BrightSpire Capital, Inc.

Hello, and welcome to the Brightspire Capital, Inc. second quarter 2024 earnings call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. We ask that you please limit yourselves to one question and one follow-up. As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to David Palame, General Counsel. Please go ahead, David.

Good morning, and welcome to Brightspire Capital's second quarter 2024 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 Mazze, 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 results, please see the risk factors section of our most recent 10-K and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, July 31st, 2024, 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 second quarter 2024 results. The company reported GAAP net loss attributable to common stockholders of $67.9 million or 53 cents per share, distributable earnings of $17.0 million or 13 cents per share, adjusted distributable earnings of $28.8 million or 22 cents per share, and cash earnings of $26.8 million, or 21 cents per share. Current liquidity stands at $317 million, of which $152 million is unrestricted cash. The company also reported GAAP net book value of $8.41 per share and undepreciated book value of $9.08 per share as of June 30, 2024. 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.

Thank you, David. Welcome to our second quarter 2024 earnings call, and thank you for joining us this morning. Throughout the second quarter, the Brightspire team remained focused on asset management initiatives in order to improve certainty around the portfolio and position the firm to move forward. We, like most, welcome the anticipated interest rate cuts starting in September. This will provide further momentum for our watch list and REO resolutions. To note, in aggregate, our watch list has remained stable quarter over quarter, but with some underlying movement that we will discuss. Now, I would like to provide insights as to our results. This quarter, we are taking impairments on certain legacy office equity investments. These investments were made roughly nine years ago by predecessor companies prior to the formation of Brightspire. These have been highlighted in past filings and mentioned in my prepared remarks last quarter. In taking the impairments, we will write down these investments to zero. This write-off makes up approximately 80% of our book value adjustment during the second quarter. The remainder of the book value adjustment is attributable to the increase in our CECL reserve, which now stands at $1.32 per share. The most significant impairment of these equity investments is the Norway investment. As of this month, we are no longer receiving cash flow income from this asset. As a reminder, last quarter we also stated that we anticipated losing cash flow income on the two other office equity investments in the coming quarters. Importantly, we have also recently commenced loan originations and will redeploy capital, which will, in part, offset the lost cash flow earnings associated with the legacy equity positions. While the loss of these cash flows occur over six months, our capital deployment is anticipated to have an impact over a lengthier time period. I highlighted this dynamic last quarter. This timing mismatch became a significant factor in the decision to reduce our quarterly dividend from 20 cents to 16 cents per share beginning in the third quarter of this year. A reduction in our dividend will preserve shareholder equity in the near term. This will also allow the company to be more deliberate in pursuing value-enhancing strategies within the existing portfolio as we work through watch lists and REO investments. More specifically, as it relates to our Norway investment, although the debt comes due in June of 2025, a cash flow sweep went into effect this month. As a reminder, this is a net lease property and the global headquarters of Equinor, the state oil company of Norway. Equinor has been evaluating their future office requirements. Their options include remaining at our property, leasing an alternative building, or constructing a new headquarters. For us to accomplish a sale or refinancing, we would need to be able to negotiate a lease extension beyond its current 2030 expiration. If Equinor decides to remain on our property under the current terms of the lease, the five-year remaining term beyond the debt maturity is insufficient to refinance the property without a significant pay down of the debt. Also, Equinor's timeline for their occupancy decision may not align with the maturity of our mortgage debt. We will continue to work alongside Equinor in that process. We will also engage with the lender group in an effort to modify the debt to improve the outcome. But at this time, investing more capital into this asset does not appear likely. Unlike Norway, the two U.S. office equity investments are multi-tenanted properties financed with CMBS mortgages. Although the respective underlying property cash flows provide more than adequate coverage on both interest and amortization, these investments fall short of the criteria necessary to refinance in today's market. A cash flow sweep on these assets is anticipated to commence at their respective loan maturities in October 2024 and January 2025. Therefore, we have proactively initiated discussions with the servicer to explore options for maturity extensions. But given the uncertainties, we took the prudent approach of incurring impairments on both of these investments. During the second quarter and subsequent to quarter end, we successfully resolved a number of watch list loans and REO. In addition, we continue to be conservative in our approach to risk ratings, and in doing so, we downgraded certain other loans. However, on a net basis, the watch list loan count and aggregate loan balance remained constant. Furthermore, 65% of the aggregate watch list is current in interest payments. The largest portion of the non-accrual is attributed to our San Jose hotel loan, which Andy will discuss in his remarks. At this point in time, we do not anticipate meaningful migration onto the watch list. Alternatively, we believe that the remainder of the year will provide a window for significant resolutions and reduction to the current watch list. As we head into the second half of the year, we have experienced improved visibility on our liquidity needs. And as a result, we have reengaged loan origination efforts to deploy capital. While it is still early, we are encouraged to see opportunities emanating from the pullback by regional banks. We also expect that future rate cuts will provide a boost to dislodge more assets for refinancing. The private credit sector should be a net winner in this pivot away from regional banks. Lastly, restarting originations underscores our continued progress in our anticipation of resolving underperforming loans and REO. Again, we believe the second half of the year will yield significant progress on this front. And with that, I will now turn the call over to our president, Andy Witt.

Thank you, Mike. During the quarter, we received $85 million in repayments and resolution proceeds across four investments. Deployment for the quarter totaled $18 million, consisting of $9 million in future funding obligations and a $9 million loan upsize. As highlighted last quarter, proceeds from the loan upsize were used to consolidate collateral related to a mixed-use asset in Pasadena, California. The initial collateral includes a fully leased 94,000-square-foot office building with developable land. The upsized loan proceeds allowed the borrower to complete the purchase of the additional land parcels previously under contract and consolidate collateral underlying a fully entitled 310-unit senior living development project. The borrower is currently evaluating a refinancing and or disposition of the office property and development site. In terms of the watch list progress, during the second quarter we resolved the previously downgraded Miami, Florida office loan. Additionally, we completed the sale of the property collateralizing the risk-ranked 5 Denver, Colorado multifamily loan. Additionally, we upgraded a Las Vegas multifamily loan as a result of sustained positive progress over the past quarters. As for REO updates, the Washington, D.C., office property is under contract, and subsequent to quarter end, we received a hard deposit. and the transaction is currently scheduled to close on August 1st at our net asset value. As Mike mentioned, we continue to have a conservative approach to our watch list. In doing so, we downgraded three loans during the quarter, which included two mezzanine loans, one located in Milpitas, California, the other in Las Vegas, Nevada. Both loans had a PIC component to the payment structure. The Milpitas loan was placed on non-accrual in Q1, and the Las Vegas loan was placed on non-accrual subsequent to quarter end. We elected to move these investments to the watch list given where these loans sit within their respective capital structures combined with the current uncertainty in the capital markets. The assets themselves are best in class. In the case of the Milpitas property, it is fully leased, whereas the Las Vegas property is nearing completion and starting to lease up. The third addition to the watch list is the Dallas multifamily loan. In this case, the property has cracked behind business plan and the borrower is unable to capitalize the remainder of the business plan. As a result, we are evaluating our options, which includes selling the property or taking control of the asset and executing a value-enhancing business plan utilizing our vertically integrated asset management platform our warehouse lenders have indicated they will cooperate with us should we elect to do the latter lastly as it relates to the watch list our san jose hotel loan for 136 million at a payment default in june on both our first mortgage and the mezzanine loan which is held by a third party as a reminder This loan was initially added to the watch list in the first quarter of 2020 during COVID. The loan remained on the watch list as a risk ranked four, although the loan had been current on its interest payments. Despite a loan pay down of $57 million in November of 2023, we did not reduce the general CECL reserve attributable to loan given uncertainty. During the second quarter, Brightspire placed the loan on non-accrual, downgraded the loan to a risk ranking of five from a four, and has since commenced foreclosure proceedings. In coordination with our warehouse lender and in anticipation of this potential eventuality, we have secured a commitment from our existing lender to maintain funding throughout this process. Given the commencement of foreclosure, which is in the public domain, we will refrain from discussing this matter further. Although it was an active quarter as it relates to the watch list, the total number of loans did not change quarter over quarter at 12. The corresponding watch list NAS remained relatively flat quarter over quarter at $543 million, or 20% of the portfolio, 5% of which is attributable to the San Jose hotel loan. As it relates to the loan portfolio, as of June 30, 2024, excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 83 investments with an aggregate carrying value of $2.8 billion and the net carrying value of $877 million, or 83% of the total investment portfolio. Our weighted average risk ranking remained flat quarter over quarter at 3.2. The average loan size is $33 million. First mortgages constitute 97% of our loan portfolio, of which 100% are floating rate. The multifamily portion of our portfolio remains our largest segment, with 49 loans representing 54% of the loan portfolio, or $1.5 billion of aggregate carrying value. Office comprises 30% of the loan portfolio consisting of $821 million of aggregate carrying value across 24 loans with an average loan balance of $34 million. The remainder of our portfolio is comprised of 8% hospitality with mixed use and industrial collateral making up the remainder. As of quarter end, remaining future funding obligations stand at $127 million. or 4% of total outstanding commitments. 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 our second quarter 2024 Supplemental Financial Report is available on the Investor Relations section of our website. For the second quarter, we generated adjusted DE of $28.8 million, or $0.22 per share. Second quarter DE was $17 million, or $0.13 per share. DE includes a specific reserve of approximately $12 million. Additionally, we reported total company gap net loss of $67.9 million, or $0.53 per share, which reflects operating real estate impairments, as well as increases in our CECL reserves. Quarter over quarter, total company gap net book value decreased to $8.41 from $9.10 per share. Undepreciated book value decreased to $9.08 from $10.67 per share. This change is mainly driven by impairments taken on our operating real estate assets and an increase in our CECL reserves, partially offset by adjusted DE and excess of dividends required. Looking at reserves, during 2Q, we recorded a specific CECL reserve of $13 million related to the Miami, Florida office loan. As Andy mentioned, this loan was downgraded to a 4 in 1Q and resolved during 2Q. As the Denver, Colorado multifamily loan was also resolved in 2Q, we charged off the specific reserves related to both loans during the quarter, and as a result, ended the second quarter with no specific reserves. Our general CECL provision stands at 172 million or 597 basis points on total loan commitments, an increase of 28 million from the prior quarter. The increase in the general CECL was primarily driven by specific inputs on certain loans. Looking at our watch list loans, our one risk rank five loan represents 5% of the total loan portfolio carrying value. 11 loans equating to 15% of the total loan portfolio carrying value are risk rank four. This concludes our prepared remarks, and with that, let's open it up for questions. Operator?

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. As a reminder, in the interest of time, we ask that you please limit yourselves to one question and one follow-up, then return to the queue. Our first question today is coming from Stephen Laws from Raymond James. Your line is now live.

Hi, good morning. Appreciate the comments so far. I'll definitely be jumping in the transcript to get some of the details, Andy. But as you think about the watch list loans as we move through the back half of the year, you know, which of those 12 do you think are potential second half resolutions and which ones do you think, you know, we continue to work through as you move into 25s?

You know what, let me take that first, Steven and Mike. I would say that out of the 12, I would say the majority of them are in various stages of progress. And we think, as we said in the prepared remarks, we'll make significant progress between now and the half of the year, the back half of the year. I don't want to identify specific loans on the watch list. other than the fact that the largest one, the San Jose loan is now in default on its interest payment. And so we have started and it's public. We started a foreclosure process on that property. So we are moving toward a resolution. It's in the state of California. So that typically takes call it about 120 days and we're into it for about, about approximately approximately 30 days. So that's another example of something that we are clearly moving in the direction of resolution on. So I'd say a substantial number of the assets on the watch list are in various states of play, and we're really looking for this second half of the year to give us significant progress.

Great. Appreciate the comments, Mike.

And also on that note, Stephen, I'm sorry, also just to reiterate the fact that 65% of the loans are current. And so, you know, we don't have a full say in that as long as the borrowers are maintaining payments. They're somewhat in the driver's seat there. So 65% of that portfolio is current and the largest, as we said, non-accrual is the San Jose loan.

Yeah, no, that's a good point. I appreciate you pointing that out about the 65%, Mike. As my follow-up question, I wanted to touch on your comment about, you know, you've got better visibility into your liquidity needs. You've reengaged discussions on new originations. You know, can you maybe talk about your pipeline of deploying capital and then how that balances against expected repayments in the second half of the year, kind of getting to an answer of kind of net portfolio growth, net portfolio flat, or do you think you see some shrinkage here in the back half before you get originations ramped back up?

No, we expect the portfolio to start growing. We have $152 million of cash on the balance sheet. And as we continue to execute on the plan for under-levered loans, unlevered REO or loans, the watch list, that is going to generate more cash to reinvest. So we think that this, as I said in the prepared remarks, over the period of the reinvestment and relevering, between now and through next year. So it'll be a steady flow, if you will, of deployment. And again, $152 million is on the balance sheet now in cash, and the rest of it will come from asset resolutions, which we feel the visibility on that, along with the stability in the portfolio at this point, where we don't think anything that we can see is going to move onto the watch list. We feel confident in redeploying. And I also think that we look to hopefully accumulate enough by mid-year 2025 to execute on a 2025 CLL. Great.

Appreciate the comments this morning, Mike. Thank you.

Thank you. Next question today is coming from Steve Delaney from J&P Securities. Your line is now live.

Thanks. Good morning, everyone. Appreciate all the detail on the impairment. Just looking in the comments on Norway, Looking at the debt, just trying to reconcile here on page five, the $1.32 of total impairment, and then on page six, we get the non-GAAP impairment of $0.98. Is the $0.98 simply Norway and the difference or the other impairments and charges that you took? Trying to reconcile this too. Thank you.

Sure, Steve. This is Frank. So 34 cents of that impairment came through as a GAAP-related impairment. And as you know, GAAP has certain rules requiring what you can take as far as impairment, and you can only impair down to a GAAP value. And really the difference between, you know, undepreciated book value and GAAP book value is the accumulated amortization and depreciation that gets added back to GAAP book value. So we're eliminating that and saying don't add that back from gap book value, and that equates to 98 cents. Got it.

Okay, thanks very much. And then switching to new lending, obviously you're seeing some repayments, so the portfolio is shrinking near term. Just comment on where you stand with, evaluating new loans do you actually have a pipeline uh at this time um i know you commented on the opportunity mike when you were at nary but just curious how close we are to actually issuing commitment letters and and funding new loans thanks thanks yes we are actively looking at product today um we're meeting on investment committees and quote committees

Every week, nothing has been committed to yet, but that process has been fully engaged, and we're out there speaking to mortgage bankers, brokers, and all of our borrowing constituents out there looking for new product. And as I said in the script, that we are seeing a lot from the regional banks. We don't expect anything, any gam to break there. We don't expect massive bulk sales. unless banks go under, which we don't see at this point. But we are seeing the banks allowing what I would call runoff, where there is a construction loan or a mini perm, the bank is not renewing that loan without some sort of significant pay down, and they're not letting borrowers off the hook for recourse on a construction loan. And so those loans are starting to come into the non-bank market. And I think after we get a Fed cut, and as we move into the fourth quarter, that's going to enable a lot of those borrowers to start to get refinancing away from the banks. So we're still encouraged about the flow that we're going to see from the regional banks and the community banks. But we are actively engaged, absolutely, but no commitments yet.

Encouraging. Okay. And while the banks don't want that paper on their books, you sense they're still more than willing to finance you on repo lines to carry the loans on balance sheets?

Yeah, these are regional and more community banks where you're seeing commercial real estate loan exposure at 300 times their tier one capital or in excess of that. And there could be hundreds of those. The money center banks are not in that position. The money center banks are probably somewhere as a fraction of loan exposure relative to their tier one capital. And our money center banks who finance us on warehouse are very actively engaged in that. An asset class has probably been their best performing asset class in commercial real estate, warehouse lending. In terms of risk reward, I think they probably have suffered no or very little losses there. So they're very actively engaged with us and would like to grow their exposure to us, yes.

Well, thanks for the clarification between the regionals and the money centers. And I know asset management is hand-to-hand combat, but it's the only way to get through it, right, and get to the end and get your portfolio and your balance sheet cleaned up. So all the best.

Well, we've been doing this for two years now. And so I think at this point in time, we see enough stability in the portfolio, as we said earlier, We don't see anything in the front window that is going to come on to the wash list, and we see more of the resolutions because we've been working on these assets for quite some time. We see more resolutions toward the second half of the year, so I think we're feeling encouraged about with the cash on balance sheet that we have today and the cash that we're going to generate from these resolutions that we should go full throttle on origination.

Thanks for the comments, Mike. Thank you.

Thank you. As a reminder, it's star one to be placed into question Q. Our next question is coming from Matt Howlett from B. Reilly Securities. Your line is now live.

Okay, guys. Thanks for taking my question. Hey, Mike, just on the comments with the current loan portfolio, you feel pretty good about the status going forward. And then the general CECL that you took this quarter, the reserve, I mean, I don't want to hold you to it, but is this it in terms of just An increase in general CISO, meaning were the core EPS now, were the dividends going to be, I mean, book value should be basically at a bottom or near a bottom?

What I would say is that we feel pretty good that it's on the high side at 6% of the loan book and roughly 15% of the book value. And with the fact that we think that we're going to make a lot of progress on the second half of this year, I think we're feeling that that is on the high side. I also would underscore that part of that is due to the fact that we have a very low average loan balance and our loan concentrations are low, and we will not have any loans over $100 million in after the resolution of the San Jose loan. So that's giving us more confidence as we look at what we have now in our existing portfolio. And as we emphasize with the San Jose hotel loan, when that loan was reduced in balance last year by 30%, we maintained the CECL amount on that loan. We did not reduce the CECL on a pro rata basis. So that's another reason why we're feeling like We're relatively conservative on our CECL reserves right now. And then in terms of the office portfolio, you know, we have a number of office loans on the watch list. And we think that the office portfolio is probably going to shrink a little bit more over the course of the remaining part of the year and into next year. So that is giving us some confidence on our CECL reserves at the levels that they're at now. And I want to also mention that we don't have any life science. I know that our peer group emphasizes that they have an office category and a life science category. We do not have any life science loans, and we kind of view life science as office product that has three times the amount of loan per square foot for refrigeration and turbo HVAC. But we don't have that exposure here. And so we see that loan exposure in the office sector dropping over the course of the next six months and into next year as well. So overall, I'm not going to never say never, but we are feeling that it is on the high side at 6% of the loan book.

And then we look at sort of, you know, adjusted EPS and the dividend now at $0.16 a day. You should be, you know, we'll run our models, but I mean, you should be covering, there shouldn't be any sort of, degradation of not covering it on a core basis.

We feel good about maintaining the dividend here. We feel it was right-sized primarily to prevent leakage. We looked at it from a negative coverage basis on cash flow, not just DE, but on actual cash flow of the book. And we feel we'll get back into positive coverage on a cash flow basis and retain earnings as a result of executing on the build back to hopefully a 20-cent dividend in the future. So right now, we feel confident that we can maintain the dividend where it is.

I appreciate those comments, and it's great to hear that you guys want to take it back up to 20 cents when you can do it. I figured I'd ask the question because, look, it's great to hear that you're back in the market. We all know the opportunity with non-banks. in the market and you guys being internally managed, being efficient, being out there with rate sheets, it's great to hear. But I want to ask the question, we've heard a lot of your peers talk about, hey, in the meantime, things aren't that busy. They're busy, but they're not that busy. We're going to buy AAA CNBS where we can get 20% yields. And or I'll take it to the other side. We could buy back stock here. If you think book is good at $9, you're trading at under six. Hey, why don't we buy back stock until we get things going?

Well, in terms of the buyback, we are looking at that. Having said that, we're reducing our scale. And when we look at loan origination and potentially executing a CLO and the ROE on that looks pretty compelling versus the buyback. The buyback would make sense really if you look at doing a secondary equity offering in the near-term horizon. I mean, that makes it absolutely compelling. But just in terms of deployment of capital, rather than reduce scale, I think we feel that originating loans and executing on a CLO in 2025 will give us a better ROE. With regard to buying AAAs, we haven't done that in the past. Others might be doing it. But we don't think you could get that in enough scale. When you level those up 75%, 80%, on a securities warehouse line, you're really not deploying a lot of equity. So putting out $10, $15, $20 million in AAA securities and leveling them up 80%, you really don't move the needle that much.

Right. It's that beta field just to go and get involved with that. Okay. Then just, I guess, on that CLO, can you give us a sense of what size? I mean, what would you... What could you tell us? Are we talking about a $400 million-plus deal?

What would you tell us in terms of your marketing? We're talking out of 2025, so I think we would look at what traditionally gets done. If you're looking at a CLO, you're probably trying to do something greater than $500 million, maybe shy of $1 billion, which is what we've done in our first two CLOs. But I think that when you look at the ROE that we have typically gotten after executing a CLO, you're probably adding – several hundred basis points or maybe more to your returns on your loan book. And so that's where we look at originating loans and then executing the CLO versus a buyback of stock as we move into 2025. We think that the CLO execution is something we prefer because, again, we really don't want to necessarily reduce our scale at this point. So right now, yes, we'll look at buybacks, but right now we think, Just executing on the business plan gives us as attractive or better returns.

Great.

Appreciate the comments.

Thank you. Next question today is coming from Jason Weaver from Jones Trading. Your line is now live.

Hey, good morning. So, Mike, taking your few last answers regarding originations into account, you know, we've heard a lot about new private capital coming into the space on the sidelines. So how are you thinking about the competitive environment going into year-end and beyond?

It's going to be competitive, flat out. I'm still trying to get my arms around what private credit means outside of leveraged finance. It absolutely means real estate. I guess it means anything that's in a wholesale lending side of the bank, not consumer-related that the private credit groups want to get into. But, yeah, we see a lot of demand for credit coming out of that sector. Also, though, we've seen hundreds of banks execute on commercial real estate loans over the course of the last three, four-plus years where we didn't know who these banks were. And I make the analogy to it's like watching the sea level rise. You can't tell because all of these banks are doing loans And you're not seeing these repeat banks come up. And roll the tape forward, here we are, after several banks go under, you're realizing that there are hundreds of banks out there with commercial real estate exposure that are many multiples times their tier one capital. We didn't see that happening over the past three or four years. We may have seen 10 banks or some of the New York big banks that went under here, Signature Bank and what's happened at New York Community Bank. But outside of those banks, we really couldn't detect that volume. And so we think there's a lot that's going to come off of those regional and community banks that's enough to satisfy our peer group in 2025-26.

Thank you. That's helpful, Culler. And then I know we just discussed it only recently, maybe it narrated, and you've only had them for a year. But do you have any update on the repositioning or the lease-up of that Long Island City asset?

We continue to work on that, and we are one, as we said in the past, not to hold on to REO for this protracted period of time. And so I think that based on how long we've held on to it, we feel like there's something there that's worth holding on to for. And so we should have something to report, as we said, the back half of this year we think will be significant, and I would put the Long Island City assets in that category.

All right. Thank you very much.

Thank you. Next question is coming from Tom Catherwood from BTIG. Your line is now live.

Thank you, and good morning, everybody. Maybe starting with Andy, you've made opportunistic investments in the past. Is there a chance Brightspire could take a more direct position in the South Pasadena office land asset as the sponsor looks to refinance that project?

Right now, that particular asset is fully entitled.

It's really an office building that's fully leased and a development site. The borrower is in the process of looking to either refinance or capitalize the development project. We've looked at it a number of different ways and really don't think it fits our strategy and mandate moving forward, but we agree it's a tremendous project.

Makes total sense. Then maybe, Mike, I know you said you're confident in watch list stability, but is there a potential scenario where a pickup at transaction activity, especially if we get the rate cuts, actually accelerates watch list migration as price discovery drives certain sponsors to back away from assets sooner than would otherwise be expected?

Anything could happen, but when we look at that portfolio right now, we do not see anything migrating onto the watch list near term. And so that's why I think we're comfortable with our CECL reserve at this point. But anything can happen over the course of next year, particularly around really the office loans. But right now, as I said, we see that portfolio shrinking, and we don't see anything there that will migrate onto the wash list in the next coming quarters. So I think the Cecil Reserve feels, as I said, on the high side at 6% of book value, and I would say that we feel very reasonable about where we are.

I appreciate those thoughts.

That's it for me.

Thanks, everyone.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Mike for any further or closing comments.

Well, thank you all for joining us today, and thank you for your continued support. As always, we are available for one-on-ones as requested. Otherwise, we will see you in November.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.