BrightSpire Capital, Inc.

Thank you for standing by. This is the conference operator. Welcome to Colony Credit Real Estate Inc's third quarter 2020 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to David Palame, General Counsel. Please go ahead.

Good afternoon, and welcome to Colony Credit Real Estate Inc.' 's third quarter 2020 earnings conference call. We will refer to Colony Credit Real Estate Inc. as CLNC, Colony Credit Real Estate, Colony Credit, 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 Neil Reddington. Chief Accounting Officer Frank Saraceno is also on the line to answer questions. Before I hand over the call, 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 the current pandemic of the novel coronavirus or COVID-19. For a discussion of risks that could affect results, please see the risk factors section of our most recent 10Q 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, November 5th, 2020, 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 represent non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released this 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. And now, I'd like to turn the call over to Mike Mazze, President and Chief Executive Officer of Colony Credit Real Estate. Mike?

Thank you, David. Welcome to our third quarter earnings call. On behalf of the CMLC team, I would like to start by wishing everyone well and thanking you for joining. After considerable effort from our employees over these past quarters, we have succeeded in solidifying the CLNC balance sheet, including full repayment of our revolving credit facility. I would like to thank this team for their dedication and accomplishments thus far during this difficult period. Of course, the risks and uncertainties of COVID-19 still exist. However, while the team continues to remain focused on asset and liability management, we've also begun to pivot the organization toward offense and on the execution of our business plan. First, I'd like to cover some of the key third quarter takeaways. For this quarter, we had gap and total core earnings per share of 4 cents and 30 cents, respectively. Our third quarter gap and underappreciated book value per share are 13.25 and 14.53, respectively. These book values have both increased this quarter. Currently, CLNC's Unrestricted cash position is $438 million, or approximately $3.33 a share. We will seek to redeploy this cash over time into new earning assets. Regarding core asset sales, in the third quarter, we closed on the last sale of an operating property and realized a gain of $7.5 million. We have also terminated a contract for sale on an owned industrial net lease portfolio. Therefore, at this time, we have no other core assets held for sale. Last quarter, we took a write-down for the mezzanine loan on the L.A. mixed-use project and stated the project required additional outside capital. I am pleased to inform you that while working closely with the senior lender and borrower, we have successfully closed a third-party recapitalization for $275 million. This was a complex transaction and I would like to thank the CLNC team and our counterparties for their combined efforts in seeing this through. There are no changes for the loan status this quarter. I would refer you to our third quarter form 10Q filing for more details. We continue to make progress on the resolution of our legacy non-strategic assets. We anticipate collapsing our bifurcated financial reporting in this portfolio segment in the first quarter of 2021 as it will have been substantially resolved. This will also simplify our reporting in 2021. As we begin to pivot towards offense, we have started the implementation of our business plan to build earnings. This entails the reinvestment of our cash balances into newly originated first mortgage loans. Our strategy will be to focus on making floating rate loans to transitional assets, as well as fixed rate CMBS conduit loans. We will utilize our warehouse lines for interim financing where we have $1.5 billion of available capacity. We will later contribute these loans into CLO or CNBS securitizations as we expect those markets to further improve in 2021. Along those lines, we would also like to welcome George Koch as a new member of the CLMC team. George has joined us as our Chief Credit Officer. He has spent 35 years in commercial real estate credit and is a proven leader and business builder. In addition, George will further enhance the L&C's relationships with our banking counterparties and investors. Lastly, to underscore the progress we've made in stabilizing the financial position of the company in light of COVID-19, we plan to reinstitute a quarterly dividend in 2021, assuming macroeconomic conditions do not deteriorate. We will be addressing this with the CLNC Board of Directors and aim to announce a reinstatement of the dividend beginning with the first quarter. That said, it is important to note that our decisive actions thus far to protect the CLNC balance sheet during COVID-19 came at a cost to the company in both the form of a reduction in NAV and in revenues. We exited and financed certain income-producing assets in order to build cash liquidity. Earnings have been impacted and therefore the initial dividend policy will reflect this. We also recognize that our current share price is a deep discount to our book value. This discount is also greater than that of our peer group. The current market valuation effectively implies that there are approximately $1.2 billion of future potential losses. We feel the best way to address this disconnect is by shifting the focus and momentum of the saliency team beyond the challenges of COVID-19, and toward playing offense. In our effort to close this gap, we are committed to continuing to protect the balance sheet while redeploying capital into new investments, building earnings, and reinstituting a quarterly dividend. In summary, while not fully out of the woods, we have accomplished many of our goals during this challenging time. We are now focused on executing our business plan to grow earnings. We have already begun to originate new loans while continuing to remain vigilant on asset liability and cash management. The continued risks of COVID-19 can by no means be dismissed. However, through the efforts of the CLMC team and the support of our counterparties, CLMC is now in a position to lean forward. At this time, I would like to turn the call over to our Chief Operating Officer, Andy Witt.

Andy? Thank you, Mike, and good afternoon, everyone. The focus of this past quarter and subsequently has continued to be asset and liability management. More recently, we have begun to turn our attention toward new originations and building earnings. Company highlights this past quarter include CLNC's current liquidity position is $609 million, which includes cash on hand and availability under the corporate revolving line of credit. 98% of core portfolio cash interest payments expected during the quarter have been paid. Outstanding borrowings on our whole loan warehouse lines currently stand at $551 million, and securities repo has been reduced to $19 million. Efforts to resolve the L&S portfolio continue. Currently, this segment of the portfolio consists of 6% of total company GAAP netbook valuables. And lastly, CLNC is actively quoting new loans, and we are pleased to report, subsequent to quarter end, one new deal closed for approximately $23 million in committed capital. Additionally, we have three loans under application, totaling approximately $94 million in committed capital. Loan portfolio performance during the third quarter and October remain strong. 98% of core portfolio expected cash interest payments were received. There were loans which required some form of partial modification of their existing loan reserves, as well as some loans where borrowers have come out of pocket to support their equity. This is a cash collection figure and excludes PIC loans. Our owned real estate assets, inclusive of the legacy non-strategic segment, performed well. We collected 93%. in the third quarter and October. Core portfolio collections were higher, 98%. CLNC remains current on all investment-level borrowings on our own real estate portfolio. Since last reporting, core portfolio asset sales included the sale of an equity investment in a portfolio of industrial properties, resulting in $109 million of gross proceeds. Four core portfolio loans paid off or were resolved for $260 million of gross proceeds. Following quarter end, CLNC also executed on a discounted payoff, resulting in $12 million of proceeds. Currently, there are no core portfolio investments for sale or targeted for disposition, except for certain CMBS holdings. Neil will address the CMBS portfolio more specifically in his prepared remarks. Core portfolio liabilities, including full loan repo and securities repo, stand at $551 million and $19 million, respectively. Underlying portfolio performance has been solid, and the advance rates are relatively low, 67% on whole loan repo and 40% on securities repo. Lastly, as it relates to the core portfolio, the managed CLO continues to perform and benefit from LIBOR floors at the underlying loan level. We continue to monitor and manage the performance of the trust for COVID-19 related developments, as well as ordinary course loan payoffs within the underlying portfolio. Since our last reporting period, there were two loan payoffs within the trust for a total of $78 million. It is worth noting that The loan collateral was replaced concurrently with the payoffs or shortly thereafter. The managed aspect of the CLO provides for flexibility to introduce replacement collateral to address ordinary course payoffs and other collateral events. Currently, the portfolio underlying the trust consists of 21 first mortgage loans. Turning to the L&S portfolio, resolving the remainder continues to be a focus of the company. To date, we have monetized $235 million, or 57% of the L&S portfolio. During the third quarter of 2020 and through today, the company sold or resolved 16 L&S assets for a $1 million premium above carrying value for an aggregate gross sales price of $23 million and a net sales price of $22 million after transaction costs. At present, the L&S portfolio accounts for less than 6% of the total company GAAP net book value. We expect meaningful resolution activity between now and the end of 2020 with nine assets currently in execution with an aggregate net book value of approximately $76 million. As Mike noted, We anticipate collapsing the reporting segments in the coming quarters as the L&S portfolio is further reduced in size relative to the total portfolio. In closing, CL&C is now playing offense, originating new loans. As a company, our objective is simple. build earnings with a focus on current and predictable cash flows generated through high quality real estate sponsors. We began quoting new loans in September and subsequent to quarter end, we closed one new investment for approximately 23 million in total committed capital. We also have three loans under application totaling approximately 94 million in total commitments. With that, I will turn the call over to our Chief Financial Officer, Neil Reddington, to elaborate on the third quarter results.

Thank you, Andy, and good afternoon, everyone. Before discussing our third quarter results, I'd like to remind everyone that further information will be included in our Form 10-Q filing tomorrow. We would also like to draw your attention to our supplemental financial report, which is available on our website. And finally, we continue to provide asset-by-asset details for our core portfolio in our supplemental financial report, as well as all holdings in our Form 10-Q. With that, let's turn to our third quarter results. CLNC reported third quarter 2020 total company debt net income attributable to common stockholders of $5 million, or four cents per share, and total core and LNS earnings of $39.7 million, or 30 cents per share. Excluding realized gains and mark-to-market losses on CRE debt securities, provisions for loan losses and fair value adjustments, and a one-time tax benefit, adjusted total core and LNS earnings were $31 million, or 24 cents per share. During the third quarter, total company Gap net book value increased from $13.06 to $13.25 per share, and undepreciated book value increased from $14.43 to $14.53 per share. Earlier this year, we concluded that it was in the best interest of the company to conserve available liquidity due to the volatility and unprecedented market conditions arising from the pandemic. and we suspended the company's monthly cash dividend beginning with the monthly period ending April 30, 2020. Given that our financial position, operational performance, and business outlook have improved significantly since the onset of COVID-19 pandemic. As Mike mentioned, we will be reviewing our dividend policy with the Board of Directors with the intent of resuming dividend payments to stockholders for Q1 2021. That being said, the company continues to monitor its taxable income and will ensure that the company meets the minimum distribution requirements to maintain its status as a REIT for year-end 2020. We continue to make good progress in reducing our commercial mortgage-backed securities exposure. During the third quarter and subsequent to quarter-end, CMBS sales generated gross proceeds of $44 million with $9 million in realized net gains. With these sales, we paid down a total of $20 million on our CMBS repo facility, leaving a current balance of just $19 million. Turning now to our book value, core portfolio undepreciated book value stands at approximately $1.7 billion, or $13.13 per share, unchanged from the second quarter. Our loan book continues to be the largest segment with a carrying value of approximately $2.3 billion a quarter rent. The blended unlevered yield of our loan book is approximately 5.8%, with an average loan size of $49 million. Furthermore, the loan portfolio remains diversified in terms of size, collateral type, and geography, with a focus on office and multifamily. Also within our core portfolio, net lease real estate at a carrying value of $746 million at the end of the third quarter. This portfolio consists of industrial and office properties, a weighted average lease term of 7.4 years. The net lease assets are core to our investment strategy due to the long-term, stable cash flows they provide, in addition to the potential for capital appreciations. Turning to our legacy non-strategic portfolio, this segment is predominantly composed of operationally intensive owned real estate, all retail, and certain other legacy loans originated prior to the formation of CRMC. Total GAAP net book value for this portfolio stands at approximately $99 million, or 75 cents per share. Moving to our balance sheet, our total at-share assets stood at approximately $4.3 billion as of September 30th, 2020. Our debt-to-assets ratio was 56% and our net debt-to-equity ratio was 1.1 times at the end of the third quarter, down from 60% and 1.4 times at the end of the second quarter. Since the first quarter, we have substantially reduced our recourse debt exposure from $718 million to $171 million. And current liquidity stands at approximately $609 million between cash on hand and availability under a revolving credit facility. Turning to risk ratings, we increased our risk ratings earlier in 2020 for a number of assets because of COVID-19 concerns. And we're reducing some of those ratings in the third quarter given the continued good payment history from our borrowers. As such, our overall risk rating at the end of the third quarter was at 3.8 compared to 3.9 at the end of last quarter. Finally, at the end of the third quarter, our CECL provision is $40 million and represents approximately 1.7% reserved against our loans. That concludes our prepared remarks, and with that, let's open up the call for questions. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. The first question is from Stephen Laws from Raymond James. Please go ahead.

Hi, good afternoon. Mike and your team, you know, nice job getting a lot done. I know you've been there about six months and eight months now. I'm picking an interesting time to join, Mike. But good to see that you're shifting here to offense and starting to pivot in that direction. You know, you mentioned one loan I think is already closed in a pipeline building. Can you talk about you know, maybe if you look out six or 12 months, what would the new portfolio look like? Is it going to be exclusively CRE loans or are you looking at other type real estate or investments? It's all first or you look at Mez. Can you talk a little bit about the focus on the origination side on a go forward basis?

Thank you, Steve, for joining the call and thanks for the question. Um, Going forward, on the short term as we deploy the cash, the first part of that is going to be how much of the cash we can deploy. And so there's really one leg in new business and one leg watching the portfolio and watching COVID. And as we get more visibility on the cash needs in terms of protecting the balance sheet, we'll be able to deploy more of that, almost half a billion dollars in cash. So let's say we're looking at deploying the first slug of 100 million of the cash and That will take us a couple of months, and we'll look down and see what it looks like at that point and how much more we can deploy. In terms of what we're going into, well, right now, you know, by definition, there are some segments you're probably avoiding, probably hotel and definitely hotel and retail. And maybe there's some retail we can do highly selectively. But right now we're focusing on the other categories, multifamily and suburban offices. And that's what the loans that we've got under application consist of, office and multifamily. And we're seeing transactions that are 65% to 75% leverage. Pricing, floating rate pricing on a rate basis is probably in the fours, low fours to high 4% rate. ROEs are probably 11% levered. And we're looking at assets that we would look at for a CLO contribution. And so as that market improves, we'll put these on our financing lines, but we're going to look to exit through a CLO, or quite frankly, as loans come out of the CLO that we currently have, replace those loans, some of which we've already done. The things that we are also avoiding in terms of trying to change the mix of the portfolio, we're keeping into loan sizes that are probably 25 to 75 million in size and really don't want to go much above that. That would be really exceptional. We want to make sure that any loan that we do If we lever it, we can cure it. If there's a problem, we can take it off the line. So we're going to avoid big nine-figure loans. We're going to avoid pre-development. We're going to avoid ground-up construction. The transitional that we're doing is really acquisitions with maybe some new tenancies or taking out an existing construction loan where lease-up has begun. And we're going to step in and continue taking the lease-up risk. And that could be with the existing... developer or with a new one. I think many of the loans we're looking at are acquisition. The investment market has slowed down considerably because folks just don't know how to price assets right now, given COVID-19. So right now, the demand for credit is not super high, but we're excited about what we're seeing. So I think as we move forward, to close the answer on that, it'll be a lot what Andy had been doing when Andy was involved and transitioning the firm in 2019 with the team where they were focused on CLO assets. And we're going to be doing that. With the addition of George Koch, which I think is a major coup for the firm, we'll also have the ability to do securitized loans in the CMBS market. That may take us 90 to 120 days to get the plumbing in place to do that. But we'll try to augment the business with a higher ROE in that as well.

Right. Appreciate the color on that. And as we, you know, I guess shift a little towards the existing portfolio, can you talk about, you know, maybe a near term? So say three to six months outlook on expected commitments from an unfunded commitment standpoint that will need to be funded and then repayment outlook. Do you have any visibility on loans that are maturing here in the next one to two quarters and how repayments are looking on that front? Yeah.

In terms of future fundings, that is a number we can give you. I'm going to say that total is probably something under $200 million all the way out past 2021, in fact. So you might want to cut that number in half for 2021. It's not a big number for us in terms of future fundings. We have seen some loans pay off in the CLO, and we have replaced those loans with loans from the balance sheet. There are some loans that could continue to go away in the CLO, and we'll continue to do that. If we're originating current loans, the CLO is a great liability structure in terms of cost. I think it's got like a LIBOR plus 159 cost basis. So anything that comes out of that CLO, we'll look to put any new originations in as long as they meet the guidelines in terms of weighted average maturity and things like that. I think the thing we are going to focus on is really trying to repatriate the lower-yielding, underperforming assets and try to monetize those. And that doesn't necessarily mean sell them, but it means that we do have a slug of assets, whether it's the L.A. mixed-use, which is not accrual. We put the waterfront property, which is described in the Form 10-Q. You'll see tomorrow it was in the previous filings. That is not accruing at this point in time. So we have an MSC MBS. We turned off taking the interest carry on that, and we're writing down the basis. So we've got a slug of assets that are underperforming, and it would really move the needle for us if we can repatriate that capital and put that back out in the market.

Yep. Makes sense. I appreciate that color. On the dividend and return of capital to shareholders, kind of a, I guess, a two-part question here, and then I'll wrap it up. Mike, if you could talk a little about how we should think about framing the dividend. Should we look at the adjusted core L&S EPS? I know you said it probably gets more straightforward on a reporting basis next year, but is this something where you're going to have positive redistribution requirements as opposed to losses that carry forward? Are you looking to pay a yield that's two or three times the you know, S&P? Or can you talk a little bit about how you're thinking about framing the size of that dividend?

I think that we're not looking at a yield on day one. We are looking at when we fully deploy capital and we repatriate some of the assets on the balance sheet, trying to figure out where we think that will bring earnings in terms of that yield. But on day one, I think we're looking to pay a dividend. So we're not looking or shooting for a metric. When you look at the prepared remarks, you see I mentioned that we've sold core assets. We've sold some at a discount and took a hit on NAV. We've done that financing, and those were not to no effect of earnings. They had an impact on earnings. And, in fact, given the sales that we just had recently that have just closed, you'll see earnings continuing to drift down a little bit further as those things work their way through our financials. So earnings will continue to come down a little bit, and we'll start to now trend up as we build earnings back and we deploy capital. But our dividend, I think, is going to be obviously much less than what we had in the past, and I think it could potentially increase over the course of the year. We'll talk to the board about what the starting point is, but I think it will be a nominal dividend to get us started. So we can say that we have a quarterly dividend that we think we can rely on and build from there.

Great. And I guess lastly, I think I ask this every quarter, but Considerations around stock repurchase, is that something you look at? Do you feel that the dividends better for shareholders or new investments are more attractive than repurchasing stock? I do think it's of note that book value ticked up slightly, which I think is good to see, nice to see some stability and actually a slight increase there. So with the stock trading at 60% discount to book, maybe just your general thoughts on why reinstating a dividend is more attractive than a stock repurchase here.

Right. So, you know, with book value at $13.25 gap and $14.53 undepreciated, you know, a sub-$6 price, you know, is compelling. So let's not mince words around that. That is very compelling. It's a huge ROE. Having said that, first out of the gate, as we amended our line during the course of the year, we were – had a restriction regarding buybacks and leakage of dividends beyond what's required for REIT status. So we have a restriction on buybacks. Now, that could be a discussion that we have with our lenders at a later date. But I also note that so while the ROE is compelling, you know, the capital is gone. And we're at a size right now where I think shrinking the firm – To move the needle, you really have to buy back a lot of shares. And if you do that, the percentage of ownership by colony capital increases. You have more overhang there. And from what we've noticed in the buybacks, which have been nominal in the sector, they really, other than giving confidence to shareholders, which we want to do, it's a very short-term effect. in terms of moving the stock. Now, obviously, it has a long-term effect on EPS because you've taken shares out of the market, but we don't see necessarily the pop in that. So that's why I specifically stated in the prepared remarks, we recognize that there's a discount, but we think the plan to get the discount gap closed is not going out and buying shares of the market one time and having a one- or two-day effect on the stock, but rather to effectuate the plan and use the capital to effectuate the plan. So right now I think the buybacks are probably something that we're not highly focused on. Certainly we are restricted on doing it, so that would have to be remedied. But even if we didn't have the restriction, I think we'd rather reinvest into the business. And I think we're at a point where, given the equity size of the firm, I don't know if that makes sense to shrink the size of the firm in terms of economies of scale in terms of where we are with shareholder equities.

Great. Well, I appreciate those comments, and you make some very good points there. Obviously, it's clear you've put a lot of thought into that. So thanks a lot for taking my questions this afternoon, and have a good evening. Thank you.

The next question is from Randy Binner from B. Riley. Please go ahead.

Hi. Thanks. So I'm going to try and ask a couple questions. kind of dimension the dividend the best I can. So, yeah, I guess first, Mike, when you said you were deploying 100 million, was that generic or does that map to the 23 million and 94 million identified in the sub on page five?

Right. So that does not. That's a very good question. So, you know, if you look at leverage of around, you know, 70%, 75%, that could be probably something like $300 and something million in loans. So on the $100 million that we're deploying right now, that may be $30 out of the first $100 slug. And we don't have any clear cut with doing $50 to $100. What we're basically saying is we're gradually deploying cash, and as we're deploying that cash, we're also closely monitoring the portfolio to make sure that there are no delivering needs elsewhere on the portfolio. And as we get more confidence around that, more of that $400 million will make its way into loans. So if you took all $400 million, you could just, you know, multiply that by, you know, or you got your loan amount. Now, if we get into the CMBS conduit business, Randy, that probably uses $50 to $100 million in capital because you're turning over loans every two, three months. and getting that capital back and recycling it. So there may be a portion of that $450,000 that we allocate to the conduit business, but that's probably not until late fourth quarter, early 2021. Okay.

So then back just to the income statement. the interest income and property and other income have been running.

Yeah.

I had a little out of the plan, you know, is there a way to, it's going to come down though, as legacy stuff comes off and you put new stuff on, but is there, can you roughly size if you took what you've done year to date from a top line perspective or what you think you'll do this year and think about 2021, is there, can you size how much lower you think 21 would be versus what you were able to accomplish in

So, Randy, maybe I can jump in on that one if it's helpful. So, I think you know how we've described the reduced adjusted earnings per share, right? So, we're down to the 24 cents. And I think that tells you the adjustments that we had during that period. What you then need to build in is the transactions that have happened during Q3 that will come out because there was some partial income that was recognized during that period and that will come out. And we then have a number of sales that are taking place primarily in the ONS book during Q4 as well, which will further reduce income. I think you have to sort of think through those components to keep driving that 24 cents downwards to form a base for Q1 where we would set a dividend. And then, as Mike said, we'll be deploying either through our existing commitments or through newer deals that we pick up. And that would give us an opportunity to grow during the year or later in the year But, you know, we did a sort of a baseline at Q1.

All right, that makes sense. And then, whatever that base is, you know, and Mike, you said there's no, you're not thinking of metrics, but I mean, is it reasonable to think of it being like a 90 or 100% payout ratio, if I want to think of it just generally? Okay.

I mean, ultimately, it will be if we don't get there by the end of the year. But I think our goal is to start off with something that we know we can pay. And then as we redeploy capital and we're competent around other issues around the balance sheet, if there are any, if COVID persists. So it's really what we're trying to do, Randy, is I think the initial dividend start, that's where we're opening up. You know, we don't want to go backwards. So we'll open up there, and if after a quarter or two we have confidence that we're redeploying capital and the use of our capital elsewhere is not needed, then that dividend is going to come up. And, again, I have to comment that this is a discussion that we have to have with our board. They know that we're saying this, obviously, that we want to reinstate the dividend, but we have to have in the fourth quarter kind of resolve where that starting point will be And it's going to start off with the confidence level that we're not going backwards. This is a base. It'll only grow from here.

Yeah, this is helpful. So then to the non-core being collapsed, that kind of 75 cents of book value that still remains, when you say that's collapsed, I guess how should we think about what happens to that 75 cents? Is it basically disposed of and monetized between – now and whenever non-course collapse next year? Is that the easy and right way to think of it, or is there some other way to think of what happens to that portion of book value?

Over time, it will be transitioned into cash, but in the interim period, it will be grouped in with total assets, so we just won't call it out separately. So it's not a reduction in book value as that goes away. It's a conversion of book value from LNS assets to just sort of included within total assets as we collapse the entire balance sheet back together and ultimately cash. And sorry, Andy, I jumped in. I don't know if you had other commentary on that.

No, I think that covers it. I think the... Yeah, it's just... I just may make Sorry, go ahead, Andy. No, I think that the story is today that that portion of the book stands at about 6% of net book value. And what you can expect to see over the coming quarters is a meaningful reduction of that, at which time we'll collapse the reporting but continue to manage the underlying assets to maximize value.

Got it. Okay, I'll leave it there. I can save some of the other details for offline. Thanks so much.

Next question is from Steve Delaney from GMP Securities. Please go ahead.

Thank you. Hey, Mike, it's good to be on with you, and congrats to you and Andy and Neil on the progress that you guys have made, and exciting to go into 2021 with the new game plan. Steve, thank you for joining us. It's a pleasure to have you. It's my pleasure. All mine. George Coates' name is very familiar, but I apologize. I just Googled him, but I couldn't find it. Can you just tell us where he's been the last five or ten years?

It's actually... He'd be very flattered that you asked five to ten years.

I know, but I'm an old... I'm not going to paint him as an old guy like me.

George... George has spent his years at major financial institutions. Initially, Morgan Stanley, where he ran the securitization debt platforms there. Then he went to Merrill Lynch prior to the financial crisis. And then after the financial crisis, when I was at B of A, George and I worked together there. He rejoined the firm. And then George and I also worked together at Ladder Capital for a period of time. And then, unfortunately, we lost him back to Morgan Stanley. and we got him off the bench recently. So he's spent, you know, decades at major institutions in this business.

Well, between George and yourself, you guys shouldn't have much trouble getting back into the conduit club, I wouldn't think, with your relationship. So that's a great development, and congrats on that. So I just have one other quick thing. You described your first few loans, you know, $20, $30 million type loans. I mean, it kind of feels like what I call middle market. But the real question is, you know, historically we always talk about property types, multifamily, industrial. So how much are you thinking about geography these days? And just the combination of things like rent controls, social unrest, urban flight, you you've got a choice to which geographies you want to expose your capital to. And I'm just curious if your thoughts about that today with what we've been through with COVID and everything are different than they might have been two or three years ago.

Thank you. Well, I think that plays in. Well, first of all, for the time being, the property types that we're focused on, given what's going on in the market, have narrowed, and that's the theme that exists everywhere. Sure. And that will hopefully change as we get a better idea of how retail is affected, certainly. I actually think that retail will have a longer impact than the lodging business. The lodging business will come back. Those assets, people want to go and travel and be at an asset for a reason. You may get some changes because of remote working and the ability to telecommunicate and whatever, but you know, we think that the hotel business will eventually come back. So there are states, the growth states we love, and you're seeing that flight going on, so whether it's in the southwest, southeast, Texas, all those states are positive on our radar screen. We'll do business in any state and any location based on the loan metrics, but there are concerns that there are some states where taxes are going up and there is a shrinking population. And that is an overriding concern that we look for. And so there have been some transactions we've looked at where all things being equal, we say, you know, that's an area, that's a state, that's a city where taxes could be going up dramatically. We don't know the state of play. Yes. In terms of social unrest, I think, you know, we think this is a short-term phenomenon. Right. Hopefully that passes. Right. They're not going to deter us from doing transactions. But generally, we're trying to stay middle market. So, you know, doing a deal in major MSAs where you're doing bigger loans, probably something we avoid. So something where we're doing, as I said, $25 million to $75 million loan sizes is More middle market, more secondary cities is probably the initial focus.

That sounds great. Well, listen, thanks for the time, and great to be on with you.

Thank you. Thank you for joining us.

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

Well, thank you for joining our call today, and we look forward to updating you on the fourth quarter results in February. Thank you very much. Stay well.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.