BrightSpire (BRSP) Q2 2025 Earnings Transcript

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DATE

Wednesday, July 30, 2025 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Michael Joseph Mazzei
• President — Andrew Elmore Witt
• Chief Financial Officer — Frank Vito Saracino
• General Counsel and Secretary — David A. Palame

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TAKEAWAYS

• GAAP Net Loss -- $23.1 million, or $0.19 per share, reported.
• Adjusted Distributable Earnings (DE) -- $22.9 million, or $0.18 per share, up from $0.16 per share in the prior quarter, driven by loan originations and San Jose Hotel operating income.
• Distributable Earnings (DE) -- $3.4 million, or $0.03 per share, including specific reserves of approximately $19.5 million.
• Dividend Coverage -- The dividend was covered by adjusted distributable earnings.
• Net Book Value -- $7.65 per share GAAP; $8.75 per share undepreciated, with no change in undepreciated book value quarter over quarter.
• Liquidity -- $325 million available, including $106 million unrestricted cash, $165 million under the credit facility, and $54 million in approved, undrawn warehouse borrowings.
• Watch List Loan Exposure -- Reduced by 50% to $202 million, or 9% of the loan portfolio, primarily through REO asset transitions and loan upgrades.
• REO Portfolio -- Grown to 8 properties with $379 million undepreciated gross book value, $136 million of which is the San Jose Hotel (36% of REO); aggregate net carrying value is $263 million with a debt-to-assets ratio of 31%.
• Loan Portfolio -- $2.4 billion across 81 loans; average loan balance $30 million; net portfolio grew approximately 3% (or $70 million), excluding San Jose moving to REO.
• New Originations and Investments -- $98 million in 2 new senior loans and one cross-collateralized preferred equity investment, plus $7 million in future fundings; total capital deployment of $105 million.
• Share Repurchases -- 561,000 shares repurchased at an average price of $5.19.
• Balance Sheet Leverage -- Debt-to-assets ratio at 63%, debt-to-equity ratio at 2.0x, with no final maturities until 2027 and no corporate debt.
• CECL Reserve -- General CECL provision is $137 million (549 basis points on total commitments), approximately $20 million lower than the prior quarter following specific charge-offs for San Jose Hotel and Santa Clara multifamily loans.
• Market Valuation -- Management stated, "BrightSpire continues to trade at a roughly 40% discount to its undepreciated book value. This equates to a discount of approximately $450 million to a book value, which includes a CECL reserve of $137 million or $1.06 per share.
• Origination Pipeline -- 6 loans totaling $114 million have closed or are near execution for the upcoming period.
• Preferred Equity Investment -- New cross-collateralized instrument spans 6 Phoenix properties with 900+ units at 92%-93% occupancy, and a coupon rate of 14%.
• Office REO Update -- Two Long Island City office properties comprise $60 million (16% of REO), with active leasing and one building to be imminently marketed for sale.
• Multifamily REO -- Four properties plus one predevelopment site total $183 million (48% of REO); Phoenix multifamily asset pending sale close in the next quarter.
• Risk-Ranked Loan Migration -- All risk rank 5 loans removed from the watch list; two rank 4 loans upgraded due to new borrower equity, two loans downgraded to rank 4 (Ontario industrial, Austin multifamily) due to market-specific challenges.
• San Jose Hotel Status -- Now owned outright, unleveraged, and cash flow positive; management intends to invest in CapEx and target a sale aligned with major Bay Area events in 2026.

SUMMARY

BrightSpire Capital, Inc. reported a shift of substantial watch list exposures to REO, resulting in a halving of watch list loans and expanded real estate ownership, including the fully unleveraged San Jose Hotel now contributing positive operating income. The company disclosed two legacy office loan impairments totaling $51 million, which decreased GAAP book value but had no effect on undepreciated book value as prior marks were already in place. An additional $19.5 million in specific CECL reserves were charged off in conjunction with loan resolutions, leading to a reduction in the general CECL reserve. BrightSpire’s liquidity position supports further loan growth, and management articulated a path to scale the portfolio toward $3.5 billion with current capital and redeployment from REO proceeds.

• President Witt said, "the portfolio has the opportunity to grow to about $3.5 billion given our existing capital base," with progress dependent on REO asset sales and repayments.
• Chief Financial Officer Saracino reported, "The combined items lowered second quarter total GAAP net book value to $7.65 per share from $7.92 per share in the first quarter. However, the impairment charges and offsetting tax benefit had no impact on our undepreciated book value as we had previously written both investments down to 0 over a year ago.
• Management expects both loan payoffs and REO resolutions to increase materially in the second half, providing additional deployment capital.
• Leadership cited improved lending market conditions, including "credit and lending spreads stabilize, loan inquiry has increased steadily, and the CMBS market has returned to normal and is quite active."

INDUSTRY GLOSSARY

• CECL (Current Expected Credit Loss): An accounting reserve reflecting expected future credit losses on financial assets.
• REO (Real Estate Owned): Properties acquired by the company, typically via foreclosure or loan resolution, to be operated or sold as assets.
• Watch List Loans: Loans categorized as having heightened credit or operational risk, meriting enhanced monitoring and potential intervention.
• Distributable Earnings (DE): A non-GAAP performance metric used by REITs to indicate recurring income available for shareholder distribution.
• Adjusted Distributable Earnings: Distributable earnings modified to exclude certain non-recurring, non-cash, or unusual items, offering a view of cash-based ongoing performance.
• Risk Rank: Internal credit assessment reflecting a loan’s risk profile; lower numbers indicate stronger credit and higher numbers greater risk.
• Cross-Collateralized Preferred Equity: A mezzanine-level investment secured by multiple properties, providing yield and risk diversification from multiple underlying income streams.

Full Conference Call Transcript

Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported second quarter GAAP net loss attributable to common stockholders of $23.1 million or $0.19 per share, distributable earnings of $3.4 million or $0.03 per share and adjusted distributable earnings of $22.9 million or $0.18 per share. Current liquidity stands at $325 million, of which $106 million is unrestricted cash. The company also reported GAAP net book value of $7.65 per share and undepreciated book value of $8.75 per share as of June 30, 2025. 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 second quarter earnings call. We had a solid second quarter and are pleased with our progress and the results. Our dividend was covered by adjusted DE, while our undepreciated book value remained unchanged. In addition, our net loan originations were again positive for the quarter. Most importantly, we made substantial headway in reducing exposure to watch list loans, thus making further progress in continuing to derisk the portfolio. We also, of course, remain actively engaged in managing the resolution of REO assets. Turning briefly to the markets. We saw a notable improvement in market conditions and a welcome decline in volatility since our call in April.

Commercial real estate debt markets appear to be largely unaffected by the headlines over the last 90 days. We've seen credit and lending spreads stabilize, loan inquiry has increased steadily, and the CMBS market has returned to normal and is quite active. Moreover, bank warehouse lenders have remained ready, willing and engaged to provide competitive financing throughout the second quarter. These recent improvements are encouraging and provide optimism for the CRE market's continued progress. Now turning briefly to our balance sheet. During the quarter and subsequently, we have reduced the watch list on a net basis by 50%. The most notable reduction was the result of foreclosing on the San Jose Hotel loan.

We now own the property free and clear with no financing in place. During the protracted foreclosure process, the hotel experienced meaningful deferred maintenance that we are now in the process of addressing. Our intention is to make much needed and neglected physical and operational improvements to the property ahead of significant events taking place in the Bay Area through mid-2026. This is most notably the Super Bowl and the World Cup. We will look to sell the asset sometime in 2026. However, while the asset remains unlevered, it is currently cash flow positive and is now contributing to earnings.

In the interim, given the asset is unlevered, it also serves as a significant source of immediate liquidity as a result of committed but undrawn financing capacity. On the origination side, as anticipated and highlighted in our last call, we experienced a lull in new loan closings during the second quarter. This quarter's origination dynamics were mirrored by a slowdown in payoffs in our own loan portfolio. As a result, on a net basis, we experienced positive growth in the loan book. We expect loan origination conditions to improve in the second half of the year as we already have an additional 6 loans for $114 million that have closed or are in execution.

Finally, during the quarter, we repurchased 561,000 shares at an average price of $5.19. BrightSpire continues to trade at a roughly 40% discount to its undepreciated book value. This equates to a discount of approximately $450 million to a book value, which includes a CECL reserve of $137 million or $1.06 per share. Given the recent improvements in our watch list and the consistency in book value, we feel the stock is significantly undervalued. In closing, we navigated a very dynamic first half of the year. We delivered net positive growth in our loan book, our adjusted distributable earnings covered the dividend, and we cut the watch list in half.

We will continue to make progress on our remaining watch list loans as well as our REO resolutions. The REO resolution proceeds are a significant source of liquidity for future loan originations and the continued regrowth in our loan book. We enter the second half of the year with a more defined path forward to capitalize on the opportunities ahead. With that, I will turn the call over to our President, Andy Witt. Andy?

Andrew Elmore Witt: Thank you, Mike. Echoing Mike's comments, we continue to execute on our stated objectives, resulting in a positive quarter of significant watch list reductions, stable book value and meaningful progress on the portfolio management front. During the second quarter, the portfolio grew by approximately 3% or $70 million on a net basis, excluding the impact of the San Jose loan moving to REO. Capital deployment was relatively modest during the quarter, consisting of $98 million across 2 new senior loan originations and a cross-collateralized preferred equity investment as well as future fundings of $7 million, resulting in total deployment of $105 million. Repayments were insignificant, consisting of 5 partial paydowns.

However, we anticipate repayment volume related to both loan payoffs and REO resolutions to increase over the next several quarters. The combination of current liquidity on balance sheet and resolution proceeds will be redeployed in the coming quarters in new loans. During the quarter and subsequently, we continue to make progress on the watch list loans, reducing total watch list exposure by nearly 50% and by 2 loans on a net basis. The reduction in watch list exposure was primarily driven by the removal of our 2 risk ranked 5 loans. During the quarter and subsequently, we took ownership of the San Jose Hotel loan and the Santa Clara multifamily predevelopment loan.

As a result, there are no risk ranked 5 loans on our watch list. Additionally, we upgraded 2 risk ranked 4 loans. The loans were previously downgraded due to uncertainty. In both cases, the borrower contributed fresh equity to support the execution of the underlying business plan resulting in the upgrades. Also during the quarter, 2 loans were downgraded to a risk rank 4, the Ontario, California industrial loan has faced challenges related to increased supply and most recently, tariff-related policy. Given the uncertainty the borrower is no longer supporting the property and BRSP is evaluating options, which include either a sale in the short term or potentially managing the property through this period of uncertainty.

Additionally, we downgraded the Austin, Texas multifamily loan. Occupancy at the property has been stable. However, the supply glut in the market has put downward pressure on rental rates. On a net basis, watch list loan exposure was reduced from $396 million at the end of Q1 to $202 million today or 9% of the loan portfolio. While the watch list experienced a significant reduction, our REO portfolio has grown commensurately. Currently, our REO portfolio is comprised of 8 properties with an aggregate undepreciated gross book value of $379 million. The San Jose Hotel property accounts for $136 million or 36% of the REO portion of our portfolio.

As Mike previously mentioned, our current plan for the property contemplates holding it in the near term to improve property level performance to maximize shareholder value. The office portion of our REO portfolio is comprised of 2 Long Island City properties with a combined undepreciated gross book value of $60 million or 16% of the REO portfolio. We are focused on leasing up one of the properties where we have a tenant taking one full floor and are negotiating with another for significant space. Imminently, the second building will be marketed for sale.

The remaining portion of our REO portfolio is comprised of 4 multifamily properties and 1 multifamily predevelopment site for a combined undepreciated gross book value of $183 million or 48% of the REO portfolio. As it relates to the 4 multifamily properties, we're actively engaged in the execution of value-add business plans. We anticipate resolving most of the multifamily portion of our REO portfolio over the next year or so, subject to how the market evolves. Currently, we are in the process of finalizing the sale of our Phoenix, Arizona multifamily property in line with our carrying value. We expect to close on the transaction next month or shortly thereafter.

As previously highlighted, our corporate business plan contemplates repatriating capital from this portion of our portfolio for redeployment in new loans. At present, our 8 REO properties have an aggregate undepreciated gross carrying value of $379 million and a debt-to-assets ratio of approximately 31%, resulting in an undepreciated net carrying value of $263 million. As we look to execute our business plan, we'll exercise prudence with a focus on maximizing the value of our existing properties to provide fuel for loan portfolio growth over the next several quarters. Currently, the loan portfolio stands at $2.4 billion across 81 loans with an average loan balance of $30 million.

With that, I will turn the call over to Frank Saracino, our Chief Financial Officer, to elaborate on the second quarter results. Frank?

Frank Vito Saracino: Thank you, Andy, and good morning, everyone. For the second quarter, we generated adjusted DE of $22.9 million or $0.18 per share. Second quarter DE was $3.4 million or $0.03 per share. DE includes specific reserves of approximately $19.5 million. Additionally, we reported total company GAAP net loss of $23.1 million or $0.19 per share. . I would first like to provide an update on 2 of our legacy office equity investments. First, our Equinor Norway net lease asset reached a maturity default on its bond financing and the lenders foreclosed on the property.

As a result, we deconsolidated all Equinor assets and liabilities from the balance sheet and recorded a GAAP impairment of approximately $49 million and an income tax benefit of approximately $22 million. As for the second of the 2 properties, in January earlier this year, we defaulted on the CMBS financing for our multi-tenanted office equity property located just outside Pittsburgh. Subsequent to quarter end, a receiver was appointed for the property, and as a result, we will deconsolidate the assets and liabilities from the company's consolidated balance sheet in the third quarter. Accordingly, we reported a GAAP impairment of approximately $2 million related to the property.

The combined items lowered second quarter total GAAP net book value to $7.65 per share from $7.92 per share in the first quarter. However, the impairment charges and offsetting tax benefit had no impact on our undepreciated book value as we had previously written both investments down to 0 over a year ago. As such, for the second quarter, we reported undepreciated book value of $8.75, flat quarter-over-quarter. Now I would like to quickly bridge the second quarter adjusted distributable earnings of $0.18 versus the $0.16 recorded in the first quarter. The change was primarily driven by loan originations and operating income from the San Jose Hotel. Looking at reserves.

During the second quarter, we recorded specific CECL reserves of approximately $19.5 million related to taking ownership of the properties associated with the San Jose Hotel loan and the Santa Clara, California multifamily predevelopment loan. As both loans were resolved during the quarter and subsequently, we charged off their reserves. Our general CECL provision stands at $137 million or 549 basis points on total loan commitments. This is approximately $20 million lower than the prior quarter. As the CECL provision is flat quarter-over-quarter, the decrease is primarily driven by the charge-offs. Our debt-to-assets ratio is 63%, and our debt-to-equity ratio is 2.0x. We have no corporate debt or final maturities due until 2027.

Lastly, our liquidity as of today stands at approximately $325 million. This comprises $106 million in current cash, $165 million under our credit facility and approximately $54 million of approved but undrawn borrowings available on our warehouse lines. This concludes our prepared remarks. And with that, let's open it up for questions. Operator?

Operator: [Operator Instructions] And your first question today will come from Randy Binner with B. Riley FBR.

Randy Binner: So that was well covered. Good quarter. I guess my question here is related to the REO portfolio, specifically the San Jose Hotel, the multifamily properties you mentioned. Can you just give a little color kind of like on value-added activities you mentioned? And then in San Jose, I think there's events coming to that market. I'd just like to -- love to hear like a little bit of color about like how the outlook is going for managing those and adding value to the process, as you said.

Michael Joseph Mazzei: This is Mike. I'll discuss the San Jose asset, and Andy is deeply involved in the multifamily assets. So he could tell you what we're doing there, which is -- some of them are very heavy lifts and the team is doing a great job. On the San Jose Hotel, again, as I said, it was a very protracted process and ended up foreclosing on the asset. There is a considerable amount of deferred maintenance at the asset given that the foreclosure process was a long one, and there was some distress at the asset. There were just basic things like elevators. Some elevators were not operating and offline. So there are things like that, that we need to address.

So when I talk about getting -- doing those things, there are some big events that are coming up. You obviously want the hotel fully operational in its best condition. So we are going to be investing capital over the next 6 months into the hotel for deferred CapEx and things that need to be addressed. There are some big events coming up. I believe the fall is the peak season. We also have, as I said in the prepared remarks, the Super Bowl coming in the World Cup to Levi's Stadium, which is a very close proximity to our hotel. And then we have the March Madness in San Jose in March, obviously.

So we want to do things that we need to do to get that hotel fully operational in peak condition before those events. So we would envision because it's going to take some time to get some of these things addressed. Probably about 6 months, we're going to hold the asset certainly to do that, address the CapEx that's being deferred and then prepare for these big events. And that's why I think we'll look to potentially sell the hotel sometime in mid of 2026, but we don't really have a time line for it yet. It is contributing to earnings. The hotel is -- the NOI is above OpEx.

So there is a positive NOI, but it's still in a trough and the ROE on that asset is still low. We don't have it encumbered right now. We can draw a modest amount against it on our preapproved capacity with our lender, something like $60 million in terms of potential liquidity. But right now, we're going to keep it unencumbered. The ROE is low, but hopefully, the cash flow will increase. And again, we'll look to address this in 2026. And now I'll turn it over to Andy to talk a little bit about some of the multifamily REO that we have.

Andrew Elmore Witt: Thank you, Mike. So as it relates to our multifamily REO, we've got one that's on the precipice of being sold. And then for the remaining assets, the business plan is largely comprised of addressing deferred CapEx, addressing some of the unit improvements, leasing up the property, in some cases, improving the curb appeal. But these are relatively straightforward executions. And in most of the cases here, we're well along the way in terms of the execution of that business plan. And it's essentially taking an asset that is leased at a below market rate, improving the look and feel of the asset and driving towards market occupancy.

And so we anticipate exiting the other 3 assets over the next several quarters. They're in various phases of that business plan that I laid out. So they'll kind of come in sequence. So we're encouraged by what we're seeing in terms of the demand for the underlying product and we anticipate executing these plans and getting them to market.

Randy Binner: No, I was going to say that's super helpful on both fronts, but Mike, you were going to say?

Michael Joseph Mazzei: No, thank you. That's it.

Operator: And your next question today will come from Steve Delaney with Citizens JMP.

Steven Cole Delaney: Congratulations on your stock up 6% today. Mike, just a little kind of theoretical question to start. If we look at bridge loans that you're underwriting today, especially after having worked through some 4s and 5s of bridge loans made in 2022 or 2023. Is there a difference in the quality of the borrowers or the properties of the structures? What have we as an industry, I'm throwing myself in there as an analyst, but the interim bridge lending, commercial real estate lending apparatus in the country. Has there been a lesson learned? Is the bridge loan business today meaningfully different from what was being done post-COVID 2022 with lower rates?

I'm just curious if there's something kind of cyclical going on there or the new version, if you will, is 2.0 going to be better than 1.0?

Michael Joseph Mazzei: I feel like I'm talking to my daddy. Yes, there's been a lesson learned. We had a bubble market. We stopped lending in early 2022 because we saw it. We wish we stopped lending a quarter or 2 earlier. One of the things that were driving the market before that we've spoken about in past calls have been the syndicators, and they've largely gone. And that's a huge positive. We're also operating in a different rate environment, and we're also operating where some of these properties, the values are getting reset. And so that's also very positive.

So right now, we're looking at going in debt yields that are much better than we were before and exit debt yields also better. I think the backdrop of capital markets are looking very good, CLO market. We have a deal that's in the market, not us, but another lender that should price shortly, spreads look like it may tighten on that. The CMBS market, as you've heard on other calls today, the CMBS market is wide open and doing well. We mentioned on our call the bank warehouse lenders are very active.

As you know, Freddie and Fannie, probably from your GSE lender calls, Freddie and Fannie are robust lending activity, very aggressive, and hopefully, we'll have a Fed cut in September. So the capital markets are feeling very good after this quarter. We're very constructive on multifamily. We feel like the recovery is U-shaped and we're at the bottom of that trough. We're still seeing concessions that are given, but construction lending is down considerably than where it was in our previous cycle in 2020, '21 and '22. The rent versus own proposition is looking stronger than ever, which bodes very well for multifamily. So we think that in 2026, '27, you're going to see rent concession, burn-offs and rent increases.

And hopefully, our credit people are recovering from the PDSD over the past 2 years, and they're seeing that, and we're trying to lean into the underwriting more because we do believe that, that market will tighten. We are picking our spots. We would prefer new construction takeout and properties, obviously, brand new in areas where we're seeing higher household incomes where you could potentially push rents further than in other older vintage multifamily. We still think it's a lender- driven market. We've said that repeatedly on the last 2 or 3 calls, meaning that there's billions of dollars coming up for refinancing in the next 2 years which bodes well for the bridge market.

And the lenders are at the end of the rope with regard to loan extensions without putting equity in the deals. And so the borrowers that are coming to us are still looking, and this is why inquiry has increased dramatically. 75% of it is still refi. The reason why the hit ratio is still low is because those borrowers are seeking to do better than the paydowns required by their existing lenders. So they're coming to the market asking for an equity-neutral refinancing. And those are still a struggle.

And so as the lenders that they currently have are working with them, we're starting to see those refi requests turn into sales, and we're seeing more acquisition activity, which we largely prefer over bridge to bridge lending. So hopefully, that investment sale activity will continue to grow as lenders are pushing their borrowers into the market saying sell the property or pay down the loan. So we're pretty constructive in the market right now, especially for multifamily. And we think that this is a much different lending market than you're seeing.

And evidenced by the fact, Steve, you're seeing the advance rate on CLOs about 5 percentage points higher than they were in 2022 because the debt yields going in are much better than what we saw in 2022.

Steven Cole Delaney: That's very helpful. Great look back and roll forward to where we sit here today. And given where we are today at June 30, your portfolio was $2.4 billion. If you look -- and maybe, Andy, wants to -- whoever wants to answer it, I guess, I'll address it to the team. But looking at your capital base today in that portfolio, how much incremental loan portfolio growth do you believe you have with your existing capital base to maybe move beyond the $2.4 billion portfolio at June 30?

Michael Joseph Mazzei: I'm going to turn it over to Andy because he did say and he'll clarify further from what his prepared remarks were about how much embedded capital we have in our REO. Andy?

Andrew Elmore Witt: Thanks, Mike. So in terms of portfolio growth, right now, today, we're sitting on about $260 million of net book value in our REO portfolio. And so we're incredibly focused on getting to liquidity as it relates to those underlying positions. We're also sitting on a healthy cash position. So we're deploying capital. But as we look forward, we think the portfolio has the opportunity to grow to about $3.5 billion given our existing capital base. Now that's going to happen over time. Obviously, you're going to have repayments occurred during that period of time.

Our deployment is going to be somewhat moderated by our ability to dispose of the existing REO, but that's certainly the focus of the organization at this point.

Operator: And your next question today will come from John Nikodemus with BTIG.

John Nickodemus: Somewhat related to Steve's last question, something that Andy, you went over in your prepared remarks, the repayments. Obviously, you noticed that they were low in the second quarter. Good to hear that they're going to be bouncing back. We did note that there were just $7 million total so far in July. Is that something that looks like it will be happening before the end of the third quarter or deeper into the year? I'm just kind of curious what the repayment trajectory is looking like throughout the rest of 2025?

Andrew Elmore Witt: Yes. As always, it's difficult to predict with a high degree of accuracy what the repayment schedule will look like. And getting to the REO proceeds, but we're certainly going to see an uptick over Q2 without a doubt. We've got some rather significant positions that we've got a clear line of sight in terms of resolving. So I think over the back half of the year, you are going to see some rather material resolutions, both in the existing REO portfolio and as it relates to repayments. And it's really difficult to size that.

Michael Joseph Mazzei: I will also -- I'll add to that, that we are seeing -- we had some -- a modest paydown on one of the risk-weighted floor office loans. We expect a small office loan to pay off at the end of the month. We also are seeing on some of the larger office loan assets that we have -- I think, hopefully, next quarter, we should have this discussion about some underlying leasing that we're seeing there. In the Phoenix office asset, they are in the process of working on a lease that could be meaningful for the building.

We cannot speak for the borrower, but there is a chance that, that borrower in executing that lease, we'll put that asset up for sale. So we're hopeful of that. Again, we can't speak to their goals and what their intentions are, but we would hope that, that would be the case. In Baltimore, that asset is a relatively highly leased asset, that office asset. And it is competing for a number of leases for state agencies.

There was a state agency building that was owned by the Maryland government that they are deciding not to invest new capital in, and they've told those tenants, those 9 agencies in the building for about 250,000 square feet to go find some new space. And our building is -- our owner or borrower is competing for some of that space. And again, we can't speak on their behalf, but we -- hopefully, that will get done, and that may lead to that property being sold. And if we can get the office portfolio down, by about 20% from where it is today. It shrunk over time. That would bring it down to like a 5 handle, $500-ish million.

Then I think we would potentially look at the market for doing new office loans. The CMBS market is accepting office properties more than it has over the past year. So we're optimistic that we can get some one-off deals done in the office market again, we have to shrink the office portfolio. And then I would also add that in Long Island City, Andy alluded to this, one of the buildings, we have leased one floor. And we're all working with a state agency. We were selected in an RFP process. We are in lease negotiations with that agency.

I would put a grain of salt on that, please, because anything could happen, but there is some positive momentum there. Hopefully, that lease gets done. It's probably a little premature to say that because it's not fully baked. Hopefully, we'll have more to say about that positively next quarter. .

John Nickodemus: That's some great color and definitely exciting to hear what's coming through. Then for my follow-up, little bit more of a pivot, and I know this is something we've discussed before, I believe, in the spring with your team. Just wanted to hear any updates your team might have now that Texas has moved to change its legislation on traveling HFCs. Has that changed how your team is looking at your existing loans as well as any future loans there, just given your Texas multifamily exposure?

Michael Joseph Mazzei: We made -- we have executed on some of the HFCs and we understand what the new legislation says, it gives us a 2-year benefit in taxes, unless we sell the assets, we will probably -- we will be selling the assets before that 2-year horizon. So that is what it is. And we think that -- that will have really no impact on our strategy in executing on those REOs. We are, right now, almost complete with complete CapEx on the Fort Worth asset, and I think that will probably see the light of day in terms of a sale after we list the Mesa multifamily asset. That will be the next one that goes up.

The Fort Worth asset is experiencing extensive leasing progress after the refurbishments that we put in place. And we'll put that one on the market, my guess around first quarter of 2026. And then after that asset, the next one that will follow will be the one in Arlington, Texas. And that will probably be around the second quarter of 2026.

Operator: [Operator Instructions] And your next question will come from Jason Weaver with JonesTrading.

Jason Price Weaver: Just looking at the decline in property operating margin in the quarter, I assume a good portion of that from the two you took back specifically San Jose. But how should we be thinking about the trajectory from here moving forward? Andy, you mentioned in your prepared remarks, there was a lot of deferred maintenance. Did that contribute to the extra expense burden there?

Frank Vito Saracino: I mean, for -- this is operating during the quarter, remember, we foreclosed on Signia San Jose Hotel. So that would have not only increased property income but as well as property expenditures during the quarter. So maybe that combination that's looking odd, but CapEx wouldn't affect the NOI.

Jason Price Weaver: Got it. So can you point to anything else that is affecting the operating margin there? It declined about 10 points is what I'm getting.

Michael Joseph Mazzei: No. I'm failing to get the gist of where you're going.

Jason Price Weaver: We can revisit, no worries. Second, maybe related to Steve's question, it seems like many of the peers out there, a few have reported that they're still having some difficulty seeing net growth in their portfolios. Anything that you can point to from a competitive perspective on why you've been able to win more mandates, whether that's pricing, covenant structures, et cetera?

Michael Joseph Mazzei: I'll be perfectly honest with you here. I mean, we feel -- we're disappointed in the second quarter. We said that going into last quarter that we would have a low, and quite frankly, hats off to some of our competitors. We've looked at our friends at TRTX have done a great job for the quarter, and we look to follow suit. We feel like the inquiry that we've gotten has increased, as I said in the prepared remarks, dramatically year-over-year. So we're getting the looks that we want, and that's the main thing that we want to see as much as possible that's out there. And then it's up to us about the hit ratio.

The struggle has been a lot of the borrowers coming to us for refis are looking, as I said earlier, for these cash-neutral deals, or to get a better deal than their current lender is asking of them. And so that has been a little bit of a struggle. But I think over time, we're seeing the lenders really pushing on the borrowers to move on. And we're starting to see more acquisition financing. So that's why we're optimistic for the back half of the year, especially if there's a Fed cut in September.

But in terms of our peer group, I would not thank you for the generous remarks, but I don't necessarily think that we've done or outperformed our peer group in originations this quarter.

Operator: And your next question today will come from Gaurav Mehta with Alliance Global Partners.

Gaurav Mehta: I was hoping to get some more color on the cross-collateralized preferred equity investments that you guys had in 2Q '25.

Andrew Elmore Witt: Sure. This is Andy. I'll take that question. So this is related to the pref equity position that we originated during the quarter, correct?

Gaurav Mehta: Yes.

Andrew Elmore Witt: Okay. So this is a cross-collateralized pref across 6 properties or loans. They're all located in Phoenix. These were existing loans. So this was crossing the performance of those 6 properties under this pref equity agreement. And the underlying collateral consists of just over 900 units, and the occupancy is about 92%, 93%. In terms of the rate on that particular instrument, I believe it was 14%. I don't know if you had any other questions as it related to this particular loan.

Gaurav Mehta: No, that's helpful. And as a follow-up, I wanted to ask you on the Santa Clara multifamily that's in REO. I look at the carry value of $39 million, it seems like it's different than $57 million that was reported when it was in the watch list. Just wanted to get some more color on the difference in the carry value.

Michael Joseph Mazzei: Which asset?

David A. Palame: So that's -- so the difference -- essentially you're seeing the charge-off of the CECL that's related to that. So that was a decrease. This was our CECL reserve that we had against it and that accounts for the difference.

Operator: 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. Okay. In closing, we would like to mention to the families, friends and colleagues of the victims of the 345 Park Avenue tragedy and our friends and industry colleagues at Blackstone and Rudin that we offer our thoughts and prayers and deepest condolences. And thank you to the NYPD, the first responders and to all of the building security staffs who keep us safe. Thank you. And thank you for joining us today. This ends our call.

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

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