Good afternoon, everyone. Just turned 1:30 P.M., so we'll get started. I'm Steve Delaney. I serve as the Director of Mortgage and Real Estate Finance Research at Citizens JMP Securities, and I was pleased to see when I walked in that Citizens JMP is a silver sponsor for REITw eek this year. It's a pleasure to be asked to moderate this panel with BrightSpire. BrightSpire Capital, ticker BRSP, is a rare, internally managed commercial mortgage REIT. It has been a public company since its 2018 IPO, and currently has a common equity market capitalization of about $800 million. In early 2021, the company completed an internalization transaction and terminated its relationship with the former external manager, DigitalBridge, which was previously known as Colony Capital.
Citizens JMP rates BRSP shares at market outperform, with an $8.50 price target, suggesting potential upside of more than 40% from the current price range, along with an attractive low teens dividend yield. Today, we're pleased to have each of the top three officers in the company with us for our panel discussion. To my left, Mike Mazzei is the CEO. In the middle, Andy Witt is the President and Chief Operating Officer, and at the far end, Frank Saraceno is the Chief Financial Officer. Mike started his career in commercial mortgage trading at Lehman Brothers, where he worked for 20 years.
He subsequently spent time in executive positions at Barclays and then BofA Merrill Lynch, before joining Ladder Capital in 2012, where he spent 5 years as president, and then remained a member of the board of directors until he joined BrightSpire in 2020 as CEO. He has impressively survived and thrived through 40 consecutive years in the commercial real estate finance industry. Is that where the hair went? Andy Witt, who is President and COO of BRSP, joined Colony Capital in 2007, and worked for 14 years for Colony when he transitioned to BrightSpire at the time of its internalization in 2021. He graduated from Stanford and then earned his MBA at USC. But maybe more notably, Andy was a member of the U.S. Men's Olympic Volleyball team in the year 2000.
Frank Saraceno is a CPA, and started his career at Coopers & Lybrand, then held senior accounting and finance positions at Deutsche Bank, Cantor Fitzgerald, Macquarie Group, and Prospect Capital before joining Colony Capital in 2015, where he worked until the BrightSpire internalization transaction in 2021. We'd like to now start sort of a roundtable management discussion, and if we have time at the end, we'd be delighted to take your questions. Mike, would like to start with you. Given your many years of experience in commercial real estate finance, how would you compare the current challenging conditions in the CRE and multifamily property and lending markets to the previous market disruptions?
We can all recall the S&L crisis in the early 1990s, Long-Term Capital and related fallout in the late 1990s, and then, of course, the Great Financial Crisis, 2006-'08, or however long it dragged on. Yeah, how did we get where we are here today in this current environment? What inning are we in with the down cycle, and what is different or unique this time around? Take us down memory lane.
Can you hear me okay? Can you hear me? So Andy's played volleyball 'cause he sucked at basketball. So when you compare it to the, I mean, I'm looking at Rob, who was at Bear Stearns, right? I was at Lehman. When you look at this versus the GFC, right? I'm gonna look at you, see if you nod or shake your head the other way. In the GFC, everything was in the wrong place. It was all at the banks, right? We had massive loans that were done. A lot of these private equity take privates. When they couldn't get it done in the leveraged finance market, they figured out they can come to the loan market and CMBS.
So you had the Hiltons, the Harrah's, the Extended Stay hotels, the Archstones, which I, I took part in at Barclays. And you had capital structures that were incredibly complicated. You had these take privates that had 20 classes of mezzanine debt behind it. And you had the CDO market, which everything went to zero in the CDO market, like the movie The Big Short. So this is very different. There, it was at the banks, it was bad credit, it was hyper structuring, it was driven a lot by real estate private equity.
You had so many more private equity opportunity funds in existence in 2007, where the mantra after that were the pension funds were paring down to the best brand names and not, you know, not having 20 guys in their portfolio investing in real estate private equity. So big difference. So when we came out of that, the market did a big correction. Things got more simple. Deal sizes got smaller. Investors really went on a, on a, on a tear to make sure that they were monitoring the transactions, especially in the securitization markets. You could only have a certain amount of this, a certain amount of that, and the transactions were capped in size at $1 billion, where in the GFC, doing a $3 billion transaction was, like, the goal.
Everyone wanted to top everybody else in terms of size and complexity. So very different today. There was a huge healing process. And then, you know, things went where they belonged, where everything was at the banks. The banks held. I can remember when I went to BofA, and we had, like, portfolios of mezz equity that we just didn't deserve to own. So today, with the advent of the non-bank funds and the mortgage REITs that really came out of the GFC, first with Starwood and Apollo were the first ones who were kinda really out with their mortgage REITs, things ended up being in the right spot. So the banks did the first mortgage loans and handled securitizations, and the non-banks did more of the heavy lifting, transitional stuff, and things were working.
The retail regional mall market problem hit in, like, 2014. Here we are, 10 years later, leasing is doing great. The ISC-ICSC conference is packed. So leasing has done well. Very little building in retail. That feels like it's gone through a healing process. So even though we had that bump in the road, after the GFC, things really got to heal. And then where I think where it all changed, it were interest rates, you know, where we got just, you know, into this opium-driven, low interest rate environment, where you just could not do nothing. So all the cor-
That was COVID, right? There was the Fed's response to COVID, it was like-
Yes.
-free money.
Well, it was leading up to COVID, too, because, you know, you got a lotta, you got a lotta loans that are out there in CMBS land that have four handles on them. And that's a, that's a loan rate that Grandpa didn't see either. So I think that it was just generally a low-rate environment, and then you're right, it got really low for a long period of time, and a lot of it driven by COVID, and so that's what's got us ensnared today. We're coming out of this. Everyone sees it. We're feeling it every day in our lives. Credit card debt's 29%. And so we did loans in that environment.
and then the Fed, you know, this experimentation, I mean, you know, if you listen to a Starwood earnings call, and we'll let Barry say all the things you wanna hear about the Fed that are negative, and he could do that. We can't. But, you know, that we went a long period of time with this experiment at low rates. We put money out, and everyone knows, you know, we read about it every day, and here we are, and we're kinda working our way out. The only difference I'd say that is really compounding things, is the office sector, where the office is the new retail, but there's a hell of a lot more office. And with the retail, you knew which ones were the bad retails.
You saw the anchors, and you're like: Okay, I know where this mall's going. You see the inline sales per square foot, and you know where... If it was below 400, it wasn't feeling good. You can't do that with office. You don't know what's lurking inside the rent rolls, and right now we're seeing severities in office that, you know, nobody would have predicted, even coming out of COVID. We lent on office properties. We stayed away from major cities. We went to drive-to markets. We did smaller average loan balances. We thought we were doing the right thing. In hindsight, I think we wished we didn't make a lot of these office loans.
Yeah.
At the time, they seemed great. The debt yields seemed good. The stories seemed good. And then, you know, who knew what was gonna happen a year later? So I think that's the difference between... When you look back, the GFC was a total train wreck for bad credit, crazy structuring, all the loans in the wrong places. We did all the corrective corrections we had to do, and I think between the Fed and the office market, those are the biggest headwinds that we have.
Yeah. You mentioned the commercial banks. Obviously, they've got the lowest cost of capital of anybody that really plays in this space, but there's a lot of regulatory pressure on them, and we're hearing that they're pulling back. So looking forward, you know, as we come out of this sorta down market cycle, how do you feel about the opportunity as a private non-bank to compete? Do you think the banks will be there in size with all that cheap money, or do you think this could be a good cycle for non-bank lenders?
I think, non-bank lenders, whether you are a fund or a mortgage REIT, you're very excited about it. And even the equity investors wanna be in the debt.
Mm.
They all see. They, they, they're seeing very little transactions happening at the equity level, for all the reasons we just discussed, and they're seeing that the debt is driving the transaction. They're driving the bus. So everyone, whether you're an equity investor or you're a traditional debt investor, everyone wants to be on the, on the debt side of the equation. And you're right, the regional banks, I think the mortgage REITs were first to really start acknowledging that there's a problem out there and that the Fed was gonna tighten, and it's going to affect us.
The regional banks really didn't do anything until the deposit base was pulled out from under them by high T-bill rates, and that's when that deposit runoff began to happen, even if you weren't an SVB or a First Republic, every regional bank looked at themselves and said: "Whoa, we have way more real estate than we were really getting focus on." The shareholders, the public market started taking notice of that. They started taking notice that their cost of funds were going up because they were buying wholesale deposits. So now the regional banks, while they're much better than they were in October- ...
There's still a problem there, where if you talk to a regional bank real estate head: "What are you guys doing?" They'll say, "We're servicing our clients." You're like: "No, what are you doing?" "We're servicing our clients." "So you're putting out new money?" "No." "Are you letting runoff happen?" "Yes." So if you look at a CLO that was done by MF1, you know, you know, 3, 4 months ago, it looked much different than an MF1 CLO, multifamily CLO, a year ago, where it was lower debt yields a year ago. Now they're all getting all assets that are coming. They look like they're coming off bank construction loans.
Mm.
where the bank would normally do the mini perm.
Sure.
The bank is taking a step back, saying: "Let the construction loan go roll someplace else, and that's all going into the nut." So the short answer is, I think there's a huge opportunity for non-banks, not just really 'cause of the commercial banks, but more because of the regional banks. That's gonna be a big pullback.
Thank you. The CMBS market, sort of the permanent fixed rate market, is also showing some signs of spread tightening and higher issuance because of its spread tightening. Now, this is an area you've personally had a great deal of experience with over your career. What's your current outlook for CMBS conduit lending? Do you see a future role or benefit to BRSP from that activity?
Well, I'll tell you, to build and gain on sale fixed rate loan program takes a massive amount of infrastructure, which I personally have a lot of respect for, and that is hard to build ground up. Especially being a new entrant to the market. You become like the broker's last pick. You're seeing deals that other deals, you know, originators-
Sure
... have turned down. So it's the barriers for entry are not low. I think that market's in great shape. I mean, the problem that that market has is supply. There's not enough... There's demand for credit, but you have to have the change in pricing. So the lenders are gonna have to force equity to the table to sell properties to get more supply out in the market. The debt yields that are being underwritten on these assets at these higher interest rates are fantastic. It's a great time to be a lender. Same reasons why it's a bad time to be a borrower. So I think that the only thing that holds back the securitization market is, you know, the not just the demand for credit, but the ability for borrowers to deal with the...
You know, Brian Harris said it on an earnings call, you know, a few quarters ago. You know, some borrowers can get over the rate, but then when you tell them what their proceeds are at that rate, they're like: "I'm loan locked. I can't get out of my existing loan." Having said that, the CMBS markets are healing, spreads are good, the quality of product and credit quality going into the deals are fantastic. But to do a $750 million deal, you know, pre-COVID, you'd have two partners, two banks in that securitization. Now you have, like, seven.
Yeah.
So everyone is struggling to get... You know, nobody can seem to break over $100 million of loan contributions into a securitization easily. So it's very multi-contributor based, but the market is doing very well, and the underwriting is as solid as it's ever been in my career.
The bid is there from the street-
Oh, my God, yes!
from the paper.
For CLO as well.
Yeah.
I mean, there's such a dearth in supply that investors are there. It's just a matter of getting the right amount of supply out there, which they haven't been able to do. But that market is very, very healthy right now.
That's great color. Thank you. Andy, let me turn to you. You know, chatting with Mike about future opportunities, but still challenges today, as he mentioned, with spacing CRE lenders. A lot of heavy lifting, you know, in on the asset management side and loan workouts. Can you comment on the level of visibility after these couple of years of a tough market that you believe your management team now has with your existing portfolio? And are there any benchmarks you'd like to reach in terms of where you are with your four and five, your stressed loans, before you might become a little more proactive foot forward in terms of a lot of new lending and investment? So I guess I'm getting at the balance between defense and offense.
Yeah, thank you. Thank you.
Thank you.
No, a great, great question. Obviously, we've been living with our existing portfolio for a period of two years or more, and we really haven't been active in terms of new origination. So a lot of our, you know, day-to-day focus is on the existing assets, on the existing portfolio and, you know, managing what we have. And we're certainly starting to look out and see enough clarity in the portfolio that we're starting to look at new opportunities from an origination's perspective. You know, in terms of our four and five risk-rated loans, we, you know, we feel like we've got a fair bit of visibility on those loans. We're working them, you know, really on a daily basis.
And, you know, I think the important part of addressing, you know, that group of assets is giving us the clarity to really lean in on the new originations. But even more important is really unlocking capital that's sitting in our REO book. So we've taken some assets back that aren't producing, they're not productive in terms of earnings. So bringing those, you know, repatriating that capital and being in a position to, you know, redeploy that capital. And then as well, we see an opportunity to relever the balance sheet. So, you know, in terms of first mortgages, we're sitting at about 3x leverage, which is well inside of the peer group.
We think it's the combination of, you know, gaining clarity on the risk-rated 4 and 5 assets, some of which are gonna produce incremental liquidity, addressing the REO book and repatriating some of that capital, and then finding ways to relever the portfolio. We think the combination of those things, you know, gives us the positioning to start looking forward and making new loans. We can't wait until all of those things happen-
Right
... in order to start making new loans or start looking at the, you know, new opportunities in the market. So, you know, we are, you know, we're holding pipeline meetings. We're looking at what's out there in the market. We're starting to, you know, dip our toe in and anticipate starting to make new, new, new loans. So-
That's a great segue to wrap on that, and that is 'cause the question was gonna be: You know, look-
Yeah.
As you look at these new bridge lending opportunities, and you apply the, you know, the lessons you've seen over the last several years, is that bridge loan, that floating rate bridge loan product—you know, three-year loan, two renewals. How are you restructuring those? Sort of the structure of these loans, the return expectations. So the two, the next version of Bridge Loan 2.0, how is it gonna look different from what you're working, you know, what you're working with in your residual portfolio?
Sure. So I think in terms of the structure, I think you're gonna see, you know, relatively similar structure. Probably gonna see, you know, loans with less DSCR coverage focus. I think that's been a big challenge, given the current interest rate environment. But I think in terms of, you know, what we're looking to accomplish with our portfolio is really focusing on that middle market opportunity. And, you know, we've gone through a lot of kind of morphing of the portfolio, if you will, pre-COVID to now. We were sitting on an average loan balance of about $54 million. That loan balance is now, you know, squarely in the low thirties, $33.3 million.
And I think what you're gonna see from us is a continuation of that strategy of, you know, keeping the loan sizes relative to our balance sheet and, you know, that middle market segment. And then, as Mike highlighted earlier, I mean, we really feel like the opportunity moving forward with the regional banks taking a step back, really squares well with our strategy of being in the middle market. So we're very excited about, you know, the opportunity going forward. Right now, you know, there's not a lot of investment sales occurring right now.
There's not a lot of activity in the market, but we're looking forward, we're looking through that, and we think there's gonna be a tremendous amount of opportunity, and we think we're, you know, quite well-positioned, you know, vis-à-vis the void that the regional banks are likely to leave.
Importantly, you know where you're focused and where you're headed as well, it sounds like.
Yeah
... in terms of a portfolio construct. Frank, we can't let you sit there quietly for too long. You know, CECL accounting for loss reserves, you know, it was fairly smooth implementation. It didn't take long, however, you know, for what was a new concept for investors and companies to get a handle on. But it didn't take long for it to be tested by this major credit disruption. Can you talk about the approach that BrightSpire takes, you know, generally to risk ratings, and have you applied specific reserves as needed on your four or five loans? And maybe if there's anything that you think is maybe a little differentiated between the BrightSpire approach and some of your peers. Thank you.
Sure. Thank you, Steve. So I think for risk rankings, we use kind of a standard, you know, in the space, a 1 through 5 system. For us, you know, if a loan is risk ranked at 3, it means all is well, and we're comfortable with the performance. You know, when issues or discussions start arising around a loan that could potentially impact performance or, you know, lead to some type of default, we move a loan to a 4. And we probably do so, I think, sooner than probably our other competitors do in the space. And we do so because we want investors to know, and we want the analysts to know that these are loans that are on our watch list, loans we're talking about, and loans that we're monitoring.
At the same time, we don't want anyone to be surprised. We don't want a loan to go from a risk rank three all the way to a risk rank five default. We wanna have a chance to let people know that it's going on. At the same time, we're slow to move things off a risk rank four or our watch list to a risk rank three. Something's really... We really gotta feel a loan is performing well and is kind of out of the woods for us to move it to a three. We don't wanna yo-yo. We don't wanna move something down to a three and move it back to a risk rank four.
So if we upgrade, again, with something that we feel is well, and if it's going to a five, it's because, you know, similar to our competitors, it's not performing or it's in default.
On a five, more so than not performing, when you say it's a five, are you expecting that you'll likely have a realized loss?
We're expecting at that point in time.
And in that case, you would-
Correct
... apply a specific reserve to that.
That, we can do that. That's right.
Yeah.
You know, as far as CECL, you know, we use a Trepp system similar to others in the space, and kind of three main factors that drive kind of our reserves is, you know, economic outlook, you know, what are the resolution dates of our loans, as well as the NOI that the loans are throwing off. And I think, you know, we, we, we try to be as intellectually honest with ourselves as we can. You know, if we're looking at an individual loan and performance and, you know, we're evaluating that loan, if we think that some of the leases on those properties are gonna roll, or there's gonna be other, you know, issues that are forthcoming, we're gonna take that into account today. We're not gonna wait for that to evolve, tomorrow. We've also, I think, just realistic about our economic outlook.
Higher for longer, things Mike talked about, you know, just, you know, we're, we're tending to be more conservative when it comes to our CECL reserves.
Lastly, you're not alone in dealing with credit problems, and as we've discussed so far on the panel, you and many of your peers are seeing your stocks trade at a discount to book value, such as 40%, maybe trading in the 60% of book range, which, you know, is kind of unheard of, understandable, but somewhat unheard of, where this group is generally traded in normal times near book value. Your dividend yield is kind of elevated because of that, you know, over 13%. You know, how do the conversations go with the board between the opportunity to buy back stock at such a meaningful discount, even if that might require you to consider temporarily reducing your dividend payout?
... Yeah, I think when it comes to buybacks, you know, I think we have an authorization, but it's not something we actively entertain. You know, we're in a balance now between we're still protecting and we're looking to go on offense, and buying back stock, that liquidity then leaves the house forever. But, you know, I think as Andy spoke to, and we've heard from investors, you know, they're looking for us to go on offense. Offense drives the dividend, helps us maintain the dividend, and we feel that's really the best use of our cash.
Okay, that's clear. Two ways to go on that answer, but I like the... You know, I think maybe at this point in the cycle, it sounds like to me management has enough visibility about what the next year or two are gonna look like, that you're, you're comfortable with thinking that the often a greater longer-term return than the short-term, one-time-
Yes
benefit to
Yes
for a book value pickup. Maybe we'll stop there. There are a few minutes remaining. I get 4 minutes remaining in our time. I just see if there are any questions in the audience that you'd like to present to management. Over here.
Mike, what advice would you give to interns at this point? Like, helping with your business starting out, how is it different from when you started?
Back in the Flintstone days.
Yes. No laptops, no cell phones.
You know, yeah, no cell phones.
Uh-huh.
That was a good thing. I think it's the same formula. You know, I... Personally, I try to consume as much information as I can. So, you know, if you're on this, you're on it because you're reading Zero Hedge, or you're reading The Wall Street Journal, or the New York Post, a vital, crucial avenue of information. But you really—I would absorb anything I could. And a lot of the things I say are not original ideas at all. I, I just regurgitate things I read, but I try to read a lot. So I'm not much of a book reader, but I'll read. I'll read through The Wall Street Journal, you know, twice. I'll go to Zero Hedge five times a day.
I know they're cynical, but they really have some really interesting articles about what's going on in the world, a different perspective, how to look at things. So I really, I'm focused on making sure I have a lot of varied views and then just work hard. I mean, this is a market where the, you're building personal capital, and the more you put into it, the more you're gonna get out of it. The more hours you put into it, the more you're gonna get out of it. And it's also a great market, in that unlike other areas, big markets like technology and things like that, this is a tight market. People know each other. You know, so you-- this is a market where you guys will grow up in one organization, people will leave, you go to another organization, you make that connection.
You go to NAREIT, you see each other. You go to the CREFC conference, the debt securitization conference, you see each other. We used to joke that the CREFC conference was a job fair 'cause everybody knew each other, and you could have coffee with your competitors. And this is a table where we know all our competitors, you know. We know what a great job the guys at TRTX did in taking hits, and we know the guys at TRTX. Frank arranges a dinner with them. So it's a very collegial market. So I would say the more you apply yourself, the more you're gonna get out of it. Read everything you can get your hands on, research papers, anything that you can really educate yourself on.
I think it's a great market where everyone knows each other. Very tight market.
Can I add to that? 'Cause I have a son about the same age. Put your phone away. Go talk to people. Get out of your chair and go talk to people. Get to know people, right? They're the ones who are gonna... You know, your ticket of information, not-
Yeah
... not texting, not emailing. Get out of your chair and actually go interact with people.
Yeah.
Very important.
TikTok, bad. No TikTok.
No TikTok.
Stephen Laws, Raymond James.
Thanks, Steve. As you're looking at loans that are coming due on original maturity dates, can you talk about, you know, where you're seeing stress? Is it liquidity of the sponsors? Is it, you know, issues at the property level within a LI as above? And as you look at modifications, you know, what are the gives and takes? The new capital in, new interest rate caps, new purchase, how much time do they need? I know it varies by loan, but any color on how those discussions are going?
You just kind of in your question, you kind of answered the question. It's all of that. You know, you'll hear from anybody who's in a lender's chair, they love when a borrower comes to the table with some form of capital, whether it's capital to buy an interest rate cap, which is not inexpensive today. Those are the things we're looking for. If there is a problem at the property level, if the borrower wants to put equity in, that's great, but if there's a problem at the property level, I think every lender is gonna look at taking control of that property. And we've done that with a number of properties where, you know, you have syndicators involved.
That's one thing I would say in this market, though I want to shoot myself over with, you know, 40 years of experience, not lending to syndicators, you know, massive syndicators, because they're not in touch with their limiteds. So when it comes to your question about can they raise money, bring money to the table, those guys can't, 'cause they don't even know who their limiteds are in some cases. And then regard to their performance at the properties, they were really. It was hot money. They, they wanted to slap some paint on, improve 25% of the units in hindsight, and flip the dream to somebody else. And when the music stopped, we found that it was going the opposite way. They weren't re-refurbishing the units. The rent roll had deteriorated. The amount of bad debt had accumulated.
They just weren't the best operators. And those are properties where we decided we have to take control. Andy took control of a property in Phoenix with our team, from a syndicator, got the after, like, two quarters, got the occupancy up from 50 to 83, got the bad debt down dramatically, closed the back door with people leaving. But it was really hands-on. It took us 6 months to get this property turned around, but if we left it with them, the operators, even if they put money in, we would've been in a bad spot.
We'll have to end it there, but thank you for attending, and thank you, Andy-
Thank you for having us.
... for being here.