Earnings call: BrightSpire Capital reported a GAAP net loss of $67.9 million

BrightSpire Capital, Inc. (NYSE: BRSP) reported its financial results for the second quarter of 2024, highlighting a GAAP net loss of $67.9 million or $0.53 per share, while adjusted distributable earnings stood at $28.8 million or $0.22 per share. The company's liquidity position remained strong with $317 million in total, including $152 million in unrestricted cash. BrightSpire announced a dividend reduction from $0.20 to $0.16 per share in a strategic move to preserve equity and enhance shareholder value. The company is actively managing its assets and loan portfolio, expecting interest rate cuts to aid in resolving underperforming loans and real estate owned (REO) in the latter half of the year.

Key Takeaways

• BrightSpire Capital reported a GAAP net loss of $67.9 million but showed positive adjusted distributable earnings of $28.8 million.
• The company reduced its quarterly dividend to $0.16 per share, aiming to conserve capital for value-enhancing strategies.
• BrightSpire is focusing on asset management and anticipates interest rate cuts to support its watchlist and REO resolutions.
• A significant San Jose hotel loan on the watchlist defaulted, and foreclosure proceedings have begun.
• The company remains engaged with banks for financing and is considering a collateralized loan obligation in 2025 to improve returns.

Company Outlook

• BrightSpire is actively seeking new lending opportunities and expects portfolio growth.
• The company is engaged in financing agreements with regional, community, and money center banks.
• Expectations are set for capital release from regional and community banks in the coming years.
• Significant updates on the repositioning and leasing of a Long Island City asset are anticipated in the second half of the year.

Bearish Highlights

• The GAAP net loss of $67.9 million reflects challenges in the market.
• The company took impairments on certain legacy office equity investments, writing them down to zero.
• A San Jose hotel loan worth $136 million defaulted, contributing to the unchanged 12% of loans in the watchlist.

Bullish Highlights

• Adjusted distributable earnings of $28.8 million indicate potential for positive cash flow.
• The company has resolved a number of watchlist loans and REO, showcasing effective asset management.
• BrightSpire maintains a conservative approach to risk, with a weighted average risk ranking of 3.2%.

Misses

• The quarterly dividend was reduced from $0.20 to $0.16 per share, signaling a need to conserve cash.
• The general CECL reserve increased by $28 million to $172 million, indicating potential concerns over credit losses.

Q&A Highlights

• Mike Mazzei expressed confidence in the stability of the loan portfolio and the prospect of further resolutions.
• The company is considering a CLO in 2025 to improve returns on their loan book.
• BrightSpire does not anticipate near-term additions to the watchlist and is confident in its CECL reserve adequacy.

BrightSpire Capital's second-quarter earnings call presented a mixed financial picture, with a notable GAAP net loss contrasted by solid adjusted distributable earnings. The company has taken steps to manage its assets and strengthen its financial position in anticipation of favorable market conditions in the second half of 2024. Despite the challenges posed by certain legacy assets and a significant loan default, BrightSpire's strategic adjustments and focus on asset management initiatives indicate a proactive approach to navigating the current economic landscape.

InvestingPro Insights

BrightSpire Capital, Inc. (NYSE: BRSP) has recently made headlines with its financial performance and strategic decisions. As investors look beyond the surface-level earnings reports, it's important to consider deeper financial metrics and expert analysis that could influence the company's valuation and future performance. Here are some InvestingPro Insights to provide additional context:

InvestingPro Data shows BrightSpire's market capitalization stands at approximately $809.9 million. Despite facing challenges, as reflected in a negative P/E ratio of -10.74, the company's dividend yield is notably high at 12.9%, indicating a substantial return for income-focused investors. This high yield aligns with the InvestingPro Tip highlighting that BrightSpire has raised its dividend for 3 consecutive years, underscoring a commitment to returning value to shareholders despite recent losses.

Another InvestingPro Tip worth noting is that analysts expect BrightSpire's net income to grow this year. This projection of profitability, coupled with the company's solid liquidity position, may provide some reassurance to investors concerned about the recent net loss and dividend cut. Meanwhile, the company's price/book ratio, as of the last twelve months leading up to Q1 2024, is 0.63, potentially indicating that the stock is undervalued relative to its assets.

For those interested in a more comprehensive analysis, InvestingPro offers additional tips on BrightSpire Capital, Inc. In total, there are 9 InvestingPro Tips available, which can be accessed through the InvestingPro platform, providing investors with a more detailed understanding of the company's financial health and market position.

These insights and metrics should be considered in the context of the company's ongoing strategy and market conditions, as they offer a glimpse into BrightSpire Capital's financial stability and future prospects.

Full transcript - Colony Northstar Credit A (BRSP) Q2 2024:

Operator: Hello, and welcome to the BrightSpire Capital, Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to David Palame, General Counsel. Please go ahead, David.

David Palame: Good morning, and welcome to BrightSpire Capital's Second Quarter 2024 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 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, July 31, 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 yesterday afternoon 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. Before I turn the call over to Mike, I will provide a brief recap on our second quarter 2024 results. The company reported GAAP net loss attributable to common stockholders of $67.9 million or $0.53 per share, distributable earnings of $17.0 million or $0.13 per share, adjusted distributable earnings of $28.8 million or $0.22 per share and cash earnings of $26.8 million or $0.21 per share. Current liquidity stands at $317 million, of which $152 million is unrestricted cash. The company also reported GAAP net book value of $8.41 per share and undepreciated book value of $9.08 per share as of June 30, 2024. Finally, during this call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike.

Mike Mazzei: Thank you, David. Welcome to our second quarter 2024 earnings call, and thank you for joining us this morning. Throughout the second quarter, the BrightSpire team remained focused on asset management initiatives in order to improve certainty around the portfolio and position the firm to move forward. We, like most welcome the anticipated interest rate cuts starting in September. This will provide further momentum for our watchlist and REO resolutions. To note, in aggregate, while watchlist has remained stable quarter-over-quarter, but with some underlying movement that we will discuss. Now, I would like to provide insights as to our results. This quarter, we are taking impairments on certain legacy office equity investments. These investments were made roughly 9 years ago by a predecessor companies prior to the formation of BrightSpire. These have been highlighted in past filings I mentioned in my prepared remarks last quarter. And taking the impairments, we will write down these investments to zero. This write-off makes up approximately 80% of our book value adjustment during the second quarter. The remainder of the book value adjustment is attributable to the increase in our CECL reserve, which now stands at $1.32 per share. The most significant impairment of these equity investments is the Norway investment. As of this month, we are no longer receiving cash flow income from this asset. As a reminder, last quarter, we also stated that we anticipated losing cash flow income on the 2 other office equity investments in the coming quarters. Importantly, we have also recently commenced loan originations and will redeploy capital, which will, in part, offset the lost cash flow earnings associated with the legacy equity positions. While the loss of these cash flows occur over 6 months, our capital deployment is anticipated to have an impact over a lengthier time period. I highlighted this dynamic last quarter. This timing mismatch became a significant factor in the decision to reduce our quarterly dividend from $0.20 to $0.16 per share beginning in the third quarter of this year. A reduction in our dividend will preserve shareholder equity in the near term. This will also allow the company to be more deliberate in pursuing value-enhancing strategies within the existing portfolio as we work through watchlist and REO investments. More specifically, as it relates to our Norway investment, although the debt comes due in June of 2025, a cash flow sweep went into effect this month. As a reminder, this is a net lease property and the global headquarters of Equinor, the state oil company of Norway. Equinor has been evaluating their future office requirements. The options include remaining at our property, leasing and alternative building or constructing a new headquarters. For us to accomplish a sale or refinancing, we would need to be able to negotiate a lease extension beyond its current 2030 exploration. If Equinor decides to remain on our property under the current terms of the lease, the 5-year remaining term beyond the debt maturity is insufficient to refinance the property without a significant pay down of the debt. Also, Equinor's time line for their occupancy decision may not align with the maturity of our mortgage debt. We will continue to work alongside Equinor and in our process. We will also engage with the lender group in an effort to modify the debt to improve the outcome. But at this time, investing more capital into this asset does not appear likely. Unlike Norway, the 2 U.S. office equity investments or multi-tenanted properties financed with CMBS mortgages. Although the respective underlying property cash flows provide more than adequate coverage on both interest and amortization, these investments fall short of the criteria necessary to refinance in today's market. A cash flow sweep on these assets is anticipated to commence at their respective loan maturities in October 2024 and January 2025. Therefore, we have proactively initiated discussions with the servicer to explore options for maturity extensions. But given the uncertainties, we took the prudent approach of incurring impairments on both of these investments. During the second quarter and subsequent to quarter end, we successfully resolved a number of watchlist loans and REO. In addition, we continue to be conservative in our approach to risk ratings and in doing so, we downgraded certain other loans. However, on a net basis, the watchlist loan count and aggregate loan balance remained constant. Furthermore, 65% of the aggregate watchlist is current in interest payments. The largest portion of the nonaccrual is attributed to our San Jose hotel loan, which Andy will discuss in his remarks. At this point in time, we do not anticipate meaningful migration on to the watchlist. Alternatively, we believe that the remainder of the year will provide a window for significant resolutions and reduction to the current watchlist. As we head into the second half of the year, we have experienced improved visibility on our liquidity needs. And as a result, we have reengaged loan origination efforts to deploy capital. While it is still early, we are encouraged to see opportunities emanating from the pullback by regional banks. We also expect future rate cuts will provide a boost to dislodge more assets for refinancing. The private credit sector should be a net winner in this pivot away from regional banks. Lastly, reselling originations underscores our continued progress in our anticipation of resolving underperforming loans and REO. Again, we believe the second half of the year will yield significant progress on this front. And with that, I will now turn the call over to our President, Andy Witt.

Andy Witt: Thank you, Mike. During the quarter, we received $85 million in repayments and resolution proceeds across 4 investments. Deployment for the quarter totaled $18 million, consisting of $9 million of future funding obligations and a $9 million loan upsize. As highlighted last quarter, proceeds from the loan upsize were used to consolidate collateral related to a mixed-use asset in Pasadena, California. The initial collateral includes a fully leased 94,000 square foot office building with developable land. The upsized loan proceeds allowed the borrower to complete the purchase of the additional land parcels previously under contract and consolidate collateral underlying a fully entitled 310 units senior living development project. The borrower is currently evaluating a refinancing and/or disposition of the office property and development site. In terms of the watchlist progress, during the second quarter, we resolved the previously downgraded Miami, Florida office loan. Additionally, we completed the sale of the property collateralizing the risk rank by Denver, Colorado multifamily loans. Additionally, we upgraded a Las Vegas multifamily loan as a result of sustained positive progress over the past quarters. As for REO updates, the Washington D.C. office property is under contract and subsequent to quarter end, we received a hard deposit and the transaction is currently scheduled to close on August 1 at our net asset value. As Mike mentioned, we continue to have a conservative approach to our watchlist. In doing so, we downgraded 3 loans during the quarter which included 2 mezzanine loans, one located in Milpitas, California, the other in Las Vegas, Nevada. Both loans had a pick component to the payment structure. The Milpitas loan was placed on nonaccrual in Q1, and the Las Vegas loan was placed on nonaccrual subsequent to quarter end. We elected to move these investments to the watchlist, given where these loans sit within their respective capital structures combined with the current uncertainty in the capital markets. The assets themselves are best-in-class. In the case of the Milpitas property, it is fully leased, whereas the Las Vegas property is nearing completion and starting to lease up. The third addition to the watchlist is the Dallas multifamily loan. In this case, the property has tracked behind business plan and the borrowers unable to capitalize the remainder of the business plan. As a result, we are evaluating our options, which include selling the property or taking control of the asset and executing a value-enhancing business plan, utilizing our vertically integrated asset management platform. Our warehouse lenders have indicated they will cooperate with us should we elect to do the latter. Lastly, as it relates to the watchlist, our San Jose hotel loan for $136 million had a payment default in June on both our first mortgage and the mezzanine loan, which is held by a third-party. As a reminder, this loan was initially added to the watchlist in the first quarter of 2020 during COVID. The loan remained on the watchlist as a risk rank for, although the loan had been current on its interest payments. Despite a loan paydown of $57 million in November of 2023, we did not reduce the general CECL reserve attributable to loan given uncertainty. During the second quarter, BrightSpire placed the loan on nonaccrual, downgraded the loan to a risk ranking of 5 from a 4 and has since commenced foreclosure proceedings. In coordination with our warehouse lender and in anticipation of this potential eventuality, we have secured a commitment from our existing lender to maintain funding throughout this process. Given the commencement of foreclosure, which is in the public domain, we will refrain from discussing this matter further. Although it was an active quarter as it relates to the watchlist, the total number of loans did not change quarter-over-quarter at 12%. The corresponding watchlist NAV remained relatively flat quarter-over-quarter at $543 million or 20% of the portfolio, 5% of which is attributable to the San Jose hotel loan. As it relates to the loan portfolio, as of June 30, 2024, excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 83 investments, with an aggregate carrying value of $2.8 billion and the net carrying value of $877 million or 83% of the total investment portfolio. Our weighted average risk ranking remained flat quarter-over-quarter at 3.2%. The average loan size is $33 million. First mortgages constitute 97% of our loan portfolio, of which 100% are floating rate. The multifamily portion of our portfolio remains our largest segment with 49 loans representing 54% of the loan portfolio or $1.5 billion of aggregate carrying value. Office comprises 30% of the loan portfolio consisting of $800 million and $21 million of aggregate carrying value across '24 loans with an average loan balance of $34 million. The remainder of our portfolio is comprised of 8% hospitality with mixed-use and industrial collateral, making up the remainder. As of quarter end, remaining future funding obligations stand at $127 million or 4% of total outstanding commitments. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer, to elaborate on the second quarter results. Frank?

Frank Saracino: Thank you, Andy, and good morning, everyone. Before discussing our second quarter results, I want to mention that our second quarter 2024 supplemental financial report is available on the Investor Relations section of our website. For the second quarter, we generated adjusted DE of $28.8 million or $0.22 per share. Second quarter DE was $17 million or $0.13 per share. DE includes a specific reserve of approximately $12 million. Additionally, we reported total company GAAP net loss of $67.9 million or $0.53 per share which reflects operating real estate impairments as well as increases in our CECL reserves. Quarter-over-quarter, total company GAAP net book value decreased to $8.41 from $9.10 per share. Undepreciated book value decreased to $9.08 from $10.57 per share. This change is mainly driven by impairments taken on our operating real estate assets and an increase in our CECL reserves, partially offset by adjusted DE in excess of dividends acquired. Looking at reserves. During 2Q, we recorded a specific CECL reserve of $13 million related to the Miami, Florida office loan. As Andy mentioned, this one was downgraded to a 4 in 1Q and resolved during 2Q. As the Denver, Colorado multifamily loan was also resolved in 2Q, we charged off the specific reserves related to both loans during the quarter and as a result, ended the second quarter with no specific reserves. Our general CECL provision stands at $172 million or 597 basis points of total loan commitments, an increase of $28 million from the prior quarter. The increase in the general CECL was primarily driven by specific inputs on certain loans. Looking at our watchlist loans, our one risk ranked 5 loan represents 5% of the total loan portfolio carrying value, 11 loans equating to 15% of the total loan portfolio carrying value or risk rate for. This concludes our prepared remarks. And with that, let's open it up for questions. Operator?

Operator: [Operator Instructions] First question today is coming from Stephen Laws from Raymond James.

Stephen Laws: I definitely jumping in the transcript to get some of the details, Andy. But as you think about the watchlist loans as we move through the back half of the year, which of those 12 do you think are potential second half resolutions? And which ones do you think you continue to work through as you move into '25?

Mike Mazzei: Now let me take that first, Stephen, it's Mike. I would say that out of the 12, I would say, the majority of them are in various stages of progress. And we think, as we said in the prepared remarks, we'll make significant progress between now and the half of the year -- the end of the back half of the year. I don't want to identify specific loans on the watchlist other than the fact that the largest one, the San Jose loan, is now in default on its interest payment. And so we have started and it's public. We started the foreclosure process on that property. So we are moving toward a resolution. It's in the state of California. So that typically takes, call it, about 120 days, and we're into it for about approximately 30 days. So there's -- that's another example of something that we are clearly moving in the direction of resolution on. So I'd say a substantial number of the assets on the watchlist are in various states of play and we're really looking for the second half of the year to give us significant progress.

Stephen Laws: Great. Appreciate the comments, Mike.

Mike Mazzei: And also on that note. Stephen, I'm sorry. Also just to reiterate the fact that 65% of the loans are current. And so we don't have a full say in that as long as the borrowers are maintaining payments, they're somewhat in the driver seat there. So 65% of that portfolio is current and the largest, as we said, nonaccrual is the San Jose loan.

Stephen Laws: Yes. No, that's a good point. I appreciate you pointing that out up to 65%, Mike. As my follow-up question, I wanted to touch on your comment about you've got better visibility into your liquidity needs, you've reengaged discussions on new originations. Can you maybe talk about your pipeline of deploying capital and then how that balances against expected repayments in the second half of the year, kind of getting to an answer of kind of net portfolio growth, net portfolio flat? Or do you think you see some shrinkage here in the back half before you get originations ramp back up?

Mike Mazzei: No, we expect the portfolio to start growing. We have $152 million of cash on the balance sheet. And as we continue to execute on the plan for under levered loans, unlevered REO or loans, the watchlist that is going to generate more cash to reinvest. So we think that this, as I said, over the -- in the prepared remarks, over the period of the reinvestment and relevering between now and through next year. So it will be a steady flow, if you will, of deployment. And again, $152 million is on the balance sheet now in cash, and the rest of it will come from asset resolutions, which we feel the visibility on that, along with the stability in the portfolio at this point, where we don't think anything that we can see is going to move on to the watchlist. We feel confident in redeploying. And I also think that we look to hopefully accumulate enough by midyear 2025 to execute on a 2025 CLO.

Operator: Next question today is coming from Steve Delaney from JMP Securities.

Steve Delaney: Just looking at -- and the comments on Norway. Looking at the debt, just trying to reconcile here on Page 5, the $1.32 of total impairments. And then on Page 6, we get the non-GAAP impairment of $0.98. Is the $0.98 simply Norway and the difference are the other impairments and charges that you took trying to reconcile this to?

Frank Saracino: Sure, Steve. This is Frank. So $0.34 of that impairment came through as a GAAP-related impairment. And as you know, GAAP has certain rules requiring what you can take as far as impairment and you can only impair down to GAAP value. And really, the difference between the undepreciated book value and GAAP book value is the accumulated amortization and depreciation that gets added back to GAAP book value. So we're eliminating that and saying don't add that back from GAAP book value, and that equates to $0.98.

Steve Delaney: And then switching to new lending. Obviously, you're seeing some repayments. So the portfolio is shrinking near term. Could you just comment on where you stand with evaluating new loans? Do you actually have a pipeline at this time? I know you commented on the opportunity, Mike, when you were at Nareit, but just curious how close we are to actually issuing commitment letters and funding new loans.

Mike Mazzei: Yes, we are actively looking at product today. We're meeting on investment committees and quote committees every week. Nothing has been committed to yet, but that process has been fully engaged and we're out there speaking to mortgage bankers, brokers and all of our borrowing constituents out there looking for new product. And as I said in the script that we are seeing a lot from the regional banks. We don't expect anything -- any game to break there. We don't expect massive bulk sales unless banks go under, which we don't see at this point. But we are seeing the banks allowing what I would call runoff, where there is a construction loan or a mini perm, the bank is not renewing that loan without some sort of significant pay down and they're not letting borrowers off the hook for recourse on a construction loan. And so those loans are starting to come into the nonbank market. And I think after we get a Fed cut and as we move into the fourth quarter, that's going to enable a lot of those borrowers to start to get refinancing away from the bank. So we're still encouraged about the flow that we're going to see from the regional banks and the community banks. But we are actively engaged, absolutely, but no commitments yet.

Steve Delaney: Encouraging. Okay. And while the banks don't want that paper on their books, you sense they're still more than willing to finance you on repo lines to carry the loans on your -- on balance sheet?

Mike Mazzei: Yes. These are regional and more community banks where you're seeing commercial real estate loan exposure at 300x their Tier 1 capital or in excess of that and there could be hundreds of those. The money center banks are not in that position. The money center banks are probably somewhere as a fraction of loan exposure relative to their Tier 1 capital and our money center banks to finance us on warehouse are very actively engaged in that. It's an asset class that's publicly been their best performing asset class in commercial real estate warehouse lending in terms of risk reward. I think they probably have suffered no or very little losses there. So we're very actively engaged with us, and we'd like to grow their exposure to us. Yes.

Steve Delaney: But thanks for the clarification between the regionals and the money centers. I know asset management is hand-to-hand combat, but it's the only way to get through it, right, and get to the end and get your portfolio and your balance sheet cleaned up. So all the best in.

Mike Mazzei: Well we've been doing this for 2 years now. And so I think at this point in time, we see enough stability in the portfolio. As we said, earlier. We don't see anything in the front window that is going to come on to the wash list, and we see more of the resolutions because we've been working on these assets for quite some time. We see more resolutions toward the second half of the year. So I think we're feeling encouraged about with the cash on balance sheet that we have today and the cash that we're going to generate from these resolutions that we should go full [flotel] on origination.

Operator: Our next question is coming from Matt Howlett from B. Riley Securities.

Matt Howlett: Mike, just on the comments with the current loan portfolio, you feel pretty good about the status going forward. And then the general CECL that you took this quarter, the reserve I mean I don't want to hold you to it, but is this it in terms of just an increase in general CECL, meaning where the core EPS now where the dividend is going to be? I mean, book value should be basically at a bottom or near bottom?

Mike Mazzei: What I would say is that we feel pretty good that it's on the high side at 6% of the loan book and roughly 15% of the book value and with the fact that we think that we're going to make a lot of progress on the second half of this year, I think we're feeling that, that is on the highlight. I also would underscore a part of that is due to the fact that we have a very low average loan balance and our loan concentrations are low, and we will not have any loans over $100 million after the resolution of the San Jose loan. So that's giving us more confidence as we look at what we have now in our existing portfolio. And as we emphasize with the San Jose hotel loan, when that loan was reducing balance last year by 30%, we maintained the CECL amount on that loan. We did not reduce the CECL on a pro rata basis. So that's another reason why we're feeling like we're relatively conservative on our CECL reserves right now. And then in terms of the office portfolio, we have a number of office loans on the watchlist. And we think that the office portfolio is probably going to shrink a little bit more over the course of the remaining part of the year and into next year. So that is giving us some confidence on our CECL reserves at the levels that they're at now. And I want to also mention that we don't have any life science. I know that our peer group emphasizes that they have an office category in a life science category. We do not have any life science loans and we kind of view life science as office product that has 3x the amount of loan per square foot for refrigeration and turbo HVAC, but we don't have that exposure here. And so we see that loan exposure in the office sector dropping over the course of the next 6 months and into next year as well. So overall, I'm not going to never say never, but we are feeling that it is on the high side at 6% of the loan book.

Matt Howlett: And then when you look at sort of adjusted EPS in the dividend now at $0.16 you should be -- we'll run our models, but you should be covering. There shouldn't be any sort of degradation of not covering it on a core basis.

Mike Mazzei: Yes, we feel good about maintaining the dividend here. We feel it was right-sized primarily to prevent leakage. We looked at it from a negative coverage basis on cash flow, not just DE, but on actual cash flow of the book. And we feel we'll get back into a positive comp on a cash flow basis and retained earnings as a result of executing on the build back to hopefully a $0.20 dividend in the future. So right now, we feel confident that we can maintain the dividend where it is.

Matt Howlett: I appreciate those comments. And it's great to hear that you guys want to take it back up to $0.20 when you can do it. I figured I'd asked the question because, look, it's great to hear that you're back in the market. We all know the opportunity with nonbanks from the market and you guys being internally managed, being efficient, being out there with rate sheets, it's great to hear. But I want to ask the question. We've heard a lot of your peers talk about, "You know what, hey, in the meantime, things aren't that busy." They're busy, but they're not that busy going to buy AAA CMBS where we can get 20% yields and/or I'll take it to the other side. We could buy back stock here. If you think book is good at $9, you're trading at under 6, hey, why don't we buy back stock until we get things going?

Mike Mazzei: Well, in terms of the buyback, we are looking at that. Having said that, we're reducing our scale. And when we look at loan origination and potentially executing a CLO and the ROE on that looks pretty compelling versus the buyback. The buyback would make sense. Really, if you look at doing a secondary equity offering in the near-term horizon, I mean that makes it absolutely compelling. But just in terms of deployment of capital, rather than reduce scale, I think we feel that originating loans and executing on a CLO in 2025 will give us a better ROE. With regard to buying AAAs. We haven't done that in the past, others might be doing it but we don't think you can get that in enough scale. When you lever those up 75%, 80% on a securities warehouse line, you're really not deploying a lot of equity. So -- and putting out $10 million, $15 million, $20 million in AAA securities and levering them up 80%, you really don't move the needle that much.

Matt Howlett: Right. That may feel to get involved with that. Okay. And then just, I guess, on that CLO, can you give us a sense of what size? I mean what would you -- what could you tell us? Are you talking about $400 million-plus deal? And what you tell us --

Mike Mazzei: We -- this is -- we're talking on to 2025. So I think we would look at what traditionally gets done. If you're looking at a CLO, you're probably trying to do something greater than $500 million, maybe shy of $1 billion, which is what we've done in our first 2 CLOs. But I think that when you look at the ROE that we have typically gotten after executing a CLO, you're probably adding several hundred basis points or maybe more to your returns on your loan book. And so that's where when we look at originating loans and then executing the CLO versus a buyback of stock. As we move into 2025, we think that the CLO execution is something we prefer because, again, we really don't want to necessarily reduce our scale at this point. So right now, yes, we'll look at buybacks, but right now, we think just executing on the business plan gives us as attractive or better returns.

Operator: Next question today is coming from Jason Weaver from JonesTrading.

Jason Weaver: So Mike, taking your few last answers regarding originations into account. We've heard a lot about new private capital coming into the space on the sidelines. So how are you thinking about the competitive environment going into year-end and beyond?

Mike Mazzei: It's going to be competitive, flat out. I'm still trying to get my arms around what private credit means outside of leveraged finance. It must -- it absolutely means real estate. I guess it means anything that in the wholesale lending side of a bank not consumer related that the private credit groups want to get into. But yes, we see a lot of demand for credit coming out of that sector. Also, though, we've seen hundreds of banks execute on commercial real estate loans over the course of the last 3, 4-plus years where we didn't know who these banks were. And then I think the analogy to is like watching the C level wise, you can't tell because all of these banks are doing loans and you're not seeing these repeat banks come up. And [indiscernible] forward, here we are after several banks go longer, you're realizing that there are hundreds of banks out there with commercial real estate exposure that at many multiples times their Tier 1 capital. We didn't see that happening over the past 3 or 4 years. We may have seen 10 banks or some of the New York big banks that went under here, Signature Bank (OTC:SBNY) and what's happened at New York Community Bank. But outside of those banks, we really couldn't detect that volume. And so we think there's a lot that's going to come off of those regional and community banks that's enough to satisfy our peer group in 2025, '26.

Jason Weaver: That's helpful color. And then I know we just discussed it only recently, maybe at Nareit and you've only had them for a year, but do you have any update on the repositioning or the lease-up of that Long Island City asset?

Mike Mazzei: We continue to work on that, and we are on, as we said in the past, not to hold on to REO for this protracted period of time. And so I think that based on how long we've held on to it. We feel like there's something there that we -- that's worth holding onto for. And so we should have something to report, as we said, the back half of this year we think, will be significant. And I would put the Long Island City assets in that category.

Operator: Next question is coming from Tom Catherwood from BTIG.

Tom Catherwood: Maybe starting with Andy, you've made opportunistic investments in the past. Is there a chance BrightSpire could take a more direct position in the South Pasadena office land asset as the sponsor looks to refinance that project?

Andy Witt: So right now, that particular asset is fully entitled. It's really an office building that's fully leased in a development site and the borrower is in the process of looking to either refinance or capitalize the development project. And we've looked at it in a number of different ways and really don't think it fits our strategy and mandate moving forward. But we agree, it's a tremendous project.

Tom Catherwood: Makes total sense. Then maybe, Mike, I know you said you're confident in watchlist stability. But is there a potential scenario where a pickup in transaction activity, especially if we get the rate cuts actually accelerates watchlist migration as price discovery drives certain sponsors to back away from assets sooner than would otherwise be expected.

Mike Mazzei: Anything could happen. But when we look at that portfolio right now, we do not see anything migrating on to the watchlist near term. And so that's why I think we're comfortable with our CECL reserve at this point. But anything can happen over the course of next year, particularly around really the office loans. But right now, as I said, we see that portfolio shrinking, and we don't see anything there that we'll migrate on to the watchlist in the next coming quarters. So I think the CECL reserve feels, as I said, on the high side, at 6% of book value. And I would say that we feel very reasonable about where we are.

Operator: Thank you. We reach the end of our question-and-answer session. I'd like to turn the floor back over to Mike for any further or closing comments.

Mike Mazzei: Well, thank you all for joining us today, and thank you for your continued support. As always, we are available for one-on-ones as we press it. Otherwise, we will see you in November.

Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

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