Hey, good morning. Thanks for being here for one of the first Firesides of Nayreed. I'm Randy Binne` r. I'm a sell-side equity analyst for B. Riley Securities, and we cover BrightSpire. With me here is CEO Mike Mazzei, President Andy Witt, and CFO Frank Saracino from BrightSpire. Just want to take a little bit of time for Mike and team to provide a brief overview of the company. It's a really interesting story coming out of Colony Credit, and then Mike came in and stabilized things, and they're doing a great job, I think now, of kind of stabilizing the platform and moving to origination. With that, I'd like to hand it over to Mike. I'll ask some questions initially, and then definitely want to leave time for questions from the audience. Mike.
Thank you. Can you hear me, or do we move that, or do you guys hear OK? Yes? Thank you. Thank you for having us. I'll give you a very, very brief history. Andy and I took over the wheel of the company right at the precipice of COVID in very early 2020. At that point, the company was public. Since 2018, it was brought public by the aftermath of the merger of Colony Capital and NorthStar. A year later, in 2018, they spawned our REIT as Colony Credit. When Andy and I took over in 2020 and COVID, the REIT had been suffering. A lot of the assets that were in the REIT, some which still are, were very heavy private equity type investments. Colony and NorthStar were really private equity firms, not credit firms.
We were faced with a lot of challenges when we joined the company. Since then, we've really tried to maneuver away from some of the larger assets. Quite frankly, some of them were just write-downs and loss of book value that were impossible to stop. That was unfortunate. Since then, after we took over in 2021, we separated from Colony Capital and internalized the management contract by buying it out. We are one of two in the space, really three. One is very small. Us and Ladder Capital are the two internally managed commercial mortgage REITs today. Since then, what we've done, we're dealing with the old portfolio, some of which we still are.
We have a large asset in Norway that they own, which we wrote the equity off in, some office buildings that we just recently wrote the equity off in that were bought 10 years ago by NorthStar. We are still dealing with some of their assets. What we have done is we have transitioned the company to get away from these big, heavy assets to get more into middle market lending, something that was more suitable for our capital base, which now is about $1 billion of common equity. We are not doing nine-figure loans. We are not doing very large mezz deals behind construction. We are doing straight-up multifamily, mostly $30 million, $35 million average loan size. We will go as high as $75 million, maybe perhaps $100 million, but that is really a stretch. We really want to keep the portfolio to an average loan size of about $30 million-ish.
We've now gone to over 50% multifamily. We're getting under 30% in office. We expect that shift and that dynamic to continue as we move along with the portfolio. We've stabilized things. Since the bubble, we've been shrinking. Right now, the main focus that we have is to make sure we're getting our watch list of loans down, any REO that we've got, some of which was on our watch, some of which is still from our predecessor portfolio. The goal is manage the REO down, manage the watch list down, repatriate that capital, and along with that capital and the cash on our balance sheet, just continue to make the loans. We did stop making loans early in 2022, the first second quarter of 2022. We started again late last year. We've put out about $300 million since. We are originating again.
We'll talk about the origination market and what Andy's experiencing there, which I think will be interesting for all the mortgage REITs out there. Also, good anecdotal information for you about what's going on in the financing markets. That's where we are today. With our stock price, we're $5. Our underappreciated book value, inclusive of over a buck of CECL, is in the high eights, called $8.75. We have a huge dislocation between where we're trading today and book value of almost $500 million, where we've already got $150 million of CECL on the books. Huge dislocation between market value and book value, which we need to compress. We're going to do that by growing earnings, making sure we're covering our dividend, hopefully growing our dividend back to the $0.20 from the $0.16 a quarter that we have now.
Our job is to converge book value and stock price. Right now, based on the amount of discount that market is imputing pretty heavily, and we voiced that last quarter by buying some shares, and we said we'd continue to do that sporadically, and I think that's the case. We think this is a very attractive price entry point with very little downside and mostly upside.
Great. Yeah, we have a buy rating on the stock and an $8 price target. That's closer to book value. I agree with Mike on the discount in the stock. I guess the first question I have, and this is a follow-up from the quarter, but also I think is important in understanding the overall market, is just on origination activity to maybe start there and talk about what you're seeing in the market as far as pricing terms and just overall impact of rates. Also, is the second quarter still a time where activity might be a little bit slower, kind of given all those dynamics in the market? This was a topic that came up during the first quarter earnings call.
OK.
Sure. Thank you all. In terms of new acquisition or new originations volume, we're seeing quite a bit of activity. This year, we've seen tens of billions of dollars of originations opportunity. Early in the quarter, we were pretty active in terms of putting out new loans. We hit a little bit of a slow spot. A lot of that is really refinancing requests from borrowers who are looking for cash-neutral type of refinancings. What we found is we're quoting, we're very active in the market, but a lot of those quotes are sitting out there for weeks at a time and oftentimes aren't moving forward. That's been a bit of a challenge and something that we've been experiencing over the last, call it, six to eight weeks. In terms of pricing, early in the year, we saw pricing really come in.
On high-quality multifamily, you saw pricing come in to the mid-200s, maybe a bit inside of that. Post-liberation day, we saw pricing push back out and then has now come back in a bit. In terms of the composition of our pipeline, oftentimes we're seeing a majority of acquisition financing. We expect in our pipeline to see 60%+ . Right now, that's about 80% refinancing. There is a very different dynamic occurring in the market. A lot of what we're seeing is being lender-driven. Borrowers are getting pushed out into the market to refinance their properties away from their existing lenders. We've also seen a lot of those lenders come back and say, well, no, we'll keep that loan. We've seen that in our own portfolio where folks have gone out and decided to come back and stay with us as the lender.
There's just not a lot of actionable deals out there, and there's just not a lot of velocity of transactions right now, particularly on the acquisition side.
The transaction volume is up in the past two years, but it's still off of a big low. We're talking 10-year low in transaction volume, sales volume, investment sales. That really is what drives the acquisition market. I would say words that come to mind are not very flattering words for the market, zombie-like market because of the interest rate bubble. A lot of loans are just sitting out there where the lenders are the ones forcing the borrowers, as Andy said, a lender-driven market. That's not an organic market. That's not a market where there's a lot of activity based on economics. It's all lender-driven, where lenders are saying, you know, we've reserved against this loan. We've modified your loan for a couple of times over. We've waived extension hurdles. We're good. It's time you go out and get a new loan or sell the property.
We're doing that ourselves. We're having borrowers do sales. They may result in a short sale. We're foreclosing on properties. We just foreclosed on the San Jose Signia Hilton a week ago after 10 months with the borrower, trying to get that property and wrestle it out of their hands. Now we're going to manage that property ourselves. That's a lender-driven market, where the lenders are saying, OK, we've done enough. Now you've got to go out there and get a new loan, or you've got to pay me down. That borrower is going to a broker saying, if you can get me a better deal than my current lender is asking on their paydown, I'll do that loan. That often isn't happening.
That is why you have this kind of like standoff between existing lenders and the market, where the borrowers are stuck in the middle and not a lot is happening. Interest rates, obviously, if we can get at least the short end of the curve down with some Fed easing and so far down where you could at least get the interest rate cap and negative carry component of a bridge loan to be more bearable by the property, that would inspire a lot of activity. Right now, with interest rates on so far in the low fours, $430, and the Fed being somewhat hawkish right now, that also is not helping.
The current portfolio is $2.5 billion. It's 43% multifamily, 22% office, 14% net lease, 8% industrial, and 13% other stuff. The first two categories, multifamily and office, in all of this, do you see a shift potentially in where you would be focusing your origination activity, or is multifamily still where you're seeing most of the activity?
Multifamily is still where we're seeing most of the activity and where we want to be. When you say we're 43% multifamily, when you really just look at the loan book, the loan book component, take out the net lease stuff, the multifamily is over 50% of the loan book. We really want to get that higher by at least 10, 15 percentage points. We need to get the loan book from $2.5 billion to about $3.5 billion with the capital that we have from watch list resolutions, REO sales, and using our existing cash balances to grow that portfolio back to about $3.5 billion and low three times leverage, like 3.2, 3.3 times leverage. That will get our earnings back up higher from more like where it was before we cut the dividend.
That is the goal, to work on the watch list, continue to try to originate, more focus on multifamily. We are seeing other property types. We are seeing industrial, but we are seeing stuff with a lot of lease exposure, a lot of roll risk, a lot of binary risk. We do not want to take binary risk in industrial right now. We are looking at industrial. We are looking at a lot of lodging and quoting a lot of lodging assets, but nothing yet has stuck. Right now, multifamily is where we have had the success. We are willing to do industrial, willing to do retail, willing to do lodging. Office, at some point, will get pretty interesting. We still think the babies are getting thrown out with the bathwater, and there are very actionable office deals.
Right now, we're not putting the periscope up for that because we really want to get the office loan exposure in the portfolio down a little bit more before we venture out there. There are some very attractive transactions, I think, that could be had in the office market in the middle market in the $30 million-$50 million range.
That's great. Just going to pause real quick. Any questions from the audience before I keep going? Go ahead.
I'm just curious [audio distortion] .
I'll restate the question for the benefit of the webcast, but it had to do with syndicator exposure.
Yeah. Certainly within our portfolio, we have exposure to syndicators. I think that cohort has been painted with a pretty broad brush. On one end of the spectrum, you've had folks that have gone out and really grown beyond their capabilities. That's certainly been reflected in the operations of their assets and the financial performance. We're not alone in dealing with those situations. We're fortunate in that most of that was done in the multifamily sector. Our ability with our internally managed asset management platforms to get in and operate those assets and turn them around when necessary is there and something that we're certainly comfortable doing. On the other end of the spectrum, you've had syndicators who have built really industrial strength platforms with the right type of capital, capital that has duration.
They've been able to stick with these assets, continue to buy interest rate caps, continue to fund short bells at the operations level and see these assets through. It's really been a tale of two cities, if you will, in that regard.
We have worked with some of these syndicators, folks that use syndication for a source of equity, we have relent money to. We have gone out in the new market, and they have done such a stellar job with their portfolio. We are working with them on the existing portfolio that they have because they are doing all of the right things. There are some, as Andy described, who have gotten just way over their skis. Those are the guys that we are foreclosing on and saying we need to take this property back. We had a conversation, Andy and I had lunch with another large mortgage REIT yesterday, and we were commenting on how fast a property can go backwards with bad management. You visit some of these properties that you are foreclosing on with a syndicator, you are like, how do you know it is your property?
Because the landscaping is dead. Things like bills aren't getting paid. You really got to get in there quickly, get the keys back, and they are cooperating, get the keys back and take charge of the property, which is what we're doing with some of the REO that we had. There's a common denominator in some of the REO multifamily that we have with one syndicator.
Thank you. Anyone else in the audience? Speaking of getting the keys back, the San Jose property has just been, it's been something that has been a topic of discussion for the company for many quarters, but it also got a fair amount of media attention from the local because there was litigation, of course. Can you just review for everyone here the size of this for the watch list, the amount of capital it would free up, and kind of when? I think a lot of you in this room know this, but just for the benefit of a broader audience, just kind of putting a finer point on the $80 million paid at auction versus where the fair value of county would be. Can we just dig into this? This has been a big issue for this stock, and it's moving forward.
They're resolving it. I think just providing a little more kind of granularity on it, I think, would be helpful for the broader audience.
OK. It's about 1/3 of our watch list. It's a $136 million loan. It's no longer a loan. It is now real estate owned. We foreclosed on the property two weeks ago after a protracted 10-month process with the borrower. It's in California. It should have taken four months, but the borrower put up a fight, declared bankruptcy, which is always a mistake to make because it triggers bad boy carve-outs on personal recourse. So ill advised. We finally foreclosed on the property. Andy's been there before. I was there last week. The plan with that is it is now unencumbered on the balance sheet. There's no debt against the property. That is a big source of capital. The ROE on that right now is very low. Let's call it low, mid-single digit ROE right now because we're coming out of a trough.
What we have to do now is because that property was under stress, it's fully managed by Hilton, but the ownership was not cooperating. There is deferred maintenance. We're going to get in there and spend some money on things like elevators, lobby, a little bit of FF&E, and some things that we want to do ourselves. We've hired somebody who's excellent in this field to act as an intermediary between us and Hilton, who's been very receptive right up to Chris Nassetta, the CEO, welcoming BRSP into the family now that we own a very big asset. There are only four Signia assets in the portfolio, which is kind of a JW Marriott competing type asset class. There's a fifth one that's getting completed in Indianapolis right now. They're very much behind the flag.
What we see going forward is we see a Super Bowl peak season in September, October for San Jose. We see a Super Bowl at Levi's Stadium in January, the March Madness Western Regionals in San Jose in March, and then the World Cup in June in Levi. A lot is coming into the area that is exceptional. This is really an opportunity to cleanse the trailing 12 with some really powerful numbers. I think we're going to hold that asset for a little longer because we think the better days are ahead. We think there are things that we need to do with the asset from a CapEx standpoint that any buyer of the asset's going to be required to do anyway.
You come off the purchase price, it'll be a heavier load if they're asked to do it than we're asked to do it. We're going to use our capital to do that. The asset's unencumbered. It's going to be a big source of equity for us in 2026. I see us holding the asset for a little while longer until we can, as I said, improve that trailing 12 NOI. We need it to be $11 million, $12 million NOI, which it did in the past. That was a fair amount. We think it could do that in the future. We think we need a low double-digit million NOI before we take that out. Where we are, we'll come out with where we're holding it on a book value perspective.
The $80 million foreclosure bid is just how the state of California works in the public foreclosure process. We had a $136 million mortgage. You have to show up with a certified check in California to participate in a public auction. Go figure that out. We put an opening bid in. The rules are there are guidelines in the jurisdiction about putting in bids that are credible. We cannot go in and bid a dollar. We went in and bid $80 million, and we were the only ones there. That establishes the value of the property for purposes of any deficiency claim that we have against the borrower. Right now, do we believe the property's worth $80 million? No.
We have a loan amount that's $136 million, and we're going to hold on to this thing and do some work on it and bring it out in 2026.
That's great. Just sticking with kind of balance sheet and capital structure, you have talked about trying to get one more CLO done this year. If there's any update on progress towards that, I'd be interested to hear that and kind of in the context of getting back to $3.5 billion in the portfolio and adding the leverage. The follow-up is going to be on the 2027 maturity, but thought I'd start with how the outlook's going for making a new CLO.
Right. So we just did a CLO in the summer, and we collapsed one of our CLOs and reissued a CLO with existing loans, which was one of the first, I think the first time that was ever done. We had a lot of folks in our space follow suit on that. Yeah, we'd like to issue a CLO by the end of the year, but that all depends on origination volume. Right now, anybody who sits here and says they know what they're originating this year, I mean, that's just impossible to say. We had a very tough second quarter. You had Jewish holiday, Easter, Liberation Day, the Fed being hawkish. A lot of folks who were putting out marketing books to refinance their properties paused and pulled back for a several-week period. This was a very low origination quarter.
Yes, we still have goals of doing one by the end of the year, but we got to get to getting in the next two quarters to get that done. We've got to originate $500 million, $600 million of product, which is totally doable, especially if the Fed cooperates a little bit in July. Right now, that's just an estimate. We'd like to get a fourth CLO done this year, yes.
On dividend, I'm sorry, no, just on the, so BrightSpire benefits from not having a notable principal maturity due until 2027. I view that as a relative advantage versus I cover some other stocks that have near-term maturities, which can come into play. Are you planning for that at all yet, or is it too early to worry about it?
It's too early to worry about that right now. I don't think we're going to be doing any form of term loan or prep at this point in time. That facility that we have that we're speaking about now is a revolver, a secured revolver, which we have never tapped. It even calls into question about whether or not we'll re-up on the revolver at all because we haven't been, or we may even downsize. We already downsized it once when we refinanced it, and we may even downsize it again.
Just touching on the dividend. The dividend was right-sized to $0.16 per quarter in the middle of last year. We have you covering it in our forecasted distributable earnings. The question is, though, the kind of commitment level to it. You have significant financial resources. I think the narrative here is of discipline and patience in getting originations back to work. Could we speak a little bit more to just the commitment to the dividend and the dividend policy, assuming there are quarters where distributable is not going to be $0.16, sometimes it will be over, just to get a better feel for commitment to continue the dividend at this level?
We've said when we set the dividend, and we've said on every conference call that we've had on earnings that our expectation is that we will have some negative coverage going forward. We may be break-even on a DE basis, but on a cash basis, because we have some accruals in the portfolio for PIK loans that we feel confident we'll get the capital on. On a cash basis, we may have some leakage over the course of the next few quarters. It really depends on how fast we can deploy capital into new loans and repatriate the capital that's stuck in low-earning or non-earning assets, like some of the REO that we have in Long Island City, which, by the way, we listed the Long Island City Paragon. We have two assets there, two office buildings, the Paragon and Blanchard buildings.
We have just started the sales process on the Paragon building in Long Island City because we're getting a lot of interest in leasing, a lot of activity, as you see in New York real estate and office. Really, covering that dividend is going to really be about resolving assets, putting out the money. We are committed to the dividend. We are committed because we're telegraphing that we are going to have some slippage and we could have some negative coverage. I think that's the case with a lot of our brethren in the sector in terms of negative coverage. We are going to tolerate some negative coverage in the short term because we think we're confident we can get that portfolio back to $3.5 billion and more than cover the dividend in 2026.
Just on other kind of capital deployment. The buyback, I think you have $50 million left for the next, you say, the next 12 months or to the end of the year. I do not remember, but you did utilize it a bit in the first quarter. How do you view, I mean, with a stock at $5 trading at this big discount to book value, how do you view that as a use of cash, especially if there is less?
We bought the stock back here, and we'll continue to look at that. We did buy at these levels. It's very attractive. It's a tension between looking at something that's trading at a substantial dividend yield, very cheap relative to book like I described. The tension is you don't want to shrink too much, right? It's permanent capital, and you don't want to part with it. That's the tightrope that we walk. It is very attractive, and we've put money out at this level, and we'll continue to look at that. The guardrail being, we don't want to shrink too much. We've underscored that. We've bought the stock back at this level. We think it's very attractive.
A couple of minutes left. Any questions from the audience here? Anything, Frank, Andy, Mike, anything I missed or any other points you want to cover before we wrap up?
I think we hit it all. I think the big takeaway I think that you'll hear, or should hear, others might say we're seeing billions of dollars of product. We're originating. It's like a carnival. In the first quarter, if you take Starwood out of our peer group, because Starwood does other loans away from commercial real estate, they have, for instance, a Master Limited Partnership Energy Lending portfolio where they lend on pipelines. That's not something we do. We take them out of the number. When you look at that, across 10 of us in our commercial mortgage lending peer group, public REITs, the sector shrunk by $500 million. We're putting out money, but also we've got some runoff.
I think what will happen in the second quarter is that as we have found a hard time putting out money this quarter, I think you'll see less runoff in the peer group portfolio for the second quarter. By and large, I think when you look at the numbers and look at if you do a calculation and say, what have the 10 REITs done, mortgage REITs done in the quarter, in the first quarter, we shrunk by $500 million as a sector. That's the challenge right now, is, as Andy said, finding actionable deals. We're seeing a ton. We're quoting loans every day. We roll our eyes and say, okay, let's see what happens here. Invariably, there is somebody who raises their hand and says, I'll do that loan that a lot of guys wouldn't have done, and that's fine.
You just have to be patient. I think that's why we expect there to be a little bit of leakage between now and getting to a point where we're covering that dividend in 6 to 12 months.
All right. We'll wrap it there.
Thank you.
Thanks for the time.