BrightSpire Capital, Inc.

Greetings and welcome to the Brightspire Capital Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you David Palame, General Counsel. Thank you, David. You may begin.

Good morning, and welcome to Brightspire Capital's second quarter 2023 earnings conference call. We will refer to Brightspire Capital as Brightspire, BRSP, or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei, President and Chief Operating Officer, Andy Witt, and Chief Financial Officer, Frank Saraceno. 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 the 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, August 2, 2023, 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 this morning and is available on the company's website, presents reconciliation 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 second quarter 2023 GAAP net loss attributable to common stockholders of $7.5 million, or $0.06 per share. In addition, the company reported second quarter 2023 distributable earnings of $21.1 million, or $0.16 per share, and adjusted distributable earnings of $32 million, or $0.25 per share. The company also reported GAAP net book value of $10.16 per share and undepreciated book value of $11.53 per share as of June 30, 2023. With that, I would now like to turn the call over to Mike.

Thank you, David. Welcome to our second quarter earnings call, and thank you for joining us this morning. As David mentioned, We are pleased to report adjusted distributable earnings of 25 cents per share, while our dividend coverage continues to remain strong. Current liquidity as of today stands at 347 million, of which 182 million is unrestricted cash. During the quarter, we again reduced our overall leverage to 1.9 times. This quarter, we recorded a 21 cent reduction in underappreciated book value. which currently stands at $1,153. This reduction was primarily driven by a net increase in our general CECL reserves in addition to a specific reserve on one office loan, which was already on our watch list. Andy will provide more details in his section. As everyone is well aware, throughout the first half of 2023, unprecedented market conditions have pressured commercial real estate borrowers across the board regardless of property type. These strains are unlikely to ease until the Fed begins reducing short-term interest rates, which is now expected to occur sometime in 2024. With another interest rate hike just last week, the Fed is very near the end. However, given the current strong economy, the Fed will maintain a higher for longer interest rate policy while continuing to reduce its balance sheet. This remains the primary risk factor for the commercial real estate markets over the next 12 months. Regarding our portfolio, the overall performance of our underlying office properties during the quarter has remained steady. We have, in fact, upgraded the risk ratings for two office loans and removed them from our watch list. This is the result of these borrowers making significant progress in their leasing plans. Given the increased focus on this property segment, And in an effort to provide investors more information, we have included in our second quarter supplement package a description of our five largest office loans, which represents 35% of our office loan portfolio. Multifamily, which represents 52% of the portfolio, has remained resilient. We have experienced top-line rent increases across the portfolio which have exceeded our underwriting projections. However, all property types, including multifamily, have not been immune from the rapid rise in inflation and corresponding interest rate increases. In some cases, the positive impact of higher rental rates is being muted by rising operating expenses such as utilities, payroll, and insurance. Additionally, in some select instances, we have seen increases in bad debt primarily due to legacy, tenant-friendly COVID policies in certain jurisdictions. Ultimately, we expect these conditions will improve in the coming quarters as we work with these borrowers to execute their value-add business plans. In the meantime, this quarter, we have identified and downgraded three multifamily loans, from a three to a four to reflect specific circumstances at the property and or the sponsor level. Importantly, all three of these loans as well as the entire multifamily book are current in debt service payments. As we look at the second half of the year, our focus remains on managing our portfolio while maintaining sufficient liquidity and lower leverage. We are of course eager to get back on offense and make new investments. especially as we expect many regional banks to shrink their balance sheets in the coming year. Last week's merger of two West Coast banks is a great example of this. This pullback by regional banks should create ample opportunities for private credit and non-bank lenders like Bryce Fire. However, in the near term, protecting the balance sheet continues to remain job number one. With that, I would now like to turn the call over to our president, Andy Witt. Andy?

Thank you, Mike, and good morning, everyone. Throughout the second quarter, the Brightspire team has remained focused on asset and portfolio management. We believe the combination of our vertically integrated and internally managed platform, including our rated special servicer, uniquely positions Brightspire to navigate the current environment. None of our loans In the second quarter, we received $162 million in repayments across two investments in line with expectations. Included in the repayments for this quarter was the Berkeley Hotel loan for $148 million. Year-to-date, we have received approximately $263 million in loan repayments, and as previously highlighted, we expect loan repayment activity to remain relatively low for the remainder of this year. Our second quarter supplement now includes additional information on all our risk-rated four and five loans, or our watch list loans. Our watch list office loans were relatively consistent with what we reported to you in the first quarter. One office loan was added to our watch list this quarter, and as Mike mentioned, two office loans were upgraded and removed from the watch list. During the second quarter, we executed deeds in lieu on two Long Island City loans in cooperation with our borrower and have taken full control of both office properties. We have engaged with a third-party property manager. Taking control of the properties has signaled to the market that ownership is now stable and well capitalized. This has resulted in renewed leasing interest. and we have already received unsolicited inquiries from prospective tenants. We believe the reset basis in these properties will allow us, as owner, to better compete for tenants and ultimately stabilize and exit the properties. In terms of updates on the Washington, D.C., office loan, we anticipate taking control of the asset over the next few months, after which we anticipate commencing a marketing process for the properties. During the second quarter, we placed the Oakland office loan on non-accrual, increased the risk rating from a four to a five, and recorded an $11 million specific CECL reserve. Additionally, subsequent to quarter end, we executed on a deed in lieu and have taken ownership of the property. Lastly, we continue to monitor the Oregon Office Park Senior Loan and have provided detailed disclosure on these investments and others in our MD&A contained within the Q2 2023 Form 10-Q. With respect to the San Jose Hotel property, last quarter we noted that a sales process was underway for the hotel annex tower comprised of Buyer was selected and terms have been agreed to. The borrower anticipates the sale and corresponding pay down of our loan to occur in the third quarter. The loan remains risk-rated for. As of June 30, 2023, excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 96 investments with an aggregate carrying value of $3.2 billion and a net book value of $970. investment portfolio the average loan size is 33 million our weighted average risk rating is 3.1 and the loan portfolio has minimal future funding obligations which stand at 226 million or seven percent of outstanding commitments first mortgage loans constitute 97 percent of our loan portfolio of which 100 percent are floating rate and all of which have interest rate caps The multifamily portion of our portfolio consists of 56 loans representing 52% of the loan portfolio or 1.7 billion of aggregate gross book value. Office comprises 32% of the loan portfolio consisting of 1 billion of aggregate gross book value across 31 loans with an average loan balance of 33 million. The remainder of our portfolio is comprised of 9% hospitality with industrial and mixed-use collateral making up the remainder. With that, I will turn the call over to Frank Cerasino, our Chief Financial Officer, to elaborate on the second quarter results. Frank?

Thank you, Andy, and good morning, everyone. Before discussing our second quarter results, I want to mention that we expect to file our Form 10-Q later today. Our second quarter 2023 supplemental financial report is also available on the investor relations section of our website. For the second quarter, we reported adjusted distributable earnings of $32 million, or $0.25 per share. Second quarter distributable earnings was $21.1 million, or $0.16 per share. Distributable earnings includes an $11 million specific reserve on one loan. Additionally, for the second quarter, we reported total company gap net loss attributable to common stockholders of $7.5 million, or six cents per share. The gap net loss reflects $29 million of total loan loss reserves consisting of the $11 million specific reserve and $18 million of general loan reserves. Quarter over quarter, total company gap net book value decreased from $10.41 per share to $10.16 per share. Undepreciated book value also decreased from $11.74 per share to $11.53 per share. The decline is primarily driven by increases in our CECL reserves, partly offset by adjusted distributable earnings and excess of dividends declared. I would like to quickly bridge the second quarter adjusted distributable earnings of versus the 27 cents recorded in the first quarter. The change is driven by loan repayments, loans placed on non-accrual during the quarter, and lower one-time loan modification income, offset by the impact of rising interest rates. Heading into 3Q, our adjusted distributable earnings quarterly run rate should remain around current levels. Turning to our dividend, for the second quarter, we declared a dividend of 20 cents per share in line with the first quarter. Our dividend remains well covered at 1.25 times. Looking at reserves and risk rankings, as Andy mentioned in his comments, during the second quarter, we took ownership of the two Long Island City office properties and placed the Oakland office loan on non-accrual and recorded a specific reserve. This resulted in our second quarter specific CECL reserves decreasing by $57 million to $55 million. Our general CECL provision stands at $52 million, an increase of $18 million from the prior quarter. This increase in general CECL was primarily driven by economic conditions as well as specific inputs on certain office and multifamily properties. The combination of asset-specific and general CECL reserves at second quarter end was $107.5 million, or 312 basis points on loan commitments. As a reminder, These are point-in-time assessments that we evaluate each quarter. Looking at changes in risk rankings during the quarter, our review resulted in four loans moving to our watch list comprising three multifamily loans and one office loan. We upgraded five loans during the quarter to a risk ranking of three and removed them from our watch list. As Mike mentioned, two of them were office loans on properties located in San Francisco, California and Baltimore, Maryland. The other three upgrades included the Milpitas Mez A, one hotel mezzanine loan, and a construction loan. Altogether, our average loan portfolio risk ranking at the end of the second quarter was 3.1 compared to the first quarter's average of 3.2. Our three risk-ranked five loans represent approximately 1% of the total loan portfolio carrying value. Seven loans, equating to 14% of the total loan portfolio carrying value, are risk-ranked for. While all risk-ranked for loans are current performing loans, we are seeing potential for increased risk and accordingly are closely monitoring these investments and working with sponsors to ensure the best possible outcomes. Moving to our balance sheet. Our total ex-share undepreciated assets stood at approximately $4.5 billion as of June 30, 2023. Our corporate leverage levels remain at the low end of the sector. Our debt-to-assets ratio is 63%, and our debt-to-equity ratio is 1.9 times down quarter over quarter. This concludes our prepared remarks, and with that, let's open it up for questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment please while we poll for questions. And the first question comes from the line of Sarah Barcom with BTIG. Please proceed with your question.

Hi, everyone. Thanks for taking the question. I was hoping if you could speak to how you think about giving loan modifications and extensions to help sponsors get to the other side of this rate hike cycle versus just removing those assets from the books, realizing a loss there, but getting some capital back now. to allocate elsewhere? How do you think about that generally?

Hey Sarah, how are you? It's Mike. I'll start off with that and I'll let Andy interject as well. I mean generally we have a bias toward working with all borrowers. Where we feel like there's equity to protect borrowers should step up and do something to help cover shortfalls. That could be either some pay down of the loan. We've experienced that. buying the interest rate cap, which these days is expensive, and some of our borrowers have definitely stepped up to do that, as well as covering interest rate shortfalls and building up the reserves. Sometimes they ask us for lowering the hurdles for the extension. The borrowers have a view, hey, if we're putting money into the deal today, we'd like to make sure that we're not we have an option of getting it out and that you don't keep the hurdles for the next extension so high. So generally speaking, we have a bias toward working with our borrowers in this environment. And in many cases, many cases, our borrowers have stepped up, have made capital calls to their LPs and have funded some shortfalls there. Andy, any additional thoughts on that?

No, Mike, I think you covered it. Really, at the end of the day, we're looking for commitment from the sponsor or the borrower in the form of a financial commitment or operational commitment. And with that, we're generally able to figure out a path forward. And so that's certainly path number one. The alternative path is, as you outlined, Sarah, taking the asset back and it off of our balance sheet.

Okay I appreciate those comments and as a follow-up I was hoping you could talk about the extent to which you used cash to buy loans out of CLOs during Q2 and were any of those loans watch listed and could you just generally talk about liquidity needs coming from Brightspire on loans that you're looking to deliver in the coming months just given the expectations that you spoke to during the prepared remarks for lower repayments this year?

Okay. You know, on that question about buying out of the CLO, we have Matt Heslin with us, who runs our capital markets. Matt, why don't you give an update on what we did this quarter on the CLOs?

Sure. So, thanks. In Q2, we bought out two loans from our 2019 CLO. One of those was an exchange. The other one was a cash purchase. So total loan balance that was removed was about $98 million. Total cash that was used to purchase those two out was about $77 million.

So the CLOs, even though we're past the reinvestment period, there is criteria in the CLO where you can make a potential substitution for a loan. And so one of the loans that came out, we were able to substitute another loan in, which helped the uh the liquidity there uh going forward sarah it's it's managing that liquidity around any potential defaults in the clo we have to buy out a loan or any potential buyouts on warehouse lines that we're watching uh we're watching very closely and i think we try to articulate that in our watch list policy we have and we've said this on earlier calls i think i've addressed this question with you before The policy we have is we really want to avoid surprises, and that really is a loan going from a three to a five where it's not accrual. So we have a bias toward moving loans into the watch list on a four basis. All the loans that we moved onto the watch list for this quarter are current loans, and we can work through those issues with those borrowers. And like the loans that were upgraded off the watch list, this quarter, we can see the same happen there. But we have a bias toward putting the loans on the watch list so that if something does go awry, that investors and analysts such as yourself have been given a heads up. Along those lines, we think that with the Oregon loan, which is a four, we're in dialogue with that borrower right now. And I think that there is a decent shot that that loan does move to a five. um in the uh in the next quarter uh and then with regard to other loans that are on the watch list as i said the new loans that went on are all current and and uh glancing at it now all the loans on uh in risk for are our current loans uh we are working very closely with the borrower on the san jose hotel uh that loan is current and then the disclosures in the mdna This quarter, we described how the mezzanine was, there is a mezzanine class behind us. That mezzanine class was upsized by about $4 million to make future debt service payments as the hotel tries to reach stabilization. We mentioned in the prepared remarks that despite the fact that a part of that hotel is under contract for sale, that could affect the credit positively. We're keeping it as a risk-rated four. until that transaction is consummated. We think that is a September or October potential close. And from what we understand, the owner may be in the market inquiring about potential for the sale of the entire hotel. So if that were to occur sometime in Q4 or early Q1, you could see the biggest loan on our watch list for a move. But we're watching that very closely. The hotel is not yet stabilized. We're very happy with the new flag in place and that the mezzanine is protecting. And that will be a big move for us in terms of liquidity because that loan, as we've said on previous calls, is I think only levered about under 50%. I think it's like 47% leverage. So we have a lot of liquidity tied up in that loan. So a sale of that one tower and potentially the sale of the entire hotel would have a huge benefit for us liquidity-wise.

Great, thanks for all that detail.

And the next question comes from the line of Steven Laws with Raymond James. Please proceed with your question.

Hi, good morning. Appreciate all the details on each of these assets. Andy, I wanted to follow up on two that you mentioned. First, on the Long Island City office, you talked about the initial interest you're seeing now that you guys are in control. Can you talk about it? You know, timeline there, kind of when you look to stabilize and sell the asset, you know, kind of what metrics are you looking to achieve for stabilization?

You know what? Let me lead off with that. I'm going to lead off with that, Steve, because I'm very proximate to that day-to-day. There's one building that Andy was mentioning that we had leasing inquiry on. That was the Paragon building. That building is unique. I don't mean to say that our buildings are better than New York office buildings. We know what's going on in the office market. But that building is unique because it sits right on top of a subway station and a rail station and a block away from a major subway line. So we've gotten a lot of inquiry on that. What we're finding is that when you do a short sale process, you're attracting low bids because the buyers sense distress. And rightfully so. I don't begrudge them that. So we felt like taking these assets over to demonstrate that they're in stable hands. And more importantly, that leasing brokers are going to get paid. And that's key. So now that we own these properties, we are getting inquiry in there. I think for an exit on that, we'd have to start to see some level of stabilization, some leasing activity where if we have LOIs in place that are strong and we have maybe tenant improvement program for that tenant up and running where a buyer, a prospective buyer can see that the property could at least sustain its operating expenses and the negative carry on that is less. I also think, we said this in the prepared remarks, this higher for longer is affecting everything, this rate environment. So if you get to a point where the Fed is telegraphing lower rates, buyers can see a potential lower cost of capital. We get some leasing traction there. I think then we really want to move the asset. We don't want to hold an asset until it's fully occupied and stabilized. We'd really prefer to get the liquidity back. So it'll be like a crossover point where we think we could get the maximum value for where the state of the asset is. But we are very pleased that now that we own the asset and have a third party manager in that we are getting incoming phone calls. But I do think it'll take at least a couple of quarters or several quarters for that to sift its way through.

Great. And then similar on Oakland assets, you know, was the Aria, Dean Liu in Q3. You know, is that one you'll look to sell quickly or is that one that'll go through a similar process?

We hired a third party manager. That asset is an older asset. We're very glad that it is a low balance asset. That's the silver lining on this. I don't have positive things to telegraph at this point in time, given that we just got control of the asset. I do think there needs to be some CapEx that goes into the asset that the owner neglected doing for obvious reasons, knowing that the asset was changing hands. So nothing really to report on that at this point.

Great. And lastly, any update on the Norway asset? Thanks.

No, no update there.

Great. Appreciate it. And the next one comes from Matthew Howlett with B. Reilly Securities. Please proceed with your question.

Hi, guys. Thanks for taking my question. First, I mean, congrats on continuing to deliver and focus on liquidity. Just any update with the bank lending group and the dialogue? Is it still cordial? Obviously, you have a lot of availability under it. Just any update on the dialogue with the banks?

Matt, you want to address that?

Yeah, I mean, obviously we've been working with our banking partners for a number of years here. You know, dialogue is very positive. As Mike mentioned, you know, we've been working through some amendments which involve, you know, sponsors putting cash in and buying new caps. So we obviously work very closely with our banking partners on all those changes, assuming those loans are on the repo lines. And they've been, you know, extremely supportive and in line with having a very similar view to what we have on those deals where, you know, seeing sponsors contribute equity and really step up and support the assets allows us, you know, to continue to finance them and the banks continue to finance us. So we're very aligned and conversations have been very positive to date.

Yeah, they've been very constructive. They've been very constructive and supportive. And I could probably, that's probably the case with, with most of our peer group, and as long as you're giving them total transparency and they feel like you've got credibility with them, which is primary with us, we're getting that support from them.

That's great to hear, and I know you've got a lot of availability in the lines, and it's great to hear that they're working with you guys on the portfolio.

One thing about that, Matt, let me just add one thing about that. When we project liquidity, we talk about cash, and we really think that there needs to be a distinction between, and some of our peer group are doing a good job at making this characterization. There's a distinction between availability and your reinvestment on CLOs. Some of our peer groups state that they have liquidity because they have assets that are under levered. but they have pre-approval to increase that leverage. We view that as liquidity. But just saying that we have capacity on our warehouse line, we have capacity for $800 million on our warehouse lines. We do not telegraph that as liquidity. We believe liquidity is cash on the balance sheet, in-place unused capacity on a revolver, or untapped capacity on a warehouse line that's pre-approved. So right now, we do have capacity to lend We have 800 million of capacity in our warehouse lines that we'll tap with our available cash as the haircut if we go on offense anytime soon.

Yeah, I'm glad you pointed it out. You almost double a line, and that's availability to do a lot of interesting things when you're ready to go on offense. So it's great to hear. I figured I'd ask that question because they have been very supportive with you guys, and it's great to hear that they're standing by you. Second question, Mike, on the triple net lease property in Norway, any headway on getting the state pension fund that you're trying to get to renew and eventually refinance that debt?

No, the status of that has not changed. The tenant, which is the state oil company of Norway, has until 2030 on that lease. As we say in the disclosures, the debt matures in 2025. We have the lease payments hedged. We were able to put on a three-year hedge when we did it in 2021. That goes to May of 2024. But until we engage with that tenant to get a possible extension, the status quo has not changed.

Can I ask if you've approached them with maybe offering, you know, if you extend early, you know, you give them a discount, and that way you get the debt refinanced, maybe even sell the property. I mean, does that make, you know, is that the strategy that you're looking at?

I've been to Norway. We've had face-to-face meetings, and I would say all of the above were put on the table. They have the benefit of being the state oil company of Norway. So they have a process that they go through, and we have to observe that process in terms of how they assess their real estate needs. We are in contact with them as frequently as we can be. We were told that they may have a decision in June that's been postponed until September. So we are waiting for that. And again, if they'll invite us to go to Norway, we'd be more than glad to go. But all those options are on the table, absolutely.

Great. And then just last question, I mean, Any green shoots, and the rates are up, obviously, here again today. Any green shoots in just the general CRE market and transactions? I mean, some of the REIT stocks have been rallying back up. I mean, the headlines have been horrendous. But is it over? It could be overdone. I mean, any green shoots you're seeing, Mike? Thanks a lot.

All right. So generally, I'd say we would trade earnings on an EPS basis consistently. that have been there because rates are up, we would trade that for better credit any day. So we're looking forward to rates coming lower because we think, as I said in the prepared remarks, that's causing distress and is probably the number one risk factor across real estate, regardless of property type. Office has its own idiosyncratic issues that are big. I don't mean to understate them, but higher interest rates are affecting every asset class and credit particularly office. The green shoots are, as I said in the prepared remarks, the retrenchment of the regional banks. There are probably over 100 regional banks and probably something like several thousand to 4,000 community banks out there. I think we were all somewhat surprised to see the amount of commercial real estate being done there because it's spread out so far among all these banks, it's very hard to detect unless you're an expert in following that market. So we're seeing that retrenchment occur. And we think that that's a positive for all the non-banks and the credit funds. There are far more community banks and regional banks than there are commercial mortgage REITs and debt funds. So we think that that will be a huge green shoot for us. And we are seeing inquiry on our origination team to try to fill that void. We're not ready to step in yet. We want to maintain a certain amount of liquidity, but we are seeing some interesting transactions. We haven't executed on any of them yet, as I said, but we think that's the big green shoot in the market. The retrenchment of the banks is going to be a huge positive. But first thing we want to see is we want to see the feds start to telegraph a pullback in rates.

Appreciate the update.

And the next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.

Good morning, everyone. Thanks for taking my question. Frank, in your remarks, I wrote in my notes that you said there were three risk-rated, When I'm looking at page 14, I see the two five-rated office loans, D.C. and Oakland, but I don't see a third five-rated loan. Did I just hear that wrong?

No, there are three loans. You may recall last quarter we reported on a property in Mesilpitas that was split into a mezzanine A and a mezzanine B, and we took a full reserve on the mezzanine B, and that remains a verse-ranked five loans.

Okay, it's just not in the deck. Is that what you're saying?

That's kidding me.

Huh?

Yeah, that's right. It's not in there. It's written off.

Yeah, that's why. That's correct. Okay, the exposure's off. Okay, gotcha. That's helpful clarity. And then, what were the issues? I noticed, and Mike referred to this, that you had three, I believe, multifamily loans that you took to four and they're now on the watch list. Is there any common theme there into what was going on with those properties and the operators that caused you to push those three multifamilies to a four? It looks like they're all out West somewhere. I don't know if that's a common theme.

Yeah. All those laws are current. Andy, do you want to answer this?

Sure, Mike. So, These are all loans in different and distinct markets with, in certain respects, different things going on. But I would say generally across multifamily, which our portfolio has about 52% exposure to, the asset class is performing rather well. But what we are seeing is an uptick in the expense side. So, GNA is up. And then if you look at certain markets, property tax, insurance, and even down at the municipality level, utilities can be up. So, there have been challenges. And then additionally, as Mike highlighted in his prepared remarks, there has been in certain properties an increase in bad debt as a result of COVID kind of lenient policy. And so that's gotten in the way of the borrower's ability in certain cases to clear out that debt, to take possession of certain units and make the improvements and execute on their business plan. So that essentially is elongating the period of negative cash flow. And so we looked at these four investments and felt like they were behind business plan. And as evidenced risk ranking movements. We've seen, you know, positive movement in certain assets. So that could certainly be the case here. But as Mike highlighted, we want to be up front with these potential issues and make, you know, make sure there are no surprises. So those are kind of the general themes. Yeah, that's a great caller. I will add that what we are seeing is we are seeing good rent growth. So on the top line, despite, you know, some of the headlines in our portfolio, kind of on a same store basis, we've seen year over year about a 6% increase. And so that's taking out the units that have been renovated. Those are obviously receiving much higher premiums. So we are continuing to see good rent growth.

Got it. That's helpful. Yeah, it sounds like being an apartment rental manager is a lot more challenging these days than it may have been in the past. And we certainly understand with the COVID changes. Thank you guys for the comments. Good job.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. And our next question comes from the line of Matthew Erdner with Jones Trading. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the question. So with the expectation that the San Jose hotel loan pays off next quarter, say that goes through, would you be willing to originate at some of these higher yields to boost the overall coupon of the portfolio and kind of jump back into the market, test the waters, and start originations again? And if so, do you guys have a current pipeline that you're looking at in areas that you'd want to target? Thanks.

Thank you for the question. I just want to clarify that on that San Jose hotel asset, there is under contract one tower. There are two towers of the hotel. The second tower was built subsequent to the first. That tower is under a PSA for sale. That has been since the spring. And that buyer, really not a, it's a non-financial buyer. That buyer is, we're expecting that to close sometime, as I said, in September, October. So that, the proceeds from that sale would go down, would pay down the first mortgage. We do believe that the buyer, the owner is exploring sales options for the entire hotel, but we can't really speak to that At this point, we think that they're making that inquiry, but we don't have any details to report that's very early. We can't say that'll occur. Having said that, any de-levering that we would have in that hotel would produce liquidity because we have such a low advance rate on it. So I just want to be clear on that. And the answer is, I think to get back on offense, we are really looking at two things. Not just that, but we're really looking at our overall liquidity and the portfolio needs. So as we get over the next quarter or two, more visibility as to what liquidity we need to protect the portfolio, that'll be the number one sign that we have for getting back into the market. That timing probably also occurs with the Fed starting to say that they're going to, or they can see easing going forward. So as we get toward the end of the year, we think that the prospects of playing on offense are are increasing dramatically and that we'll have the cash to do so, given the leverage of the firm, as we said in the stated remarks, is 1.9 times leverage. We think we're one of the lowest levered mortgage REITs in the peer group. In terms of opportunities, as I said earlier, the regional bank pullback, I think, is going to be massive. It's very difficult to understand how much they were doing because there were just so many banks in the market. literally thousands of them making loans. There were banks I've never heard of that were doing loans in areas well outside of their region. So we think that those will present big opportunities. In terms of sectors, obviously given our office exposure today and what's going on in the office market, we would be hyper-selective in office. But in terms of multifamily, hotel, industrial, other property types, we'd be absolutely open to doing that. including doing some construction loans, because we think that the regional banks were very heavy in construction lending. So we think there'll be good selective opportunities to do construction loans, and that'll be a product very well needed. But we think overall, for the market to start to move, not only on the supply side with the regional banks pulling back, but we also need to see an increase on the demand side for credit. And we think that's not going to happen broadly until assets start to trade, and until we start to see rates on the short end coming down.

Thank you. That's helpful.

There are no further questions at this time, and I would like to turn the floor back over to Michael for any closing comments.

Great. Well, thank you all for joining us today. Please, as always, feel free to reach out and contact us if you'd like to have a one-on-one meeting, and we'll try to accommodate. Until then, we'll see you in the third quarter call in November, and have a great rest of summer. Thank you.

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.