BrightSpire Capital - Earnings Call - Q2 2025

Executive Summary

• Adjusted Distributable Earnings (ADE) per share rose to $0.18, covering the $0.16 dividend, and beat S&P Global consensus EPS of $0.056; revenue also beat consensus, driving a positive stock reaction (~+6% intraday on call day). Values retrieved from S&P Global.*
• GAAP net loss of ($23.1) million (−$0.19 per share) was driven by final resolution of legacy office equity investments and specific reserves; undepreciated book value per share held at $8.75 while GAAP book value fell to $7.65.
• Portfolio de-risking advanced: watchlist exposure declined ~50% in Q2, with net loan originations positive; liquidity remained solid at $325M ($106M cash) and no corporate debt maturities until 2027.
• Outlook: management expects stronger originations in 2H 2025 and continues to target a CLO execution in Q4 2025; REO resolutions (e.g., Phoenix multifamily) are progressing, providing liquidity for future deployments.

What Went Well and What Went Wrong

What Went Well

• Watchlist cut approximately 50% and two risk-ranked “5” loans resolved, “meaningfully de-risking the portfolio”.
• ADE per share improved to $0.18 vs $0.16 in Q1, covering the dividend; uplift driven by new originations and San Jose Hotel’s positive contribution while unlevered.
• Liquidity remained strong with $325M total and $106M unrestricted cash; undepreciated book value per share stayed flat at $8.75, reinforcing balance sheet resilience.

Management quotes:

• “Our dividend was covered by Adjusted Distributable Earnings, undepreciated book value remained unchanged and net loan originations was positive during the quarter.” — Michael J. Mazzei.
• “Total watchlist exposure declined by nearly 50%… primarily driven by the resolution of our two risk-ranked five loans.” — Andrew E. Witt.
• “We anticipate stronger loan origination activity in the second half of the year.” — Michael J. Mazzei.

What Went Wrong

• GAAP net loss (−$23.1M) and GAAP EPS (−$0.19) driven by legacy office equity impairments and ~$19.5M in specific reserves recognized in DE; an additional ~$2M GAAP impairment recorded on a Pittsburgh multi-tenant office equity investment.
• Property operating margin was pressured by San Jose Hotel foreclosure effects (higher property income and expenses in quarter); margin questions arose during Q&A given the decline.
• GAAP net book value per share declined to $7.65, reflecting impairments (though undepreciated BVPS remained unchanged at $8.75).

Transcript

Speaker 6

Today, and welcome to the BrightSpire Capital Inc. second quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to David A. Palame, General Counsel. Please go ahead, sir.

Speaker 2

Good morning and welcome to BrightSpire Capital Inc.'s second quarter 2025 earnings conference call. We will refer to BrightSpire Capital Inc. as BrightSpire, BRSP, or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Michael J. Mazzei; President and Chief Operating Officer, Andrew E. Witt; and Chief Financial Officer, Frank V. 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 and financial results to differ materially. For a discussion of risks that could affect results, please see the risk factors 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, July 30, 2025, 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 Michael, 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 Michael.

Speaker 7

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 watchlist loans, thus making further progress and continuing to de-risk the portfolio. We also, of course, remain actively engaged in managing the resolution of REL 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 watchlist 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 six 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 watchlist 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 watchlist in half.

We will continue to make progress on our remaining watchlist loans as well as our REL resolutions. The REL 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, Andrew E. Witt. Andy?

Speaker 5

Thank you, Mike. Echoing Mike's comments, we continued to execute on our stated objectives, resulting in a positive quarter of significant watchlist 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 REL. Capital deployment was relatively modest during the quarter, consisting of $98 million across two new senior loan originations and the 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 five partial paydowns. However, we anticipate repayment volume related to both loan payoffs and REL 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 continued to make progress on the watchlist loans, reducing total watchlist exposure by nearly 50% and by two loans on a net basis. The reduction in watchlist exposure was primarily driven by the removal of our two risk-ranked five 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 five loans on our watchlist. Additionally, we upgraded two risk-ranked four 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, two loans were downgraded to a risk-ranked four, the Ontario, California, Industrial Loan that's faced challenges related to increased supply and most recently, tariff-related policy.

Given the uncertainty, the borrower is no longer supporting the property, and BrightSpire Capital Inc. 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, watchlist loan exposure was reduced from $396 million at the end of Q1 to $202 million today, or 9% of the loan portfolio. While the watchlist experienced a significant reduction, our REL portfolio has grown commensurately. Currently, our REL portfolio is comprised of eight properties with an aggregate undepreciated gross book value of $379 million. The San Jose Hotel property accounts for $136 million, or 36% of the REL 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 REL portfolio is comprised of two Long Island City properties with a combined undepreciated gross book value of $60 million, or 16% of the REL 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 REL portfolio is comprised of four multifamily properties and one multifamily predevelopment site for a combined undepreciated gross book value of $183 million, or 48% of the REL portfolio. As it relates to the four multifamily properties, we're actively engaged in the execution of value-add business plans.

We anticipate resolving most of the multifamily portion of our REL 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 eight REL 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 V. Saracino, our Chief Financial Officer, to elaborate on the second quarter results. Frank?

Speaker 3

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 report a total company GAAP net loss of $23.1 million or $0.19 per share. I would first like to provide an update on two 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 de-consolidated 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 two properties, in January earlier this year, we defaulted on the CMBS financing for our multi-tenant office equity property located just outside Pittsburgh. Subsequent to quarter end, a receiver was appointed for the property, and as a result, we will de-consolidate 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 zero 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 to 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 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 2.0 times.

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?

Speaker 6

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. We ask that you please limit yourself to one question and one follow-up. If you have any additional questions, you may re-enter the queue. At this time, we will pause momentarily to assemble our roster. Your first question today will come from Randy Binner with B. Riley Securities Inc. Please go ahead.

Speaker 1

Good morning. That was well covered, the quarter. My question here is related to the Real Estate Owned portfolio, specifically the San Jose Hotel and the multifamily properties you mentioned. Could you just give a little color on value-added activities you mentioned? In San Jose, I think there's events coming to that market. I'd love to hear a little bit of color about how the outlook is going for managing those and adding value to the process, as you said. Thanks.

Speaker 7

Okay. Hey, Randy, how are you? 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, 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. There are things like that that we need to address. 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. We are going to be investing capital over the next six 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 and the World Cup to Levi Stadium, which is in very close proximity to our hotel. We have the March Madness in San Jose in March, obviously. We want to do things that we need to do to get that hotel fully operational in peak condition before those events.

We would envision, because it's going to take some time to get some of these things addressed, probably about six months, we're going to hold the asset certainly to do that, address the CapEx that's been deferred, and then prepare for these big events. That's why I think we'll look to potentially sell the hotel sometime in mid-2026, but we don't really have a timeline 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 pre-approved capacity with our lender, something like $60 million in terms of potential liquidity. Right now, we're going to keep it unencumbered.

The ROE is low, but hopefully the cash flow will increase. We'll look to address this in 2026. I'll turn it over to Andy to talk a little bit about some of the multifamily REL that we have.

Speaker 5

Thank you, Mike. As it relates to our multifamily Real Estate Owned portfolio, we've got one that's on the precipice of being sold. For the remaining assets, the business plans largely comprise addressing deferred CapEx, addressing some of the unit improvements, leasing up the property, and in some cases improving the curb appeal. These are relatively straightforward executions. In most of the cases here, we're well along the way in terms of the execution of that business plan. 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. We anticipate exiting the other three assets over the next several quarters. They're in various phases of that business plan that I laid out, so they'll come in sequence. We're encouraged by what we're seeing in terms of the demand for the underlying product.

We anticipate executing these plans and getting them to market.

Speaker 1

Okay, great. I think that's great color.

Speaker 7

Go ahead. I'm sorry, Randy.

Speaker 1

No, I was just going to say that was super helpful on both fronts. Mike, you were going to say?

Speaker 7

No, thank you. That's it.

Speaker 6

Your next question today will come from Steven Cole Delaney with Citizens JMP Securities LLC. Please go ahead.

Speaker 8

Hello, everyone. Thanks for taking the question. Also, 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 fours and fives of bridge loans made in 2022 or 2023, is there a difference in the quality of the borrowers or the properties or 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? Thanks.

Speaker 7

I feel like I'm talking to my daddy. Yes, there's been a lesson learned. Thank you, Pop.

Speaker 8

Research day.

Speaker 7

Yes. Listen, it's that market. We had a bubble market. We stopped lending in early 2022 because we saw it. We wish we stopped lending a quarter or two 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're largely gone. 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. That's also very positive. 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 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. Hopefully, we'll have a Fed cut in September. 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 from where it was in our previous cycle in 2020, 2021, and 2022. The rent versus own proposition is looking stronger than ever, which bodes very well for multifamily. We think that in 2026, 2027, you're going to see rent concession burn-offs and rent increases.

Hopefully, our credit people are recovering from the PTSD of the past two years, and they're seeing that. We're trying to lean into the underwriting more because we do believe 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 this repeatedly on the last two or three calls, meaning that there's billions of dollars coming up for refinancing in the next two years, which bodes well for the bridge market. The lenders are at the end of the rope with regard to loan extensions without putting equity in the deals. 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. They are coming to the market asking for an equity-neutral refinancing. Those are still a struggle. As the lenders that they currently have are working with them, we are starting to see those refi requests turn into sales, and we are seeing more acquisition activity, which we largely prefer over bridge to bridge lending. 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." We are pretty constructive in the market right now, especially for multifamily. We think that this is a much different lending market than you are seeing.

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

Speaker 8

That's very helpful. Great, you know, look back and go forward, you know, to where we sit here today. Given where we are today, at June 30, your portfolio was $2.4 billion. If you look at, and maybe Andy wants to, whoever wants to answer it, I guess I'll address it to the team. 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? Thanks.

Speaker 7

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 Real Estate Owned portfolio. Andy?

Speaker 5

Yeah, thanks, Mike. In terms of portfolio growth, right now today, we're sitting on about $260 million of net book value in our Real Estate Owned portfolio. 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. As we look forward, we think the portfolio has the opportunity to grow to about $3.5 billion, given our existing capital base. That is going to happen over time. Obviously, you're going to have repayments occur during that period of time. Our deployment is going to be somewhat moderated by our ability to dispose of the existing Real Estate Owned, but that's certainly the focus of the organization at this point.

Speaker 8

Excellent. Thank you for that, all for your comments. That's very helpful.

Speaker 7

Thank you, Steve.

Speaker 6

Your next question today will come from John Nickodemus with BTIG. Please go ahead.

Speaker 0

Hello. Good morning, everyone. Somewhat related to Steve's last question, something that Andy 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'll be happening before the end of the third quarter or deeper into the year? We're just kind of curious what the repayment trajectory is looking like throughout the rest of 2025.

Speaker 5

Yeah, as always, it's difficult to predict with a high degree of accuracy what the repayment schedule will look like and getting to the REL proceeds. 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. I think over the back half of the year, you are going to see some rather material resolutions, both in the existing REL portfolio and as it relates to repayments. It's really difficult to size that.

Speaker 7

I will also add to that that we are seeing, we had some modest paydown on one of the risk-rated full 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. The Phoenix office asset, they're 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 will put that asset up for sale. We're hopeful of that. 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. It is competing for a number of leases for state agencies. It was a state agency building that was owned by the Maryland government that they are deciding not to invest new capital in. They told those tenants, those nine agencies in the building for about 250,000 square feet to go find some new space. Our building is, our owner or borrower is competing for some of that space. We can't speak on their behalf, but we hopefully that will get done. That may lead to that property being sold. If we can get the office portfolio down by about 20% from where it is today, it's shrunk over time. That would bring it down to like a five-handle, $500 million-ish. 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. We're optimistic that we can get some one-off deals done in the office market. We'd have to shrink the office portfolio. I would also add that in Long Island City, Andy alluded to this, one of the buildings we have leased one floor, and we are 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. 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.

Speaker 0

Thanks so much, Mike and Andy. That's some great color and definitely exciting to hear what's coming through. For my follow-up, a 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's looking at your existing loans as well as any future loans there, just given your Texas multifamily exposure? Thank you.

Speaker 7

Yeah, we have executed on some of the HFCs, and we understand what the new legislation says. It gives us a two-year benefit in taxes. Unless we sell the assets, we will probably be selling the assets before that two-year horizon. That is what it is. We think that that will have really no impact on our strategy in executing on those RELs. We are right now almost complete with complete CapEx on the Fort Worth asset. 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. We'll put that one out on the market, my guess, around the first quarter of 2026.

After that asset, the next one that will follow will be the one in Arlington, Texas. That'll probably be around the second quarter of 2026.

Speaker 0

Great. Thank you so much, Mike. Appreciate it. That's all for me.

Speaker 6

If you have a question, please press star and then one. Your next question will come from Jason Price Weaver with JonesTrading Institutional Services LLC. Please go ahead.

Speaker 9

Good morning, guys. Thanks for taking my question. Just looking at the decline in property operating margin in the quarter, I assume a good portion of that's from the two you took back, specifically San Jose. 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?

For this, this is Frank V. Saracino. Operating during the quarter, we remember we foreclosed on the San Jose Hotel. That would have not only increased property income, but as well as property expenditures during the quarter. Maybe that combination is looking odd. CapEx wouldn't affect the NOI.

Got it. Can you point to anything else that's affecting the operating margin there? It declined about 10% is what I'm getting.

Speaker 7

No, I'm failing to get the gist of where you're going.

Speaker 9

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, etc.?

Speaker 7

Yeah, I'll be perfectly honest with you here. We feel we're disappointed in the second quarter. We said that going into it last quarter that we would have a low. Quite frankly, hats off to some of our competitors. We've looked at our friends at TRTX who 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. 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. 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. That has been a little bit of a struggle. I think over time, we're seeing the lenders really pushing on the borrowers to move on. We're starting to see more acquisition financing. That's why we're optimistic for the back half of the year, especially if there's a Fed cut in September. In terms of our peer group, 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.

Speaker 9

All right, thank you for that color.

Speaker 6

Your next question today will come from Gaurav Mehta with Alliance Global Partners. Please go ahead.

Speaker 7

Yeah, thank you. Good morning. I was hoping to get some more color on the cross-collateralized preferred equity investments that you guys had in Q2 2025.

Speaker 5

Sure. This is Andy. I'll take that question. This is related to the preferred equity position that we originated during the quarter, correct?

Speaker 7

Yes.

Speaker 5

Okay. This is a cross-collateralized preferred equity investment across six properties or loans. They're all located in Phoenix. These were existing loans, crossing the performance of those six properties under this preferred equity agreement. 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.

Speaker 7

No, that's helpful. As a follow-up, I wanted to ask you on the Santa Clara Multifamily Predevelopment loan that's in the Real Estate Owned portfolio. I look at the carry value at $39 million. It seems like it's different than $57 million that was recorded when it was on the watchlist. I just wanted to get some more color on the difference in the carry value.

Speaker 5

Which asset?

The difference is essentially you're seeing the charge-off of the CECL that's related to that. That was increased. This was our CECL reserve that we had against it, and that accounts for the difference.

Speaker 7

Okay. Understood. Thank you. That's all I had.

Speaker 6

This concludes our question and answer session. I would like to turn the conference back over to Michael J. Mazzei for any closing remarks.

Speaker 7

Thank you. 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. Thank you to the NYPD, the first responders, and to all of the building security staff who keep us safe. Thank you for joining us today. This ends our call.

Speaker 6

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