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

Operator (participant)

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.

David A. Palame (General Counsel and EVP)

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.

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 USD 23.1 million or USD 0.19 per share, distributable earnings of USD 3.4 million or USD 0.03 per share, and adjusted distributable earnings of USD 22.9 million or USD 0.18 per share.

Current liquidity stands at USD 325 million, of which USD 106 million is unrestricted cash. The company also reported GAAP net book value of USD 7.65 per share and undepreciated book value of USD 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.

Michael J. Mazzei (CEO and Board Member)

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 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 observed stability returning to credit and lending spreads, alongside a steady rise in loan inquiries, while the CMBS market has normalized and remains active. In parallel, bank warehouse lenders have continued to provide strong support, remaining engaged and offering competitive financing options throughout the quarter. These factors collectively underscore growing confidence and optimism in the continued recovery of the commercial real estate market.

Our plan for the San Jose Hotel is to complete necessary physical and operational upgrades ahead of major Bay Area events through mid-2026, including the Super Bowl and the World Cup. We expect to market and sell the asset in 2026 once these improvements are complete. In the meantime, the property is unlevered, generating positive cash flow, and contributing to earnings. Additionally, the lack of leverage provides us with immediate access to liquidity through committed but undrawn financing capacity.

Looking ahead, we anticipate stronger loan origination activity in the second half of the year. We already have six additional loans, totaling approximately $114 million, that have either closed or are currently in execution.

We will continue advancing resolutions on our remaining watchlist loans and executing on REO asset recoveries. The proceeds from these REO resolutions represent a key source of liquidity that will directly support future loan originations and the continued expansion of our loan portfolio.

Andrew E. Witt (President and COO)

Thank you, Mike. Echoing your remarks, we maintained strong execution against our strategic priorities, delivering another quarter of steady performance and meaningful balance sheet progress. The second quarter reflected a 3% increase in portfolio size—approximately $70 million of net growth—excluding the transfer of the San Jose loan into REO.

During the quarter and subsequent period, we continued to execute on our asset management initiatives, achieving meaningful progress across the watchlist. Total watchlist exposure declined by nearly 50% and by two loans on a net basis, primarily driven by the resolution of our two risk-ranked five loans.

Given ongoing uncertainty, the borrower on the Ontario, California, industrial asset is no longer supporting the property. We are actively evaluating alternatives, including a near-term sale or, if appropriate, direct management of the asset through this period of market volatility.

As Mike mentioned earlier, our near-term strategy for the San Jose Hotel focuses on holding the asset while executing operational and physical improvements to enhance performance and ultimately maximize shareholder value.

We expect to resolve the majority of the multifamily assets within our REO portfolio over the next year, subject to broader market conditions. Currently, we are finalizing the sale of our Phoenix, Arizona, multifamily property, which is tracking in line with its carrying value. We anticipate closing this transaction next month or shortly thereafter.

Frank V. Saracino (CFO, Treasurer and EVP)

Thank you, Andy, and good morning, everyone. For the second quarter, we reported adjusted distributable earnings (DE) of $22.9 million, or $0.18 per share, and DE of $3.4 million, or $0.03 per share, which includes approximately $19.5 million in specific reserves. On a GAAP basis, the company reported a net loss of $23.1 million, or $0.19 per share.

The second property pertains to our multi-tenant office equity investment located just outside of Pittsburgh. Earlier this year, in January, the asset defaulted on its CMBS financing. Following the end of the second quarter, a receiver was appointed to oversee the property. Consequently, we will deconsolidate its assets and liabilities from our consolidated balance sheet in the third quarter. In connection with this, we recorded a GAAP impairment of approximately $2 million.

Turning to earnings performance, adjusted distributable earnings for the second quarter were $0.18 per share, compared to $0.16 per share in the first quarter. The improvement was primarily driven by new loan originations and incremental operating income generated from the San Jose Hotel asset.

We have no corporate debt maturities or final repayments due until 2027, which provides us with meaningful balance sheet flexibility.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, please press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing any keys.

Randy Binner (Managing Director)

Good morning, and thank you. That was a well-covered update on the quarter. My question relates to the Real Estate Owned (REO) portfolio, specifically the San Jose Hotel and the multifamily properties you discussed. Could you provide more detail on the value-add activities underway for those assets? For example, in San Jose, with several major events expected in the market, I’d appreciate some insight into how you’re managing those opportunities and enhancing value through that process.

Michael J. Mazzei (CEO and Board Member)

Hi, Randy, good morning. This is Mike. I’ll address the San Jose Hotel, and then Andy will speak to the multifamily assets, where the team is also doing an excellent job managing some significant repositioning efforts.

Naturally, we want the San Jose Hotel fully operational and in its best condition ahead of these major events. Over the next six months, we’ll be investing additional capital into the property to address deferred CapEx items and complete the necessary repairs and upgrades.

Given the scope of work required, we expect it will take roughly six months to complete the deferred maintenance and CapEx projects needed to fully stabilize the San Jose Hotel. During that time, we plan to hold the asset, complete the upgrades, and position it to benefit from the upcoming major events in the Bay Area.

The REO 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 REO that we have.

Andrew E. Witt (President and COO)

Thank you, Mike. Regarding our multifamily Real Estate Owned portfolio, one property is nearing completion of its sale. For the remaining assets, business plans focus on addressing deferred CapEx, completing unit upgrades, enhancing curb appeal, and improving leasing. These are straightforward initiatives, and execution is well underway. The objective is to reposition assets leased below market levels, enhance property quality, and achieve market occupancy. We expect to exit the remaining three assets over the next several quarters as they complete their respective business plans. Demand for these assets remains solid, and we are confident in our execution and marketing timeline.

Randy Binner (Managing Director)

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

Michael J. Mazzei (CEO and Board Member)

Go ahead. I'm sorry, Randy.

Randy Binner (Managing Director)

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

Michael J. Mazzei (CEO and Board Member)

No, thank you. That's it.

Operator (participant)

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

Steven Cole Delaney (Analyst)

Hello, everyone, and thank you for taking my question. Also, congratulations on the stock being up about 6% today. Mike, I have a more theoretical question. When we look at bridge loans being underwritten today—particularly after working through some of the risk-ranked fours and fives originated in 2022 and 2023—is there a noticeable difference in the quality of borrowers, collateral, or deal structures? More broadly, has the industry learned lessons from that prior cycle? In other words, is the bridge loan market today meaningfully improved or more disciplined compared to the post-COVID 2022 environment when rates were lower? Essentially, is “version 2.0” of bridge lending a stronger model than “version 1.0”?

Michael J. Mazzei (CEO and Board Member)

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

Steven Cole Delaney (Analyst)

Research day.

Michael J. Mazzei (CEO and Board Member)

Yes, it’s a very different market today. We experienced a bubble environment previously, and we actually stopped lending in early 2022 after recognizing the risks—although, in hindsight, we wish we had done so a quarter or two earlier. One of the major forces driving that prior market was the presence of syndicators, and they’re now largely gone, which is a significant positive.

The CMBS market is performing exceptionally well—it’s wide open and highly active, as you may have heard on other industry calls. As we noted earlier, bank warehouse lenders remain engaged and competitive. Likewise, both Freddie Mac and Fannie Mae continue to demonstrate robust lending activity, operating aggressively in the market.

Hopefully, our credit teams are starting to recover from the challenges of the past two years, and they’re recognizing the improving market backdrop. We’re beginning to lean more actively into underwriting, as we believe market conditions will continue to tighten.

Roughly 75% of current activity remains refinance-driven. The hit ratio is still relatively low because many borrowers are seeking equity-neutral refinancing, aiming to avoid additional paydowns required by their existing lenders. Those transactions continue to be challenging.

Steven Cole Delaney (Analyst)

That’s very helpful, thank you. It’s a great look back and perspective on where things stand today. Given the current position at June 30, with your loan portfolio totaling $2.4 billion, how much incremental portfolio growth do you believe is achievable with your existing capital base? In other words, how much capacity do you have to expand beyond the current $2.4 billion portfolio?

Michael J. Mazzei (CEO and Board Member)

I’ll turn that over to Andy, who can elaborate based on his earlier remarks regarding the embedded capital within our Real Estate Owned portfolio. Andy?

Andrew E. Witt (President and COO)

Thanks, Mike. In terms of portfolio growth, we currently have approximately $260 million of net book value within our Real Estate Owned (REO) portfolio, and our primary focus is on converting those assets to liquidity. We also maintain a healthy cash position, which supports our ability to deploy capital selectively.

Steven Cole Delaney (Analyst)

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

Michael J. Mazzei (CEO and Board Member)

Thank you, Steve.

Operator (participant)

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

John Nickodemus (VP, Equity Research)

Good morning, everyone. Following up on Steve’s earlier question and part of Andy’s prepared remarks regarding repayments, we noticed that they were relatively low in the second quarter. It’s encouraging to hear they’re expected to rebound. We also saw that there were about $7 million in total repayments so far in July. Do you anticipate most of that activity occurring before the end of the third quarter, or will it extend further into the year? We’re trying to understand what the repayment trajectory looks like for the remainder of 2025.

Andrew E. Witt (President and COO)

As always, it’s difficult to forecast repayment activity with precision, particularly as it relates to REO proceeds. That said, we expect a clear uptick in repayments compared to the second quarter. We have several significant positions with well-defined paths to resolution, which should drive higher repayment volumes. Over the second half of the year, we anticipate material progress on both the existing REO portfolio resolutions and broader loan repayments, though it’s challenging to quantify the exact timing or size of those inflows.

Michael J. Mazzei (CEO and Board Member)

I’d like to add to Andy’s comments that we’ve already seen some modest paydowns on one of our risk-ranked 4 office loans, and we also expect a small office loan to fully pay off by the end of the month. Additionally, on several of our larger office loan assets, we’re beginning to see encouraging leasing activity that could drive positive developments next quarter.

In Baltimore, our office asset there is relatively well-leased and performing decently. It’s currently competing for several leasing opportunities with state agencies. The background is that this was originally a state-owned government building that the Maryland government decided not to reinvest capital in. As a result, they instructed about nine agencies, occupying roughly 250,000 square feet, to relocate and find new office space.

The CMBS market has recently become more receptive to office properties than it was over the last year, which gives us optimism that we may be able to complete some selective, one-off transactions in that segment. However, as I mentioned earlier, we would still need to further shrink our office portfolio before expanding back into that space more meaningfully.

John Nickodemus (VP, Equity Research)

Thanks so much, Mike and Andy. That’s some great color and definitely exciting to hear what’s coming through.

Michael J. Mazzei (CEO and Board Member)

Yes, we’ve already executed on some of the HFCs, and we’re fully aware of what the new Texas legislation entails. Essentially, it provides a two-year tax benefit, but since we anticipate selling those assets before that two-year window, it won’t materially affect our plans.

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.

John Nickodemus (VP, Equity Research)

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

Operator (participant)

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.

Jason Price Weaver (Analyst)

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.

Michael J. Mazzei (CEO and Board Member)

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

Jason Price Weaver (Analyst)

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.?

Michael J. Mazzei (CEO and Board Member)

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.

Jason Price Weaver (Analyst)

All right, thank you for that color.

Operator (participant)

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

Michael J. Mazzei (CEO and Board Member)

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.

Andrew E. Witt (President and COO)

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

Michael J. Mazzei (CEO and Board Member)

Yes.

Andrew E. Witt (President and COO)

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.

Michael J. Mazzei (CEO and Board Member)

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.

Andrew E. Witt (President and COO)

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.

Michael J. Mazzei (CEO and Board Member)

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

Operator (participant)

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

Michael J. Mazzei (CEO and Board Member)

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.

Operator (participant)

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