BrightSpire Capital, Inc. 2026 Q3 Earnings Call

We will refer to BrightSpire Capital as BrightSpire, BRSP, or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei, President and Chief Operating Officer, Andy Witt, and Chief Financial Officer, Frank 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 the risks that could affect results, please see the Risk Factors section of our most recent 10-K and other risk factors in the 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, October 28, 2026, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported third quarter GAAP net income attributable to common stockholders of $46.9 million, or $0.37 per share, distributable earnings of $10.3 million, or $0.08 per share, and adjusted distributable earnings of $17.8 million, or $0.14 per share.

The company also reported GAAP net book value of $7.08 per share and undepreciated book value of $7.87 per share as of September 30, 2026. Finally, during this call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike.

Thanks, David, and welcome to our third quarter 2026 earnings call. We are pleased with our performance this quarter, especially given the tremendous volatility in the capital markets. Despite that backdrop, we continue to execute across multiple areas of the business. Before turning to our third quarter activity, I would like to spend time on the capital markets. During the quarter and through today, we experienced significant volatility in the rates market. The 10-year Treasury peaked at 5.37%, which at the time marked a 25-year high and represented nearly a 100 basis point move since June 30th. The volatility then reversed direction, with yields falling sharply back below 5% following a one-day 20 basis point rally last Friday. At the same time, the bond vigilantes were joined in a revolt by the credit market investors as spreads widened across corporate bonds, term loans, and structured products.

Also, it is less typical for credit spreads to widen alongside rising interest rates. That dynamic reflects heightened concerns around the endless financing requirements of the hyperscalers. In addition, there are growing doubts regarding the return on investment for the trillions being spent on AI build-out. As a result, there is greater focus on the most vulnerable credits in the AI ecosystem, especially given the co-dependent nature of these counterparties. This is most evident in the yield levels where certain AI-related debt is currently trading. These dynamics have caused capital market investors to take pause and lean toward a more wait-and-see risk-off posture. We have seen some of this bleed into the commercial real estate markets, where investment sales transactions have been repriced or simply pulled from the market.

On the CRE debt side, CLO AAAs and bank warehouse repo spreads widened about 10 to 15 basis points, prompting lenders to briefly tap the brakes as well. With that as context, valuations across the public commercial mortgage REIT sector have come under considerable pressure over the past several months. With BrightSpire, along with our public peers, trading at deep discounts to book value. We have repurchased stock over the past several quarters, including approximately 2.1 million shares during the third quarter. We of course recognize that our stock presents an even more compelling opportunity at these current price levels. However, where public mortgage REITs are trading today reinforces the importance of maintaining market and lender confidence in the strength and durability of our balance sheet. Periods like this, we believe cash liquidity becomes the single most important asset of a mortgage REIT.

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

As such, in the coming quarters, we expect our loan office exposure and pre-2024 loans will continue to shrink both on a relative and absolute basis. Second, we closed on the sale of our Albertsons triple net investment. This sale was agreed to when the 10-year Treasury was at 4.42%. Given the subsequent move in rates, it proved a substantially more favorable result for BrightSpire than when it was first announced. Importantly, it removed a risk of material ROE dilution at refinancing and was sold at only 2% below undepreciated book value. Third, we completed our fifth CLO, which was our second issuance this year. As a result, approximately two-thirds of our loan book is now in the form of non-recourse, non-mark-to-market CLO liabilities. Completing two CLOs this year is an important validation of our origination and financing capabilities.

This recent CLO includes a $100 million ramp and a 30-month reinvestment window. These features allow us to continue to actively originate new loans while also preserving near-term liquidity. Furthermore, as a reminder, BrightSpire has avoided employing additional leverage in our capital base. Specifically, we have no preferred stock and no term loan. Taken together, our third quarter activity builds on the progress we've made year to date and demonstrates our continued ability to recycle capital, identify attractive lending opportunities, and thus improve the loan portfolio and strengthen the balance sheet. In closing, we made meaningful progress this quarter, continuing to execute despite a more challenging market environment. Looking ahead, our focus is on opportunistically deploying our CLO ramp and reinvestment capacity while maintaining momentum on watchlist and REO assets. As we pursue these priorities, we will continue to take our cues from the market.

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

As Mike highlighted, BrightSpire's originations activity have been healthy over the past several quarters, driving net loan portfolio growth of over $700 million or 30% year over year to $3.1 billion. Importantly, that growth continues to enhance the composition of the portfolio. The loan portfolio is now 72% multifamily, and with the completion of our second CLO this year, approximately two-thirds is financed with non-recourse, non-mark-to-market financing. The past year was highlighted by significant loan portfolio growth. However, we expect our loan portfolio growth to moderate in the near term. While our pipeline continues to be robust, we anticipate the current interest rate volatility, the upcoming elections, and seasonality will contribute to moderated transaction activity, a dynamic that is already beginning to emerge in real time.

Looking more closely at our lending activity, we originated seven loans with an aggregate total commitment of $272 million. Repayments totaled $79 million across four positions. As of quarter end, the loan portfolio is comprised of 111 loans with an aggregate loan balance of approximately $3.1 billion, a net increase of nearly $200 million quarter-over-quarter. The average loan balance across the entire portfolio is $28 million, comfortably within our target range, with a weighted average risk ranking of 3.1. We continue to make progress resolving REO properties. During the quarter, we closed on the sale of one Mesa, Arizona multifamily REO, and the Fort Worth, Texas multifamily property closed yesterday, further reducing our REO exposure.

We have also initiated a marketing process for our Santa Clara, California REO land asset. Despite the rise in rates, given the strength of the market and the asset, we believe the property will be well-received by the market given the substantial demand for housing and favorable market dynamics we are observing in the Bay Area. Additionally, we anticipate bringing two remaining multifamily REO properties to market in the relatively near term. Our goal is to continue reducing REO exposure, ultimately reducing this segment of the portfolio to the San Jose hotel property, which we also anticipate to market at some point in 2027. In the interim, as it relates to the hotel, we are making progress on our business plan, addressing deferred maintenance and improving operating performance in anticipation of taking the property to market.