BrightSpire (BRSP) Q3 2026 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Wed, Oct. 28, 2026

CALL PARTICIPANTS

• General Counsel - David A. Palame
• Chief Executive Officer - Michael Joseph Mazzei
• President and Chief Operating Officer - Andrew Elmore Witt
• Chief Financial Officer - Frank Vito Saracino
• Chief Credit Officer - Matthew Heslin
• Originations - Daniel E. Katz

TAKEAWAYS

• GAAP Net Income -- $46.9 million ($0.37 per share), reflecting a $60.3 million gain from the sale of the Albertsons triple-net lease portfolio.
• Adjusted Distributable Earnings -- $17.8 million ($0.14 per share), excluding $7.5 million in specific reserves and other non-cash impairments.
• Distributable Earnings -- $10.3 million ($0.08 per share), which includes specific reserves resulting from the resolution of a Denver office loan.
• Loan Portfolio -- $3.1 billion, representing growth of 30% year over year.
• Originations -- $272 million across seven loans during the third quarter, with an additional $66 million closed or in execution subsequent to quarter end.
• Multifamily Weighting -- 72% of the loan portfolio, as management continues to favor smaller loan sizes and asset diversification.
• CLO Liabilities -- Approximately two-thirds of the loan book, consisting of nonrecourse, non-mark-to-market financing following the completion of the company's fifth CLO.
• Share Repurchases -- 2.1 million shares for $10 million at an average price of $4.81 per share, leaving $20.5 million remaining under the current authorization.
• GAAP Net Book Value -- $7.08 per share, an increase from $6.81 in the second quarter driven by the Albertsons sale gain.
• Undepreciated Book Value -- $7.87 per share, a decrease from $8.10 in the prior quarter due to higher CECL reserves and real estate impairments.
• Liquidity -- $181 million, comprised of $106 million in cash on hand and $75 million available under the credit facility.
• Specific CECL Reserves -- $7.5 million, charged off following the resolution of a risk-ranked 4 office loan in Denver, Colorado.
• General CECL Provision -- $107 million, or 32 basis points on total loan commitments, up from 27 basis points in the second quarter.
• Debt-to-Equity Ratio -- 2.7x, reflecting a capital base that excludes preferred stock and term loans.
• Debt-to-Assets Ratio -- 70%, which management maintains as part of its focus on balance sheet durability.
• Average Loan Balance -- $28 million, which remains within the company's target range for middle-market investments.
• Weighted Average Risk Ranking -- 3.1 across a total portfolio of 111 loans as of Sept. 30, 2026.
• Upcoming Maturities -- $275 million in the fourth quarter of 2026, with approximately 80% of these assets either listed for sale or repositioned for near-term resolution.
• Earnings Leakage -- 2 cents to 3 cents per share per quarter, which management attributes to the delay in capital deployment and market volatility.
• Operating Real Estate Impairment -- $3.4 million, related to the deconsolidation of a Kansas retail triple-net investment.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Mazzei stated, "the real risk is long rates stay above 5%. Get closer to 5.5%, and that can have an effect on cap rates," noting that higher rates could pressure property valuations.
• Mazzei noted that "heightened concerns around the endless financing requirements of the hyperscalers" and doubts regarding AI investment returns have caused credit spreads to widen and investors to take a risk-off posture.
• Mazzei warned that "a short term pullback in demand for acquisition financing coupled with permitting our near term liquidity to build could result in slower growth in the loan book," which may delay reaching positive dividend coverage.

SUMMARY

BrightSpire Capital, Inc. (NYSE:BRSP) reported a strategic emphasis on maintaining high liquidity levels and balance sheet strength in response to significant interest rate volatility. Management reported that the company is prioritizing cash preservation, which may cause near-term loan book growth to moderate and extend the timeline for achieving full dividend coverage. Despite these challenges, the company successfully reduced its exposure to office assets and real estate owned (REO) properties, while utilizing its fifth collateralized loan obligation (CLO) to ensure that approximately two-thirds of its loan portfolio is supported by nonrecourse, non-mark-to-market financing.

• Management indicated that liquidity is the primary focus in the current environment, as CEO Mazzei stated, "periods like this, we believe cash liquidity becomes the single most important asset of a mortgage REIT."
• The company's largest office loan is currently under contract for sale, representing a significant step in the multiyear effort to reduce total office exposure.
• Management observed that CLO AAA and bank warehouse repo spreads widened by 10 basis points to 15 basis points during the quarter, prompting a more cautious approach to new originations.
• BrightSpire resolved several REO and watch list assets, including multifamily properties in Mesa and Fort Worth, to narrow the gap between book and market value.
• The company is utilizing a $100 million ramp feature and a 30-month reinvestment window in its newest CLO to opportunistically deploy capital as market conditions stabilize.
• CEO Mazzei projected that the decline in new construction starts will likely lead to powerful rent growth in the multifamily sector during 2027 and 2028.

INDUSTRY GLOSSARY

• Distributable Earnings (DE): A non-GAAP financial measure used by REITs to evaluate the performance of their core business by adjusting net income for non-cash items such as depreciation and stock-based compensation.
• CECL (Current Expected Credit Losses): An accounting standard that requires companies to estimate and provide for expected credit losses over the life of a financial asset.
• CLO (Collateralized Loan Obligation): A security backed by a pool of loans, often used by REITs to provide non-mark-to-market and nonrecourse financing for their portfolios.
• REO (Real Estate Owned): Properties that have been acquired by a lender, typically through foreclosure or a deed in lieu of foreclosure, after the borrower defaulted on the loan.
• Cap Rate (Capitalization Rate): A yield metric used in real estate to estimate the potential return on an investment property, calculated as net operating income divided by property value.
• Triple-net Lease (NNN): A lease agreement where the tenant is responsible for all property expenses, including taxes, insurance, and maintenance, in addition to base rent.
• Nonrecourse: A type of debt where the lender can only seize the collateral backing the loan in the event of default, with no further claim against the borrower's other assets.

Full Conference Call Transcript

Operator: Good day, and welcome to the BrightSpark Capital Inc. Third Quarter 26 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your touch tone phone. To withdraw your question, please press *2. Please note this event is being recorded. I would now like to turn the conference over to David A. Palame, General Counsel. Please go ahead.

David A. Palame: Good morning, and welcome to BrightSpire Capital's Third Quarter 26 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 Vito Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements, which are based on management's current expectations, are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business financial results to differ materially.

For a discussion of the risks that could affect results, please see the risk factor 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, 10/28/2026, 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 results. The company reported third quarter GAAP net income attributable to common stockholders of $46.9 million or $0.37 per share. Distributable earnings of $10.3 million or $0.08 per share and adjusted distributable earnings of $17.8 million or $0.14 per share.

The company also reported GAAP net book value of $7.08 per share and undepreciated book value of $7.87 per share as of 09/30/2026. 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.

Michael Joseph Mazzei: Thanks, David. And welcome to our third quarter 26 earnings call. We are pleased with our performance this quarter especially given the tremendous volatility in the capital markets. Despite that backdrop, we continued to execute across multiple areas of the business. Before turning to our third quarter activity, I would like to spend time on the capital markets. During the quarter and through today, we experienced significant volatility in the rates market. The 10-year treasury peaked at 5.37%, which at the time marked a 25 year high and represented nearly a 100 basis point move since June 30. The volatility then reversed direction with yields falling sharply back below 5% following a 1 day 20 basis point rally last Friday.

At the same time, the bond vigilantes were joined in their revolt by the credit market investors. As spreads widened across corporate bonds, term loans, and structured products. Also, it is less typical for credit spreads to widen alongside rising interest rates. That dynamic reflects heightened concerns around the endless financing requirements of the hyperscalers. In addition, there are growing doubts regarding the return on investment for the trillions being spent on AI build out. As a result, there is greater focus on the most vulnerable credits in the AI ecosystem. Especially given the codependent nature of these counterparties. This is most evident in the yield levels where certain AI related debt is currently trading.

These dynamics have caused capital market investors to take pause and lean toward a more wait and see risk off posture. We have seen some of this bleed into the commercial real estate markets where investment sales transactions have been repriced or simply pulled from the market. On the CRE debt side, CLO AAAs and bank warehouse repo spreads widened about 10-15 basis points, prompting lenders to briefly tap the brakes as well. With that as context, valuations across the public commercial mortgage REIT sector have come under considerable pressure over the past several months. With BrightSpire, along with our public peers, trading at deep discounts to book value.

We have repurchased stock over the past several quarters including approximately 2.1 million shares during the third quarter. We, of course, recognize that our stock presents an even more compelling opportunity at these current price However, with public mortgage REITs are trading today, reinforces the importance of maintaining market and lender confidence in the strength and durability of our balance sheet. Periods like this, we believe cash liquidity becomes the single most important asset of a mortgage REIT. That said, we anticipate our liquidity levels may continue to increase over the coming months.

A short term pullback in demand for acquisition financing coupled with permitting our near term liquidity to build could result in slower growth in the loan book than we have experienced in recent quarters. This may extend our time line for full deployment and, in turn, a delay in reaching positive dividend coverage. However, we believe in maintaining balance sheet strength and liquidity is the right near term priority given the current environment. Now turning to the third quarter, let me highlight a few key developments. First, we had another solid quarter of originations. Totaling $272 million. We continue to positively reshape the portfolio with smaller average loan sizes, greater diversification, and continued greater weighting toward multifamily loans.

We also will continue to be deliberate in avoiding large loan concentrations. As such in the coming quarters, we expect our loan office exposure and pre-2024 loans will continue to shrink both on a relative and absolute basis. Second, we closed on the sale of our Albertsons triple-net investment, This sale was agreed to when the 10-year treasury, was at 4.42%. Given the subsequent movement rates, it proved a substantially more favorable result for BrightSpire than when it was first announced. Importantly, it removed the risk of material ROE dilution at refinancing and was sold at only 2% below undepreciated book value. Third, we completed our fifth CLO which was our second issuance this year.

As a result, approximately 2/3 of our loan book is now in the form of nonrecourse non mark to market CLO liabilities. Completing 2 CLOs this year is an important validation of our origination, and financing capabilities. This recent CLO includes a $100 million ramp and a 30 month reinvestment window. These features allow us to continue to actively originate new loans while also preserving near term liquidity. Furthermore, as a reminder, BrightSpire has avoided employing additional leverage in our capital base. Specifically, we have no preferred stock, and no term loan.

Taken together, our third quarter activity builds on the progress we have made year to date and demonstrates our continued ability to recycle capital, identify attractive lending opportunities, and thus improve the loan portfolio and strengthen the balance sheet. In closing, we made meaningful progress this quarter continuing to execute despite a more challenging market environment. Looking ahead, our focus is on opportunistically deploying our CLO ramp and reinvestment capacity while maintaining momentum on watch list and REO assets. As we pursue these priorities, we will continue to take our cues from the market.

While the treasury market appears to have calmed over the past week, it may be because of a flight to quality due to growing concerns in the AI credit markets. So in the near term, we will remain disciplined continue to strengthen our liquidity position, and first and foremost, protect the balance sheet. As an internally managed company, our interests are aligned with those of our shareholders and lenders. Our leadership team continues to be fully invested alongside our shareholders. With that, would like to now turn the call over to our President, Andy Witt. Andy?

Andrew Elmore Witt: Thank you, Mike. Our third quarter results reflect continued progress across all areas of the business. As Mike highlighted, BrightSpire's originations has been healthy over the past several quarters driving net loan portfolio growth of over $700 million or 30% year over year, to $3.1 billion Importantly, that growth continues to enhance the composition of the portfolio. The loan portfolio is now 72% multifamily, and with the completion of our second CLO this year, approximately 2/3 is financed with non recourse non mark to market financing. The past year was highlighted by significant loan portfolio growth. However, we expect our loan portfolio growth to moderate in the near term.

While our pipeline continues to be robust, we anticipate the current interest rate volatility the upcoming elections, and seasonality will contribute to moderated transaction activity. A dynamic that is already beginning to emerge in real time. Looking more closely at our lending activity, we originated 7 loans with an aggregate total commitment of $272 million Repayments totaled $79 million across 4 positions. As of quarter end, the loan portfolio is comprised of 111 loans with an aggregate loan balance of approximately $3.1 billion a net increase of nearly $200 million quarter over quarter. The average loan balance across the entire portfolio is $28 million comfortably within our target range with a weighted average risk ranking of 3.1.

We continue to make progress resolving REO properties. During the quarter, we closed on the sale of 1 Mesa, Arizona multifamily REO and the Fort Worth, Texas multifamily property closed yesterday. Further reducing our REO exposure. We have also initiated a marketing process for our Santa Clara, California REO land asset, despite the rise in rates, given the strength of the market and the asset, we believe the property will be well received by the market given the substantial demand for housing and favorable market dynamics we are observing in the Bay Area. Additionally, we anticipate bringing 2 remaining multifamily REO properties to market in the relatively near term.

Our goal is to continue reducing REO exposure ultimately reducing this segment of the portfolio to the San Jose Hotel property. Which we also anticipate to market at some point in 2027. In the interim, as it relates to the hotel, we are making progress on our business plan, addressing deferred maintenance and improving operating performance in anticipation of taking the property to market. As it relates to our watch list loans, we resolved the Denver, Colorado office property during the quarter. Additionally, we are actively working with borrowers on several to evaluate potential exit opportunities while remaining focused on protecting value.

Specifically, both the Austin, Texas and Las Vegas, Nevada multifamily loans as well as the Dallas office loans have been repositioned and reached stabilized occupancy. Positioning them for resolution in the near term. During the quarter, we downgraded 2 related office loans to the watch list as risk-rated 4s. The loans are secured by properties within the same complex and have 1 common borrower. We expect to have greater clarity on the ultimate resolution of these investments in the coming months. Additional details on REO and watch list loans can be found in the supplement.

Ultimately, our efforts on the REO and watch list segments of the portfolio are focused on reducing exposure that contributes to the difference between book and market value. Reducing REO and watchlist exposure should reduce uncertainty and the profile of the portfolio. We believe these are important elements of long term value creation. Our business plan is straightforward, maintain prudent levels of liquidity, reduce REO and watch list exposure, removing uncertainty in the portfolio. Over the next few quarters, we will also continue to reduce office exposure. To that end, the property underlying our largest office loan recently went under contract.

As we make further headway across these areas of the portfolio, the focus will naturally shift towards our diversified portfolio of middle market loans generating current cash flow supported by our internally managed and vertically integrated platform. In summary, we made substantive progress during the quarter and remain focused on building that momentum across the business. Looking ahead, our short term priority will be on maintaining sufficient liquidity and balance sheet management given market volatility while deploying our CLO ramp proceeds into new investments and in parallel, addressing watchlist and REO assets. With that, I will turn the call over to Frank Vito Saracino, our Chief Financial Officer.

Frank Vito Saracino: Frank? Thank you, Andy, and good morning, everyone. For the third quarter, we generated adjusted DE of $17.8 million or $0.14 per share. Third quarter DE was $10.3 million or $0.08 per share, which includes specific reserves of approximately $7.5 million Additionally, we reported total company GAAP net income of $46.9 million or $0.37 per share. GAAP net income reflects a $60.3 million gain on the sale of our Albertsons triple-net lease portfolio, approximately $6 million in operating real estate impairment related to a legacy retail triple net investment and the sale of 2 REO multifamily properties. As Mike highlighted, during the quarter, we closed on the sale of the Albertsons triple-net lease investment.

Based on net sales proceeds, we recorded a GAAP gain of approximately $60.3 million and an approximate $8.7 million reduction to undepreciated book value. Regarding the retail triple net lease investment, earlier this year, we received notice of default on mortgage notes payable cross collateralized by 5 retail properties. In August 2026, the receiver was appointed and took possession of full control of 1 triple net leased Kansas retail property requiring deconsolidation of the related assets and liabilities from the company's consolidated balance sheet. This resulted in our recording a $3.4 million operating real estate impairment charge in the third quarter.

Importantly, this GAAP impairment charge had an immaterial impact on our undepreciated book value as we had written down this investment over 2 years ago. Post the deconsolidation of the Kansas triple net there are 2 remaining cross collateralized retail triple net investments. Next, as Andy mentioned, we closed on the sale of 1 Mesa, Arizona multifamily property and 1 Fort Worth Texas multifamily property. Based on the net sales proceeds of both, we recorded GAAP impairment charges of approximately $2.6 million and approximately $7.2 million reduction to undepreciated book value. Turning to book value.

Quarter over quarter, undepreciated book value decreased to $7.87 from $8.10 The change is mainly attributable to an increase in our CECL reserves real estate impairments discussed earlier. Offset by share repurchases. Total company GAAP net book value increased to $7.08 per share, from $6.81 in the second quarter. On a net basis, this was driven by the gain on the sale of the Albertsons triple-net investment and share repurchases. Offset by the increase in CECL reserves and real estate impairments. Looking at CECL reserves, during the third quarter, we recorded and charged off specific CECL reserves approximately $7.5 million resulting from the resolution of a risk ranked for Denver, Colorado office loan.

Our general CECL provision increased to $107 million or 32 basis points on total loan commitments, compared to $100 million or 27 basis points reported in the second quarter. The increase was driven by macroeconomic conditions, originations activity and other model inputs. As Mike highlighted, during the third quarter, we repurchased 2.1 million shares for approximately $10 million at an average share price of $4.81 This resulted in a $0.06 increase of the company's undepreciated book value per share. Following this activity, we have approximately $20.5 million remaining under our stock repurchase program. Our debt to assets ratio is 70%, and our debt to equity ratio is 2.7x.

And finally, our liquidity as of today, stands at approximately $181 million This includes $106 million of cash on hand and $75 million under our credit facility. This concludes our prepared remarks. And with that, let's open it up for questions. Operator?

Operator: We will now begin the question and answer session. To ask a question, you may press *1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. We ask that you please limit yourself to 1 question and 1 follow-up. If you have additional questions, you may reenter the question queue. At this time, we will pause momentarily to assemble our roster. And the first question will be from Gabe Poggi from Raymond James. Please go ahead.

Gabriel Poggi: Hey, good morning, guys. Thanks for taking the Mike and team, just at a high level, obviously, the world is a much different place today than it was 60, 90-odd days ago. Can you talk about how you are viewing pending loan maturities this quarter or just in the first half of next year amidst varying rate constructs, conversations with borrowers, any conversations or color you can provide would be helpful. Thank you.

Michael Joseph Mazzei: Yeah. We are going to direct that to Andy and maybe Matthew Heslin. Andy, you wanna lead off with that?

Andrew Elmore Witt: Yes. Good morning, Gabe. So as it relates to 2021 and 2022 maturities, as part of our proactive asset management process, we are always talking to borrowers well ahead of maturities. And having an in house asset management group gives us the ability to have direct dialogue with our borrowers. So as it relates to the upcoming quarter, we have got about $275 million worth of final maturities. 65% of that is listed for sale right now. We have 1 additional property from our watch list which we expect to list in the short term. The Dallas office loan, which brings that number to about 80%.

Michael Joseph Mazzei: I do not know if Andy cut out. Andy, you there? Yeah. I lost Andy. I think we lost Andy. Matthew? Hello? Yep. Andy, I am sorry. We lost you for a second.

Andrew Elmore Witt: Pardon me. We lost you at 86. Cut out? 80%. Great. Thank you. So 80%, with the inclusion of the Dallas office loan, which is on our watch list, which we anticipate will go to market here momentarily. And then the remainder has been extended. So that is really the cadence in which we expect to proceed as we move through the sub subsequent quarters. Again, we are having dialogue with borrowers no less than a hundred and 20 days out addressing these maturities in a very proactive fashion.

Gabriel Poggi: Got it. that is great to hear. And then 1 follow-up, if I can. Mike, you talked about, you know, being opportunistic, not in a rush to do to do anything necessarily as you kind of wait watch and see how the world shakes out. But as you are having conversations on the new origination front, right, you guys have stayed active every quarter. On the new origination front. The book's gotten to north of $3 billion. Are you looking are you looking outside of multifamily? Are there other interesting opportunities that you are seeing from a spread perspective any incremental color you can give on new lending opportunities would be helpful. Thank you.

Michael Joseph Mazzei: Well, we have, Daniel E. Katz who runs our origination team in LA on the wire as well. Daniel, do you wanna take the lead on that question?

Daniel E. Katz: Yeah. Sure. I am happy to. Thank you. So you know, the bulk of the instant of the flow, just top of the funnel for us has been multi. it is been about 60%. So when you kind of look at the opportunity set, a lot of it is has been in multi and will likely continue to be. But that being said, we are looking at industrial. We are looking at hospitality. We have been looking at retail. We did a handful of industrial deals with this year. We did 1 hospitality deal earlier this year.

So we are spending time in the in the other asset classes as well You know, spreads are spreads are in the mid twos right now for us on multi. Industrial kind of seems to be in the same spot. And then, you know, retail and hospitality, little wider, kind of in the 3 hundreds. So we are spending time in all those asset classes. it is just that the bulk of what is coming in is still predominantly multi.

Michael Joseph Mazzei: Thanks, guys. Thank you, Gabe.

Gabriel Poggi: Thank you.

Operator: And the next question will come from William Catherwood from BTIG. Please go ahead.

William Catherwood: Thanks. Good morning, everybody. Mike, I wanna go back to your opening remarks on the capital markets environment.

Michael Joseph Mazzei: It seems that with rate volatility and AI fears and global turmoil, investors have just assumed the worst for commercial real estate, especially on the loan side. But 3Q results were steady. You know, you are transacting. You are originating. With all the noise that is out there. In your mind, what are the real risks for Brightspire? And how do you position the company for those right now? Okay. Hi, Tom. Well, the real risk is you know, rates which went to 5.37 on the 10-year. And at the time, market pundits were talking about 6 handles in September. So the real risk is long rates stay above 5%.

Get closer to 5.5%, and that can have an effect on cap rates. And that is the, I think, the overall number 1 concern in any market capitalization. So cap rates could affect the real estate side significantly. So that is what we are watching for. In Q2, we had dialogue about this. And I was concerned there mentioned on the call that if the 10-year punched above 5%, we would be concerned. And then I recall a conversation you and I had in August where we were both lamenting over the market seemed very quiet. And too weird, very quiet.

And what was lurking in the weeds there, and here we had September breakout, which I think neither of us were expecting on that call. So overall, we think that cap rates are an issue if rates stick much higher. Refinancing issues are also an issue with Freddie and Fannie. Rates getting higher. But during the quarter and what is causing us to want to sit on more cash than we would normally would have expected, As I said, a 100 basis point move in rates in 1 quarter, albeit it is gotten better recently, but maybe it is gotten better for the wrong reasons.

Triple a CLO spreads, as I said in the prepared remarks, they went out 15 basis points, and they did not go out like 5 basis points a deal. They kinda went out 15 basis points, in 1 deal. And in fact, 1 CLO issue or dropped from the market pulled their deal. Altogether, unhappy with the with the spread environment. And then on the corporate side, we had things like Skydance. Then when their issue broke, in trading, it the price dropped, like, by 5 points on those bonds and you have. In the AI sector, something like CoreWeave trading at 15%. So when you see things like that, you get concerned.

And then our origination team was telling us that during the month of September, there was a national broker who was who was indicating that their transaction sales pipeline was beginning to go sideways. And in fact, in 1 city, they had a lot of their transactions just kind of not pull from the market, but their owners were saying we have to sit tight let things calm down. So let's not solicit offers at this point. So we see things like that you start to say, you know what? You are to pay attention. And then lastly, you know, as a mortgage REIT, know, the loan books are you know, they are 4x levered.

And CLOs are a little bit more than 4x levered. So when you are operating a model like this, cash liquidity is absolutely essential that you maintain that. And then when the market indicates that there is noise out there, unfortunately, it may cause us to slow down the pipeline growth or the. I should say the loan book growth, but you have to pay attention and look liquidity is absolutely essential, which is why I. I am thinking that until we get more clear visibility, we are gonna we are gonna lighten up and hold that cash. Now, again, we have we have a CLO ramp that we have to invest.

We have anticipated we repayments that we need to reinvest for. So we will continue to stay active in the market. In Q4. And, yes, opportunistically, if something comes along and we wanna shoot it, yeah, we will do that. But generally speaking, I think we are going to. We have an. We are going to toward the side of letting our cash liquidity build And if that means that the pipeline or the or the loan book growth has to slow a little bit for the quarter, As Andy said, it is grown $700 million in the year. We did a good job there. We originated $900 million of product.

If it has to slow for a quarter, it slows for a quarter.

William Catherwood: I appreciate that, Mike. And maybe as a follow-up, just wanna dig deeper on cap rates. And, again, totally get the fear: higher rates, higher cap rates. We are hearing from the equity REIT side of the world, especially multifamily, maybe 25%, maybe 50, given on markets and kind of class b, class c assets. But you are still transacting. You are still selling. So kind of 2 parts are what have you seen kind of directly in the market cap rate wise And then second off, what kind of debt yields are you generating on your legacy multifamily? Because that would, in theory, be kind of your cushion against higher cap rates.

Michael Joseph Mazzei: Okay. I will take the first part of that, and I will turn it over to Matthew our chief credit officer for the second part of that. First of all, we have OREO to sell. And given the business model we have, we are not gonna sit back and hold REO for another quarter or 2 and play an interest rate game. We did not do that with the Albertsons triple-net investment. We are not gonna do that in the OREO portfolio. We are gonna go to market and sell it. If that means. If the market is a little less stable, we get Nick here there. We are gonna still sell.

Generally speaking, earlier in the year, folks were buying multifamily with some negative leverage upfront. With an anticipation that as you move into 2027 and beyond,, the supply was going to wane substantially enough that the back ended rent growth would more than substantiate and overcome any negative leverage upfront. As we move further into this year and early next year, it is not implausible that those buyers start to look at it and say, we have to factor in some of this negative leverage getting a little bit too much based on where rates are. So you could have an effect on our REO sales. Absolutely.

And it is gonna overall affect valuations only if the 10-year treasury the negative leverage is kind of a short term thing. I do think that the rent growth that we are going to see in 2027, 2028 is gonna be very powerful given how little building is going on, especially given that rates are now higher. Shovels in the ground are going to be less. Homeownership is going to drop. Secondary home sales are going to drop. So more residents into multifamily will be the case in 2027 and 2028. But we think that the 10-year treasury staying where it is fine.

If the 10-year treasury gets to 5.5% percent, then I think cap rates are gonna move by you know, 25 basis points or so. Matthew, do you wanna talk about the, the current loan book?

Matthew Heslin: Sure. Thanks, Mike. In terms of multi, our current book, debt yield is above a 6. You hit the nail on the head in terms of what we have been tracking not only over the last month, but really over the last you know, 9 months in terms of rates and where we feel comfortable even on multifamily assets. So a good example would be to look at our most recent CLO you know, going in debt yield for that deal, which was 95% multi was, you know, 7%. Compare that to other recently issued you know, all multi CLO deals, which are generally in kind of the 5%, low 5% range.

So it is definitely something that is been on our radar, as we continue to look at more opportunities, as Daniel mentioned, which are primarily multi we will still be focused on those going in debt yields even when there is you know, a significant business plan in place that is, you know, expected to increase that.

William Catherwood: Got it. Appreciate the answers. Thanks, everyone.

Operator: And the next question will be from Timothy D'Agostino from B. Riley Securities. Please go ahead.

Timothy D'Agostino: Good morning, and thanks for taking the question. It seems like cash and liquidity are kind of importance for you all. And, you know, you could. It seems like could take a step back on loan origination. So I guess just sitting here with, you know, the that the CLO completed towards the end of September. As we look out to 2027, is the idea to get you know, 1 CLO per year, issue 1 CLO per year and if so, you know, with kind of how we are thinking about the market and, you know, maybe holding more cash and liquidity, what might push know, a CLO in 2027 out to 2028?

And I know that might be a little far out, but any commentary there would be great.

Michael Joseph Mazzei: Yeah. that is pretty far out. Really, we are we are targeting getting the loan book which is now about 3.1 kind of north of $3.05, close to call it, like, 3.75 to pick a number. So we are. That entails probably 1 more CLO. So I think we will have 3 managed CLOs outstanding. there is no reason why that does not get done in 2027. We have already originated $900 million We had net loan growth 700 in the portfolio. So you know, I would anticipate that would not be in 2028, that it would be in 2027.

If we are not deploying capital to that extent, then something else has gone on in the market that is affecting all of us. So we do not anticipate that happening. And we would expect 1 more CLO and then have 3 CLOs outstanding all at 1 time and much less on repo. Right now, we are. As we said on the call, we wanna emphasize that we are with 2/3 of the portfolio non mark to market, nonrecourse, and match funded. And that is that is the highest we have been in our history. Okay. Great. And I guess just quickly on the loan portfolio size.

You know, and earnings calls prior, you had mentioned you have about $3.5 billion by year end and then $4 billion by middle of 27.

Timothy D'Agostino: I was just wondering, it kind of seems like that may slip out a little bit. I was just wondering if you all were gonna provide or maybe talk about how you are thinking about loan portfolio at year end 2026 and then halfway or midway through 2027.

Michael Joseph Mazzei: We do not expect the loan portfolio to shrink in the next quarter. And if we could get it to grow modestly, that would be would be good. The question becomes, is the periscope back up? In the first quarter? And it very plausibly could be by then. I think things would have to be really very difficult in the market. For us to not start originating some point in time in Q1. We will take it as it comes. But, again, I do not think this is gonna be a very protracted thing. I think we are just saying right now, we are taking our cue from the market. The treasury market appears to have calmed down.

We will see what happens in the credit spread market. The next CLO that prints and where our warehouse lenders are. We are widening spreads on multifamily in tandem with what our banks are telling us and what the CLO market is telling us. But I do think that we will be will be back in the market. This is just you know, us being, you know, cautious about where we stand today. And as also, as Andy emphasized earlier, the quality of what we are seeing generally in the portfolio right in the pipeline has not been as good as it was in the first in the first 3 quarters of the year.

So we are seeing a little bit of a tail off in terms of the type of product that we want to do as well. So as we move into year end, I think that the portfolio stays where it is, maybe grows very modestly, and then we will reengage more fully in Q1.

Timothy D'Agostino: Okay. Great. Thank you so much for taking the questions today.

Operator: The next question will be from Christopher Muller from Citizens Capital Markets. Please go ahead.

Christopher Muller: Hey, guys. Thanks for taking the questions.

Michael Joseph Mazzei: You just touched on this a little bit, but you have talked about $500 million of net growth in the back half of the year. And I heard Mike's comments on rates extending time lines and also just being cautious right now. But I guess the flip side of that is repayments have also been pretty low. So net growth seems pretty likely, I guess, in the next couple quarters. Is positive net deployment, but maybe just a little lighter, a fair assumption given the environment out there?

Andrew Elmore Witt: Yeah. I think that is that is probably a fair assumption. As Mike mentioned, we have you know, $100 million in our ramp that is immediate. Right? We expect to put that to work. Over the next few months. So that would obviously be net growth that is not as a result of payoffs. So that is our expectation for, you know, the coming months before we get additional clarity.

Christopher Muller: Got it. And then just looking at leverage, I mean, you guys definitely have some capacity to push that higher. It sounds like that is probably not likely in this environment. But I guess just naturally as some of this REO gets sold and then recycled combined with the new CLO, should we expect that to just push leverage higher just mechanically?

Michael Joseph Mazzei: Oh, yes. Absolutely. Yeah. Got it.

Christopher Muller: Well, appreciate you guys taking the questions today.

Andrew Elmore Witt: And we have we have got low leverage embedded in some of the REO that either under levered or unlevered entirely. So as we as we sell that out, that is gonna be the capital that we will be using to push the loan book north of 3.5.

Michael Joseph Mazzei: Got it. Makes a lot of sense.

Christopher Muller: Appreciate you guys taking the questions today.

Michael Joseph Mazzei: Thank you.

Operator: The next question is from Jason Weaver from Jones Trading. Please go ahead.

Jason Weaver: Hey. Good morning, guys. Thanks for taking my question. First of all, you know, take into account your comments on, you know, some moderating growth in the loan book looking ahead versus wanting to maintain excess liquidity. Talk a bit about your appetite to pursue more share repurchase here given the discount that still persists.

Michael Joseph Mazzei: Good question. And like I said in the prepared remarks, we bought it at $4.80. it is it is obviously super compelling at this level when you look at the gap between book value and where it is trading right now, it is in astonishing number for the entire sector. We are not burdened with. We are we are looking at some of the other capital sacks across the peer group. We are not burdened with breadth. We are not burdened with the term loan. So it is just cash and the repo book. So we look at that stock right now, but we also look at the market, as I said, and the market's telling us something.

Is it plausible that we purchase some stock again? It is plausible. Absolutely. As I said, it is it is obviously a point more compelling than where it was. When we purchased during the quarter. But we really have to. As a mortgage REIT, given the leverage that we run, you really have to look at the market and take your cue from it. And we have to really be confident that something else here is not happening and that the treasury does not revert to where it was. When you look at the factors in the in the in the duration market, you still have massive deficits.

You still have hyperscalers coming at the market with enormous amounts of debt requirements. So the things that would. And oil still very high. So the things that were driving the treasury market higher the uncertainties there, those things still exist, which is why I referenced the reason why the market may have come down a lot was because of the first time we had a flight to capital, a flight to safety. We had the hyperscalers being reversed correlation to the treasury market. And the equity market versus where treasury rate rates were. that is been the first time that is happened in a while.

So it could just be a flight to quality that is pushing rates down where they are. So when we get a better visibility into what the market's doing, then we will we will decide whether we wanna venture back in. But right now, to miss a trade on buying some stock here and giving up on liquidity, that is something we are not gonna do.

Jason Weaver: Understood. Frank you for that. And then maybe on the portfolio specific I think both the downgrades were Blue Bell, Pennsylvania, I think those were originally underwritten at some pretty conservative, LTVs. Can you talk about what changed within those specific markets that caused you to push them to level 4?

Andrew Elmore Witt: Andy? So the you know, those properties essentially migrated on to the watch list as a as a function of upcoming maturities. And the properties are really connected physically in terms of location. it is about 420 thousand-square-foot of office complex. And you know, we downgraded the loans because we are coming up on a. On an upcoming maturity, and there is uncertainty around those positions, which will provide more insight on in the coming quarters.

Jason Weaver: Okay. I appreciate the color. Thank you.

Operator: And the next question is from Gaurav Mehta from Alliance Global Partners. Please go ahead.

Gaurav Mehta: Thank you. Good morning. I wanted to ask you in the light of slowing loan growth for maybe next 1 or 2 quarters, how should we expect the dividend coverage in the know in the past, you had said maybe positive dividend covered by, I guess, next year. Right. Thank you.

Michael Joseph Mazzei: Hello. So right now, the leakage has been about call it, 2 to 3 cents a quarter which is not significant. And really, it depends on 2 things. 1, getting back and deploying capital quickly. So we do not expect to do a lot of that. In the fourth quarter. Things could change, but we do not expect to do a lot of it, which is why we are telegraphing it. Here. And it really depends on if we are back in the market in Q1 or we still think that there is. There are concerns about the overall market. My guess is that probably is more likely that we are.

But right now, we are just we are just being we are being cautious. It also depends on you know, where we. How we are deploying. How we are getting off the sales for the REO. We have a lot that is listed something listed this quarter. We have a number of things going on in the first quarter. If we are able to get those deals done, we will have more capital to deploy. And so that could help us as well. So this is something that the board will watch over course of the next coming quarters. To see if we are getting back in the market and we are gonna we wanted that $3.5 billion number.

But right now, the leakage is modest. it is tolerable. It really is a question of does the market continue to give us angst where we are not deploying capital? And I think us to do that is something that you are gonna be watching as well and agreeing with that there is something going on here we should hold on to cash a little bit longer.

Gaurav Mehta: Alright. And maybe on the adjusted EAD sort of run rate, should we expect earnings to remain around the current level that should reported in 3Q?

Michael Joseph Mazzei: We are not going to give forward guidance But I think as we said, I kind of said 2 to 3 cents a quarter is the leakage. that is probably something that is somewhat consistent. Other than that, we do not want to give forward guidance. Alright.

Gaurav Mehta: Yeah. Thank you. that is all I have.

Michael Joseph Mazzei: Thank you.

Operator: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mike Mazzei for any closing remarks.

Michael Joseph Mazzei: Thank you all for participating today. For those listening, if there are any 1-on-ones that you would like to request please contact us. We will be glad to do so. Otherwise, we will see you all in a new year. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.