Greetings and welcome to the BrightSpire Capital Incorporated second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Palamé, General Counsel. Thank you, sir. You may begin..

Good afternoon and welcome to BrightSpire Capital's second quarter 2021 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 President and Chief Executive Officer, Mike Mazzei, Chief Operating Officer, Andy Witt and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements.

These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially including the potential adverse effect of and heightened risks associated with COVID-19.

For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-Q 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, August 04, 2021 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 its supplemental presentation, which was released this morning 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.

And now, I would like to turn the call over to Mike Mazzei, President and Chief Executive Officer of BrightSpire Capital.

Mike?.

Thank you David. Welcome to our second quarter earnings call. I would like to start by wishing everyone well and I thank you for joining us today. The company's momentum from last year has carried into 2021 and continues to build.

We are rapidly deploying capital into our more focused investment strategy while we resolve specific assets and execute on key business objectives. And in doing so, we have grown earnings and our quarterly dividend. Today is our first earnings call as BrightSpire Capital.

On behalf of the BrightSpire team, we are very excited about our company's rebranding following the internalization of our management and operating functions. Right out of the gates, we issued our first CLO under the BrightSpire name in July. We announced the sale of five co-invest assets.

And today, we announced an increase in our quarterly dividend to $0.16. With respect to the internalization, BrightSpire is rapidly becoming a fully operational standalone company and is on track to realize the anticipated cost savings from this transformative event.

As previously stated, we believe being an internally managed company is simply a better structure for shareholders. As the company grows its equity base, our shareholders will benefit from increased scale and operating efficiencies.

The internally managed structure is a more transparent organizational model with improved alignment between the company and our shareholders. Turning now to some key financial highlights. For the second quarter, we had adjusted distributable earnings of $0.20 per share. Our liquidity as of August 2 stands at $381 million.

Our undepreciated book value per share for the second quarter is $12.66, down from $12.84. Our book value this quarter was negatively impacted by the transaction we entered into to sell certain assets that no longer fit our business model.

However, when all aspects of this transaction are completed, the net result will be substantially in line with book value. Frank will provide greater detail in his remarks. With respect to our dividend, as I mentioned, our Board of Directors has approved an increase in our third quarter dividend to $0.16 a share.

This is up from $0.14 in the prior quarter and is the second increase since reinstating our dividend earlier this year.

The increase is supported by the cost of savings realized from the internalization to continued successful execution of our overall business plan as well as the improved return on equity we have achieved as a result of our recently issued CLO.

During this last quarter, we have continued to steadily redeploy capital into floating rate first mortgage loans. Since commencing new originations in the fourth quarter of 2020, we have closed on or committed to 50 loans totaling over $1.5 billion dollars.

While much of our lending activity has been on multifamily properties, we are beginning to see increased loan demand in other property types as the pandemic continues to wind down and investment sales activities increase.

This is especially the case in office properties where we are seeing good risk-reward opportunities given that the middle market suburban auto sector has been less impacted from the pandemic than most CBD office.

For the remainder of 2021, our plan is to continue to redeploy company cash into new loan originations and further rotate our asset portfolio and liability structure with an eye toward issuing our third CLO.

We will also look to close our recently announced asset sale transaction and utilize those proceeds to pay off the preferred equity financing the company completed in June of 2020. Finally, we will continue to focus on resolving any remaining non-earning or underperforming assets.

In closing, BrightSpire is well on its way to evolving its asset base into a pure-play portfolio of first mortgage bridge loans that can deliver current and predictable earnings.

We remain confident that the successful execution of our stated business plan throughout the remainder of 2021 will lead to additional growth and stability in both our earnings and our dividend. I would now like to turn the call over to our Chief Operating Officer, Andy Whit.

Andy?.

Thank you Mike and good morning everyone. My comments today will focus on BrightSpire's operational highlights and continued execution of our business objectives.

As Mike underscored in his remarks, we have made meaningful progress on a number of fronts, most notably entering into an agreement to sell a portfolio consisting of five co-investments, executing on a managed CLO and continuing to originate new senior mortgages.

Last month, the company entered into a transaction totaling approximately $223 million to sell seven loans associated with five co-investments. This transaction accelerates the disposition of longer dated equity-oriented investments that are no longer core to our strategy.

Upon completion, the total transaction is expected to be substantially in line with the combined carrying value for these assets. Four of the five investments included in the sales serve as collateral for the five-pack preferred financing the company executed in June of 2020.

As such, we anticipate using the proceeds from this transaction to retire this financing. In July, the company successfully executed on our second CRE CLO.

The $800 million managed CLO is collateralized by interest in 31 floating rare mortgages secured by 41 properties with an initial advance rate of 83.75% and a weighted average coupon at issuance of L+149 before transaction costs. The structure also features a two-year reinvestment period.

The transaction further diversifies our funding sources and reduces our cost of capital while generating approximately $49 million of liquidity or new originations opportunities. Additionally, our existing $1 billion managed CLO executed in October of 2019 continues to perform and benefit from LIBOR floors at the underlying loan level.

We have also been replacing loans in that vehicle, as the reinvestment window remains open through October of this year. Our originations platform remains active. During the second quarter and through today, the team has originated 25 new senior loans with an aggregate commitment amount of $729 million.

All of these investments are first mortgages, the majority of which are acquisition financing on cash flowing assets. As highlighted last quarter, the investment portfolio is now presented as three distinct segments. One, senior and mezzanine loans of preferred equity. Two, net lease real estate and other real estate. And three, CRE debt securities.

As of June 30, 2021, excluding cash and net assets on the balance sheet, senior and mezzanine loans and preferred equity, this comprised of 75 investments in an aggregate at-share net book value of approximately $1 billion or 83% of the portfolio, up from 81% last quarter.

The loan portfolio remains diversified in terms of size, collateral type and geographies. Given our recent originations activity, the portfolio has lower average loan balances with a higher focus on multifamily and office properties.

We anticipate allocating the majority of our capital toward this segment of our portfolio and more specifically to senior mortgages as we continue to build company earnings.

Net lease real estate and other real estate is comprised of 12 investments in an aggregate at-share net book value of approximately $157 million or 13% of the portfolio, in line with last quarter.

CRE debt securities, a segment which includes CMBS and one remaining private equity interest, is comprised of six positions and an aggregate at-share net book value of $48 million or 4% of the portfolio, down from 6% at last reporting.

During the quarter, the company sold four CMBS positions related to one BP's transaction for net proceeds of $29 million. The majority of the remaining value in this reporting segment is associated with bonds subject to risk retention provisions through June 2022.

Pro forma, for the previously highlighted portfolio sale, non-accrual assets in our portfolio will be reduced to loans associated with two significant investments. The two remaining investments include the $165 million San Jose California Hotel senior loan and preferred equity investment and the $98 million LA mix used loan.

The San Jose Hotel loan was placed on non-accrual during the first quarter of this year after the borrower closed the hotel and filed Chapter 11 bankruptcy. We expect the borrower to emerge from bankruptcy in the third quarter at which time the loan would become a performing senior mortgage investment.

With respect to the LA mixed use loan, it has passed its July 9 maturity date and the lending group is in discussions with the borrower. This loan will remain on non-accrual. Additional information on these and other specific loans will be included in the asset specific summary section of the company's Form 10-Q filing.

In summary, the company has made substantial progress rotating the portfolio composition towards loans and more specifically senior mortgage loans.

We will continue to remain focused on the existing portfolio while building and executing on a pipeline of new originations opportunities in order to drive earnings growth to support increasing dividend payments to shareholders, With that, I will turn the call over to our Chief Financial Officer, Frank Saracino, to elaborate on the second quarter results.

Thank you Andy and good morning everyone. Before discussing our second quarter results, I want to mention that we expect to file our Form 10-Q tomorrow. In addition, I would like to draw your attention to our supplemental financial report which is available in the shareholder section of our website.

The supplement continues to provide asset by asset details as does our Form 10-Q. With that, let's turn to our second quarter results. We reported total company adjusted distributable earnings, which excludes realized losses and fair value adjustments, of $27 million or $0.20 per share in the second quarter 2021.

We also reported a total company GAAP net loss attributable to common shareholders of $19.7 million or $0.15 per share and a distributable loss of $27.1 million or $0.20 per share.

The GAAP net loss attributable to common shareholders of $19.7 million and the distributable loss of $27.1 million reflects our recording of $54 million in fair value adjustments. These adjustments are primarily associated with two items. First, the July announcement to sell certain co-investments.

I want to highlight that GAAP accounting principles require us to value each individual investment at the lower of costs or market. As such, three investments with allocations below carrying value resulted in a second quarter fair value write-down.

Additionally, there are two investments with expected gains relative to their carrying value that will be recognized at closing. The second item is the sale four CMBS positions related to one BP's transaction, which resulted in a realized net loss approximately $22 million.

I want to note that $31 million was already recorded as an unrealized loss and as a result, there was a gain of $9 million relative to our most recent markdown basis. During the second quarter, total GAAP net book value decreased from $11.98 to $11.75 per share and undepreciated book value decreased from $12.84 to $12.66 per share.

This change is primarily due to the fair value adjustments associated with the sale transaction. As Mike and Andy both mentioned in their remarks, with the close of the sale transaction, we plan to utilize the proceeds to pay off the five-pack preferred financing.

The result of doing so is a net projected increase of over $0.50 relative to our June 30, 2021 undepreciated book value. This increase reflects the combination of recording the investment gains associated with the sale as well as the result of the remaining asset under the five-pack preferred financing reverting back to BrightSpire 100% ownership.

Looking in more detail at the second quarter adjusted distributable earnings, the quarter-over-quarter growth primarily reflects the company's significant deployment of idle cash during the first half of the year, including a full quarter's impact of first quarter originations of $475 million as well as contributions from the $402 million invested in the second quarter.

We also started realizing the cost saving benefits from the internalization of our management contract, which was completed on April 30. On a run rate basis, we continue to anticipate generating operating cost savings of approximately $16 per year or approximately $12 per share. Turning to our dividend.

Given our growth in adjusted suitable earnings, along with our improved operating performance and business outlook, we declared a dividend of $0.16 per share for the third quarter of 2021, up from $0.14 per share last quarter. The third quarter dividend is payable on October 15 to shareholders of record as of September 30, 2021.

Moving to our balance sheet. Our total at-share undepreciated assets stood at approximately $4.3 billion as of June 30, 2021. Our debt to assets ratio was 57% and net debt to equity ratio was 1.3 times at the end of the second quarter, a slight increase compared to the first quarter.

This increase was primarily driven by new loan originations In addition, our liquidity as of today stands at approximately $381 million between cash on hand and availability under our bank credit facility.

Looking at risk rankings and CECL reserves, Our overall risk ranking at the end of the second quarter improved to 3.5 compared to 3.6 at the end of the first quarter. This change is primarily related to the improved performance of certain loans and second quarter loan originations which have a day one three rating.

Our CECL provision was $42.9 million and represents approximately 1.4% reserved against our loans. This is a quarter-over-quarter increase of $1.2 million and is primarily driven by new originations. That concludes our prepared remarks. And with that, let's open the call for questions.

Operator?.

[Operator Instructions]. Our first question comes from Tim Hayes with BTIG. Please proceed with your question..

Hi guys. This is Ethan, on for Tim. Thanks for taking my questions. My first question would be, you guys have made significant progress on your strategic initiatives since the end of the first quarter by completing internalization, increasing capital deployment, divesting non-accrual loans and raising the dividend.

So I want to kind of get a feel for how you guys rank your strategic initiatives today? What's your greatest focus? And how quickly do you think you will be able to accomplish those goals?.

Hi. How are you? Thank you for joining..

Good..

We realize there are a couple of calls going on at the same time. Thank you for being here. This is Mike. With regard to the rest 2021, as we kind of pretty much said in the remarks, the goals are to continue to deploy the cash balances we have on the balance sheet today.

I think we were projecting getting somewhere down to about $125 million of actual cash and then figuring out how much we think we need to manage liquidity from that point forward. We are also trying to evolve away from multifamily and look for other opportunities in other property types.

We think those opportunities will present themselves as investment sales activity, especially in other property types expected to pick up dramatically as we get into Q4. And so perhaps different property types and some more structured, highly structured transitional loans to add incremental ROE around the edges.

The overall plan, though, is to continue to evolve the portfolio toward more of, as I said in the remarks, a pure-play commercial mortgage REIT portfolio. So continue to do first mortgage loans and on transitional assets, with an eye toward potentially executing our third CLO.

And then this asset sale that we have undertaken here that will also further move the portfolio because as those assets move off and these new first mortgages come on, that kind of counts as a full game there because we have got assets that are coming off at a more pre-development type, non-income producing assets versus the first mortgages we are putting on today.

So continued portfolio evolution toward more of a pure-play, commercial mortgage REIT are the goals, issue the third CLO, increase earnings as we said and hopefully the dividend will follow and the stock price will follow as well.

And then I think if everything fell into place, potentially towards the end of the year, we could look at what we could potentially do around more capital, whether maybe that's a small pref equity issue to increase the capital base and to really more fully maximize the benefits of being internally managed whereas as we said in the remarks as we grow the capital base we are no longer paying that external management fee of 1.5 point, a kicker above a pref return.

And so all that falls to the bottomline. So those are kind of the basic goals, I would say, between now and the end of the year..

All right. Great. Thank you. And then my next question is, the weighted average risk rating for you guys improved slightly quarter-over-quarter and the CECL reserve as a percentage of the portfolio declined.

Can you just touch on any notable loan upgrades to downgrades this quarter? And what drove those changes?.

Yes. I don't think was one notable loan, We had five loans that went from four to a three and one went from a three to a two, all kind of small moving where it was kind of offset by some new loans coming on. But there wasn't any one particular loan that moved drastically..

I think you are seeing generally as the pandemic improves, albeit we are all concerned about the Delta variant spike, but generally as the economy has improved and the pandemic has improved in terms of its effects on the economy, we felt it was appropriate to add higher risk ratings going into the pandemic.

And I see you are starting to see some of that, if you will, melt away as we emerge from the pandemic..

All right. Great. Thanks guys..

Thank you. Our next question comes from Stephen Laws, Raymond James. Please proceed with your question..

Hi. Good morning. Mike, I guess to follow-up on that, it kind of seems like across the group there is kind of two ways to go, I guess, right. You can do the multifamily, industrial, life sciences that fits well into CLOs on lighter transitional stuff or some are looking at taking more ROE on some stuff that maybe doesn't it go into CLOs.

So I kind of wanted to get your thoughts on the mix there and kind of what is that incremental return you need to start looking at loans that maybe don't fit into a CLO? I know you have said in your prepared remarks, you are targeting or thinking about a third CLO. So I know that is a focus..

Hi. How are you, Steve. Thank you for joining us and thanks for the question. This is Mike. Okay. So I think there is a selective amount of capital that we would use for non-CLO assets. We have had some very good experience in some as loans that we have created that were behind some development loans.

I think the key there is to make certain that any mezz loan we do is behind a senior loan that either we are doing the senior and laying it off or it's a senior loan that we can step in and fund and cure, i e. something that we would have done directly, but have chosen just do the mezz.

So we will look for those more selective transactions and we do think that we will see more of those opportunities as investment sales pick up. Overall, when we entered the market in Q4, multifamily and lending spreads in general we are very robust.

We have seen over this past several quarters, loan origination spreads will probably come in a solid 50 basis points to the low 300s. However, commensurately with that, we have seen the bank lines improve as well. So the advance rate on the warehouse lines have come in roughly five, in some cases 10 points depending on the deal.

And in terms of spread, lending spreads, those spreads have come in somewhere between 25 to 40 basis points. In addition to that, our AAA on our CLO executed at a rate of LIBOR+115. The only spreads that were better than ours in the more were spreads up that were 100% multifamily, not only in the first pool but in the reinvestment parameters as well.

And those are priced a nickel to a dime tighter. But we priced best-in-class for a mixed pool of assets. The advance rate was also very good at close to 84%. So while we have seen a compression in some lending spreads, we have also seen a compression on the liability side as well.

And to give you an example, the loans that we originated post-COVID that we started in the fourth quarter of last year are closing, we probably saw those ROEs improve several hundred basis points from warehouse line into the CLO. A lot of that is attributable to the advance rate being 84%.

Going forward, we are seeing the level of interest in multifamily as being enormous and it's reflected itself in the valuations of the underlying assets. We are seeing our borrowers/investors starting to acknowledge that and pull back.

And while multifamily valuations have been supported by the lack of building, population growth, wage growth and we are learning materially in the path of growth in the South. So we are seeing that demographic shift is also giving us a lot of support and valuations.

We are starting to see some pushback from investors on valuation and you are starting to see us push back on credit. And I will say that consistently across the line, we are noticing other lenders are drawing the line in the low 300s.

And finally, what I would say on multifamily, so finally what I would say is, it really comes down to investment sales. What we are hearing from the brokerage community is that there's a backlog, that assets are coming to market now and will be coming to market after Labor Day most notably.

So we are expecting to see a dramatic uptick in investment sales and we are hoping that in that we will see a lot more opportunity and more diverse lending away from the multifamily sector..

Great. Thanks for the detailed color there, Mike. Frank, I had a couple of questions around the kind of expenses under the internal structure. Two specifically. Kind of how do I think about non-cash comp, equity comp, as it's running kind of maybe an average of $5 million a quarter the first half of this year.

Under the internal structure, how do I think about that line item going forward? And the second one is, any one time expenses in 3Q we need to account for around the CLO? Or are all of those expenses, they will be able to be amortized over the life of the transaction?.

Okay. So thanks, Steve. So that's the first question. The equity compensation that's running through that's getting adjusted out of the distributable earnings. That amount will remain constant. The equity award that we received at the beginning of the year, that should be consistent kind of going forward into future years.

So I think that's kind of a number you can use right now. As far as one-time items of 3Q, the CLO and those other costs will be amortized over a period of time. So that really won't move the needle, but not expecting any one-time abnormal expenses for 3Q..

Great. I appreciate the clarity there. Thanks for taking my questions this morning..

Thank you. Our next question comes from Matthew Howlett with B. Riley. Please proceed with your question..

Hi. Thanks for taking my questions. Mike, I really like the comments in terms of maybe accessing a non-dilutive preferred at the end of the year.

So can we assume that you are going to be for sort of repeat sort of deploying all your excess cash by the end of the year? And you could look to access some preferred equity towards the end of the year?.

First of all, welcome to the call. Thank you for the question. I think that's something that we absolutely can have an eye toward.

When you look at how far we have come in terms of evolving the portfolio, the internalization, the CLO, all the things that we have accomplished, we will probably look at doing something with our bank line at the end of the year in terms of extending that.

So I think at that point in time toward the end of the year, we will look at the capital structure and see where the stock price is and see what we can do. The goal is, the whole point of being internally managed is to reap the benefits of those economies of scale.

So first and foremost, we want to grow earnings, grow the dividend and hopefully the cost price follows suit. We can't dictate that. We hope it does. And if we can get there, then other doors will open and we will look at that.

And at that point in time, when we get down to about $100 million, $125 million of cash, we have to stop thinking about other ways to stay active and expand the balance sheet. So that may come through a press that we do at the end of the year, yes. We will absolutely consider that.

And again, think I want to expand on this that the advantage of being internally managed is the operating scale with our equity base. So an externally managed generally does preferred equity. And many times that gets included in what's calculated for the management fee.

So for us, if we issue that, we get the cost of capital benefit by not paying that management fee and that scale really nearest towards our benefit. So we will have an eye to look at that the end of the year, yes..

So you said, there's really no additional in terms of the extra capital putting it to work, there's no really additional overhead you need to incur, if you raise an extra capital?.

That's correct..

It means, you have you have a pretty big balance. You referenced small. But any idea sort of how much range you could issue? I mean I have seen 6%, sub-6% rates since stuff has been coming out. Any idea what? I am sure you are getting inundated with calls from the investment banks.

Is there any idea on where the market is for you?.

We understand where the market is. But at this point, I would say that we are suspending our judgment until we get through the initiatives for this quarter. Right now, we have got a number of assets that we think we are working on that are going to transition this quarter, which are key.

We have got the sale that we have agreed to that we would like to see if we can get that accomplished this quarter depending on the machinations that have to go on there. And I think once that dust settles, we will be in a much better position to assess whether or not we want to add capital..

All right. We look for it. We certainly look forward to that.

And then just moving back to the, on the low comp with the sale of the remaining two assets, are we going to pick up the total of $0.24 we lost in the second quarter? Could just walk me through that again?.

Are you asking about related to the transaction?.

Yes..

Yes. So what I said in my prepared remarks is, we are going to pick up about $0.50 greater on our book value on our undepreciated book value. And it's a combination of the gains as well as the one asset in the GSAM five-pack that will now come back to 100% ownership. So we will get over $0.50 back..

Great. Okay. So $0.50 addition to the $12.6. Great Thank you for clarifying that..

If you look back at the previous quarters, you will see that when we executed that last year, the book value was reduced by assets being contributed to this preferred equity structure vehicle. And now that we are undermining that, we are recapturing some of that back.

Some of it was taken away via a write-down of an asset in previous quarters which we stated, but the balance that Frank is referring to, that gets repatriated back to us once that preferred structure is collapsed..

Correct..

And so again that's SPV and you get it back when you retire it?.

That's right. And because many of these assets that are involved in the sale, as Andy said, are also involved in that preferred equity financing vehicle, That's why you will see the proceeds from this sale used to collapse the entirety of that vehicle..

And just for GAAP accounting, you have elected low comps. You couldn't recognize it on June 30..

Correct. Under GAAP principles and this type of transaction, you have to take the lower costs or markets, which is why we have the write-downs and we will get the benefit of the gains fully closed..

Great. Okay, great. Well, we will definitely adjust for that. And I guess it's the last question. With the stock at the discount to what's even now at greater than a 30% discount to undepreciated sort of pro forma book, you have been asked a question on buybacks. I don't want to beat a dead horse.

But could you, look, you have this triple net lease portfolio that we have seen strong bids in the marketplace. Some people announcing one-off sales and gains.

I mean, could you do something strategically where you sell, you repurchase stock, you tender for common shares, just doesn't make any sense for what the group where it is and I know we all know the periods many of which are extremely managed for you guys. I know just internalization, street is getting used of the story.

But is there anything could do return capital via buybacks and do something strategically over the next few quarters?.

I think at these levels and given the ROE we had in the CLO that deploying the capital into new loans and growing the balance sheet is the goal. And buying back stock at these levels is probably a lower ROE versus where we can execute return an equity in the CLO.

And again, I want to emphasize the whole point of being internal is that we want to grow the capital base. And at this point in time, we made an investment for roughly $0.80 a share, $100 million to buyback the manager to improve the overall operations of the company and the efficiencies of the company.

Now we want to take a step forward and try to grow the capital base, so we can enjoy those efficiencies. And a stock buyback at these levels, I think versus our competing use of capital, doesn't it make sense for that and for the other reason that the operating scale is important to us..

Right. Look, it makes complete sense and as you said, the ROEs are well over 11% on the CLOs and I know you want to get bigger been inflection..

The ROE on the ClO, I mean they are all loans in that have floors that were, let's call them, pre-COVID loans, so we could establish the vintage. And those really contributed highly to the ROE.

That's why I mentioned, if you strip out those and you just focus on the post-COVID loans, we saw a three handle move in the ROE on those loans to something that's in the mid-teens.

And so when you look at the stock price today and what the buyback and how the buyback affects you ROE accretion to book versus deploying that capital and growing the balance sheet, I think the preference is to do the latter..

Absolutely. Makes complete sense. Really appreciate it. Thanks Mike. Thanks everyone..

[Operator Instructions]. Thank you. Our next question comes from Steve Delaney with JMP Securities. Please proceed with your question..

Thanks. Hello everyone and congrats on the progress on the balance sheet clean up and also the rebranding. I think it's a very important step for you and we really like the new name. BrightSpire has sort of an aspirational feel to it, to my ear anyway. Just one thing, because a lot has been covered.

But your current debt to equity leverage, 1.3 times at June 30, clearly, you are in transition, but that's a very low level relative to peer group where you would normally see 2.5 to even three times debt to equity. The CLO obviously does a lot because you are initially close to five times leverage there.

But looking maybe forward a couple of quarters or early next year, where do you think that settles in if you do a third CLO.

What should we, in terms of modeling, what should we think about as far as a range around debt to equity including the CLOs, of course?.

It's Frank, I will take that..

Hi Frank..

So look I think as we continue to deploy the cash on our balance sheet, we expect that level to grow somewhere into the 60s. And depending on, particularly I am thinking more debt to assets, so as we continue to put that money to work.

And obviously if we do pursue some type of offerings, as Mike previously mentioned, that will help drive some of that numbers. But we expect these numbers to move closer in line with our peers..

And Steve, we also have, it's Mike. Hi.

How are you?.

Hi Mike..

And thank you for your optimistic view of our name. We greatly appreciate that. You have got a lot of smiles in the room..

Yes. But now you got to little up to it, right, yes..

Yes. And it's an interesting process when we ran. Virtually every name was taken. But I also would point you to, we have a number of unencumbered assets on the portfolio. So as Frank said, it's not just deploying the cash. And as I alluded to earlier, we are focused on this quarter on getting those assets back.

For instance, one in particular, one of the larger ones, the San Jose hotel, that loan is going have a bankruptcy confirmation hearing. The borrower is endeavoring to pull that out of bankruptcy as quickly as possible. We expect that to happen this quarter.

And in doing so, that loan which is now completely unencumbered at, call it, $170 million, $175 million, including the pref that we have with it, will do two things. One, we will have an accruing asset again, a loan that's we reinstated as current. And then secondly, we will have a loan that we can finance.

So there will be more cash that comes out of that that we can utilize through originated loans. So you will see our leverage tick up, one, as we utilize cash the balance sheet and two, as we resolve some of the unencumbered assets as I alluded to them underperforming or non-earning assets and repatriate that capital to turn it into new loans..

Makes sense. Thank you both for the comments..

Thank you. Our next question comes from Jade Rahmani with KBW. Please proceed with your question..

Hi there. And thanks for taking the question.

I wanted to ask if you are still view the CMBS conduit business as attractive and something you want to create?.

Hi Jade. How are you? Welcome..

Thank you..

Thank you. Thanks for the question. We haven't. We have the tools to do it. We haven't looked at it this year. The goal for the year has been to really turn the portfolio more toward, as we would say, a pure-play commercial mortgage REIT where we had first mortgages and more consistent earnings. We will have an eye toward that. That is something we can do.

I will tell you in looking at the landscape, looking at the issuance in the CMBS market and taking note that a substantial amount of the issuance was in SASB and CLO versus conduit CMBS, that market is very competitive. Right now, there is not a lot of product.

We do hope that as we get into the fourth quarter and first quarter, that investment sales pick up and that will generate the demand for CMBS conduit product. But right now, being a late entrant to that market and seeing how competitive it is, I don't see us doing that in 2021. It is something that we reserve the right to do.

And certainly have the people with our Chief Credit Officer, George Kok and myself and our Head of Capital Markets, Matt Heslin, we have the ability to do that. But right now, we don't see it for 2021.

We still see enough ahead of us and just evolving the portfolio into a pure-play that we will check that box and look at that in 2022 and hopefully the market will be a little bit more open and there will be more demand for credit there. Right now, it's probably ranking third in terms of the issuance.

Like I said, I think SASB is probably double what CMBS conduit has been and that's a complete inversion from what it's been historically in other years..

Okay. I appreciate that. And you mentioned transitional loans with more structured component.

Are you talking about construction loans? Are you talking about heavily transitional loans? What are you referring to there?.

Well, quite frankly, the multifamily loans that we have been doing, they are pretty easy and straight down the middle. It's exterior work. It's interior, kitchen, bath, washer, dryer, dishwasher, It's pretty, I would say, very light transitional and easy to monitor.

So I think as you move into office, where there's more tenant roll with maybe positioning of assets with CapEx, we will look to do more of that. And as I said earlier, Jade, we have had some good success in multifamily development where we have done mezz behind construction loans.

In the cases where we have had real success, it's been loans where the loan size of the construction loan is something that we could have done directly in terms of the size of scope of the loan, but we chose to do the mezz. So maybe smaller deals. But I would say that that's probably a little bit further down the list in terms of highly structured.

I think we want to evolve away from construction at this point and just maybe move into office and industrial where the rent roll and the CapEx at the property are, let's say, more value-add, more transitional than the modest transitional that we have been doing with multifamily..

Thank you. There are no further questions at this time. I would like to turn the floor back over the management for any closing remarks..

Well, thank you for joining us today on our first BrightSpire Capital earnings call and we look forward seeing you at the end of the third quarter. Thank you for joining us today..

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day..