial real estate owners, these are clear signals that help…

Thank you, Mike. Good morning, and thank you all for joining. Throughout the fourth quarter, much like the rest of 2023, our focus was on asset and portfolio management. During the fourth quarter, we received $132 million in repayments across four investments, which included a partial repayment of $57 million for the San Jose Hotel loan as a result of sales proceeds from the South Tower. The loan has been paid down to $136 million. The remaining collateral consists of the original 540-room hotel, including all back-of-house infrastructure, amenities, and conference space. The hotel is currently being marketed for sale by the borrower. In addition, during the quarter, we received repayments on two office loans and a multifamily loan. Subsequent to quarter end, we received an additional $27 million in loan repayments. Looking ahead, we received a repayment notification from the borrower of our largest office loan and expect to be paid off in March. The loan has a current balance of $87 million and a future funding obligation of an additional $13 million. We also anticipate several more loan payoffs or paydowns in the office segment of our portfolio in the coming months, further reducing our exposure to this asset class. Additionally, the sponsor on the South Pasadena, California office loan recently completed upzoning entitlements on land surrounding the existing and fully occupied office building. This upzoning is for residential senior living and far exceeded expectations, substantially increasing the value of our collateral. While we still maintain this asset in the office segment of our portfolio at year end, we intend to recharacterize the loan next quarter, given the value creation and transformation of the underlying collateral. Lastly, as it relates to office exposure within the portfolio, the Washington, DC office property, which we took ownership of during the…

Thank you, Andy, and good morning, everyone. Before discussing our fourth quarter and full year results, I want to mention that our fourth quarter 2023 Supplemental Financial Report is available on the investor relations section of our website. As Mike mentioned, for the fourth quarter, we generated adjusted DE of $35.9 million, or $0.28 per share, flat to the third quarter. Fourth quarter DE was $25.4 million, or $0.20 per share. DE includes a specific reserve on one multifamily loan of approximately $10 million, where we also took ownership of the underlying property during the quarter. Additionally, we reported total company GAAP net loss of $16.3 million, or $0.13 per share, which reflects a sequential increase in our CECL reserves and a small impairment taken on one REO asset. For the full year of 2023, we generated adjusted DE of $138.2 million, or $1.06 per share, representing a return on undepreciated shareholders' average equity of approximately 9.2%. Our dividend for the year of $0.80 was well covered at 1.33 times. Quarter-over-quarter, total company GAAP net book value decreased to $9.83 from $10.11 per share. Undepreciated book value also decreased to $11.35 from $11.55 per share. The change is mainly driven by an increase in our CECL reserves and partially offset by adjusted DE in excess of dividends declared. Looking at reserves, our specific CECL reserve decreased from $35 million to zero. The decrease was driven by the charge-offs related to our taking ownership of the properties underlying the Washington, DC office loan and Phoenix, Arizona multifamily loan. No specific reserve was required on the Denver, Colorado multifamily loan that was downgraded to a five. Our general CECL provision stands at $76 million or 246 basis points on total loan commitments, an increase of $21 million from the prior quarter. The…

Thank you. [Operator Instructions] First question comes from Sarah Barcomb with BTIG. Please go ahead.

Hey, everyone. Thanks for taking the question. I just wanted to dig into the multifamily portfolio here. Those additional downgrades related to sponsors not willing or unable to buy new interest rate caps for the most part, and can you provide any commentary on your overall exposure to syndicated sponsors that might have bought these properties during that low interest rate period?

Hey, Sarah, it’s Mazzei. I'll start off with that. I think Andy can add some color there as well. Yes, so the downgrades were, there are some syndicators in that. Yes, I think that syndicator exists across many portfolios. There are issues with execution on those specific properties. Some of them are related, as Andy said in his stated remarks, there were COVID-related policies that inhibited owners from moving tenants out of the assets. And so there were value add issues in terms of, the business plans in terms of executing on value add. So we had some of those issues with regard to the property that went REO. As Andy said, it could take us a couple of quarters, several quarters to move out of that. So yes, we had some issues with the syndicator. We are closely monitoring that. Our exposure is limited. It's been a handful of assets that we've had. One of the assets on the watch list is being supported by the preferred equity behind the asset, but we continue to have it on the watch list as well. In terms of interest rate caps across the portfolio, multifamily borrowers are buying caps. They are seeing visibility in terms of ultimately getting across the bridge, as Andy said, through the supply and getting on with their programs. So borrowers generally in multifamily have been sticking with the assets and buying caps. Andy, anything you'd like to add to that?

No, I think, Mike, you covered it. The one asset that went from a risk-ranked 5 to REO is currently in the process of going through renovations and lease-up, and that's a process that we expect to transpire over the next couple, three quarters, after which time we expect to take that asset to market on a more stabilized basis.

Okay, great. Yes we've seen some of these multifamily noise across the space this quarter, and that's to be expected just given where SOFR is these days. But just shifting over to office, it seems like there's some positive telegraphs here for the office portfolio, expecting some repays in the future here. There was one downgrade, but it wasn't watch-listed. Basically, my question is, at this stage, do you feel that the office credit is pretty well ring-fenced at this point?

I wouldn't go as far as to say that. Honestly, I don't think anybody can, given the work-from-home issues that are out there. The issue with office is going to be getting taken out of those assets with refinancing. And so I think right now that has proven to be very difficult, and you're seeing that being reflected in some of the severities on loans that have been taken back. So generally on office, I'd say, as Andy said, we are in the process of selling the Washington, D.C. asset. I think we have some encouragement there on the number of bids we got, and we're working through reviewing those bids now, and we'll have something more to say on that. Generally in the office portfolio, the Q4, it was Sarah stable. We didn't see anything that was slipping materially. We have had some successes. As Andy said, the largest asset that we have has indicated that they're paying off the loan. The South Pasadena asset with the upsizing and zoning was so substantial that we actually may recharacterize the loan. The Baltimore asset, which we've talked about in previous quarters, is now 90% leased with what will be, when the tenant takes occupancy, a very high debt yield. In San Francisco, we have two assets that are smaller. Both are fully occupied with new leases. We did a spec deal in LA for a single tenant that is now going to be fully occupied. And as Andy also mentioned, there are assets on the horizon that we think are going to pay off, most notably an asset, an office asset in Florida. So we've seen some good positive movement there. But for the rest of the portfolio, it's about visibility for the borrowers. And unlike what I just said about multifamily, where borrowers see housing shortage and over the horizon, they say, these are assets that we know will ultimately perform. So they're sticking with them generally. And we're seeing a lot of liquidity in that market. The REO asset that we are working with the borrower, he's marketing the asset for sale on that. And I think they're seeing a lot of interest in that asset. There's not much more I can say, but there's a lot of interest and a lot of liquidity on the multifamily side. The office assets, those are the assets we'll be watching more closely in terms of confidence around deploying capital. So while we've had some market improvement this quarter in terms of what will be a reduction in the portfolio, I still think going forward, that's the area that we'll be watching more closely because those borrowers have the least liquidity in terms of refinancing. But otherwise, the quarter was, for the balance of the portfolio, the quarter was absolutely stable, yes.

Great. Thank you for all that detail. Appreciate it.

Thank you. [Operator Instructions] Our next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Mike, I guess to start, it seems like you're incrementally positive as you look out later into this year. What prevents you from going on offense sooner given the very low leverage and liquidity position? Do you want to see the expected repays on office get across the finish line? Is it something else that you want to see macro, maybe rates start to roll over and get better visibly? Given the kind of seems like improving tone, why do you feel the need to wait another four to six months to kind of go back on offense?

Well, first of all, I don't think we're missing anything in the next four months. I think the transaction levels are still low because borrowers cannot get the proceeds out for their existing assets and transactions have been a lot slower because of rates. In terms of us and why we're waiting, first of all, we have to get more confidence around the stability of the portfolio, as I said in the prepared remarks. We want to see more stabilization there because the first constituent that we look at is our banks. We want to make sure the banks are protected and we have the cash to do so. No banks, no mortgage rates. Let's just be direct about that. So our banks are priority number one. In terms of new investments, when we look at it, there's been a lot of talk about buybacks. We've repeatedly said that we don't see buybacks as really moving the needle. They're small. They don't do much in terms of moving the stock price. We don't want to shrink our capital base. And so really we're looking at new investments over buybacks. And when we do the new investments, it's really about the confidence and how we would spend our cash. And for the second half of the year, if we could get some of the things we talked about accomplished in the first half, improving the watch list, getting some movement on the REO, then I think we'll have the confidence to start spending cash. And that's really more of a second half of the year thing. And maybe we can look to deploying something like $50 million to $75 million of cash in the second half if we can get some really good visibility on the balance sheet in the first…

I appreciate the color there. It'd be certainly interesting to watch the return to some of those banks and opportunities that provides. Can you touch a little bit more on the property level and multifamily? I've heard a couple of others mention some underperforming or non-performing tenants that have been stuck in assets due to some COVID policies. When did that start to change? And how, is it easier now to get those tenants out and replace with new tenants? Kind of, can you talk about that process of what you're seeing kind of re-tenanting some of these multifamily assets?

Andy, you want to lead off with that?

Sure. Thank you, Mike. So I think we have seen an easing of some of the COVID policies. Those have oftentimes been regional in nature, so they've rolled off over different periods of time. But generally what occurred was the inability to access units and start the renovation process and execute on the business plan, the value-add business plan. And so it affected the borrowers' cash flows and so forth. And what we're seeing now is borrowers are able to get to the assets, take them through renovation and get them stabilized. So it was a period where often times the borrower just wasn't able to execute their business plan and it was at great expense to them. Now we're seeing less of those impediments and the opportunity to go ahead and execute on that plan.

Great. Appreciate the comments this morning. Thank you.

[Operator Instructions] Next question comes from Matthew Erdner with Jones Trading. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. So kind of following up on the prior one, as loans kind of pay off and some REO gets sold, is there a minimum or I guess maximum amount of cash that you guys want to defend the portfolio before you start turning to offense and deploy some additional cash into new loans?

Well, I think that we've had a policy in the past. I know that we've had a policy in the past. We want to maintain minimum cash. We really we have a revolver and we really have never tapped the revolver and we don't look to doing that. So I think in terms of minimum cash, it'd be probably something like circa 100 million bucks in this market. I think previously before the Fed's hikes, we were looking at more like 75 million. So I think we want to have a little bit more cash because of the uncertainties I outlined earlier. And as I said, there's a lot that we can tap into. Certainly the REO, our largest asset is also probably the least levered asset on our warehouse lines right now. So if that asset resolves itself, which we expect, then we should free up capital there that we can re-lever. And then overall, our leverage at 1.8 times is among the lowest in the peer group. Some folks are hovering around mid-twos. Some folks are hovering in the fours. We're at 1.8. So we have to figure out a way to level up the portfolio. Some of that will be by just doing new loans and putting 75%, 80% leverage against those. So right now, $200 million of cash. Hopefully we'll harvest some of this REO over the next several quarters and be able to redeploy that, get resolution on our largest loan, which is very under-levered. And I think minimum is probably something about maintaining about $100 million cash on the balance sheet, at least through the early parts of 2025.

Yes, that's helpful there. And then in terms of new loans, are you guys kind of scouting out or looking at some deals in the marketplace, even though you might not take them until second half? And if so, what's kind of the asset type and geographic region that you guys want to target when you do go back on offense?

Yes, I would say that the periscope is up and we are looking. Absolutely. We've been attending all the conferences. Our originators have stayed in contact with their constituents and are actively involved in getting color on the market today. I think much like some of the other guys in the peer group have stated, we are focused on multifamily hotel and not really office. It would have to be a very, very unique opportunity for us to be involved in putting on an office asset. And we would need our bank lenders. It would have to be such an opportunity that our bank lenders would have to agree with us and they'd want to finance that. The CLO market, we've seen all multifamily come through to date and that's a great vehicle for financing. That'll guide us to doing more multifamily as well. I think that the opportunity is going to be construction. The banks, as I said, normally did the mini-perms. I think the banks are going to be running away from that. In terms of region, everyone talks about the oversupply in the Southeast and Southwest, but I would still say that there are certain states that are doing the best that they possibly can to chase residents out of the state. We think that's going to actually continue. As long as that continues and we're seeing quality of life issues and budget soaring in some of these states, we think, and taxes potentially going up, while there is supply that is in the Southeast that everyone is talking about, we think over the horizon, as Andy said in his prepared remarks, you get out 18 months, the pipelines really dissipate. We think those regions of the U.S. are still the best regions to lend in. Not to say that there won't be pockets that you'll do in other areas, but from a macro perspective, the South side is better than the North side.

That's helpful. Thanks for taking the questions.

Thank you. I would like to turn the call over to Mike Mazzei for closing comments.

Well, thank you all for joining us today and we look forward to speaking again in May where we hope to make some progress on the items that we outlined. Thank you all for joining.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.