Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q3 2023 Earnings Call Transcript

Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q3 2023 Earnings Call Transcript October 25, 2023

Blackstone Mortgage Trust, Inc. beats earnings expectations. Reported EPS is $0.78, expectations were $0.72.

Operator: Good day, and welcome to the Blackstone Mortgage Trust Third Quarter 2023 Investor Call. Today’s call is being recorded. At this time all participants are in a listen-mode only. [Operator Instructions]. At this time, I’d like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead.

Timothy Hayes: Good morning, and welcome everyone to Blackstone Mortgage Trust’s third quarter 2023 conference call. I’m joined today by Katie Keenan, Chief Executive Officer; Tony Marone, Chief Financial Officer; and Austin Peña, Executive Vice President of Investments. This morning, we filed our 10-Q and issued a press release with the presentation of our results, which are available on our website and have been filed with the SEC. I’d like to remind everyone that today’s call may include forward-looking statements, which are subject to risks, uncertainties, and other factors outside of the company’s control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K.

We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and our 10-Q. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the third quarter, we reported GAAP net income of $0.17 per share, while distributable earnings were $0.78 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the third quarter. Please let me know if you have any questions following today’s call. With that, I’ll now turn things over to Katie.

Katie Keenan: Thanks Tim. Since our last earnings call geopolitical risk is more acute and interest rates have continued their March higher. The tenure is 4.9% up 100 basis points in the last three months, and SOFR is at 5.3%. We believe that higher rates are having the Feds desired impact with inflation decelerating and economic growth slowing. But we take the Fed at their word and expect rates to persist at these levels and are managing the business accordingly. Rates impact our lending business in two critical and correlated ways. First, as a floating rate lender we continue to recognize the pronounced benefit in our income from higher base rates yielding yet another quarter of strong distributable earnings. At the same time the sustained pressure of high rates and the attendant capital markets illiquidity is weighing on the overall credit environment.

For dividend we are able to bolster our book value and significantly offset increasing reserves. The steps we’ve taken on both sides of our balance sheet including proactive asset management, a conservative liquidity posture, and a patient approach to new investments leave us on strong footing to navigate this environment. This positioning is evident in our third quarter results with DE of $0.78 per share covering our dividend by a 126%. Liquidity is still at record levels and a continued reduction in our leverage. On the credit side our portfolio remains resilient, 95% performing notwithstanding some negative credit migration and a continued healthy pace of repayments. And over the first three quarters of the year we contributed over $80 million of distributable earnings in excess of our dividend to book value cushioning much of the impact of incremental reserves.

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Q&A Session

Delving deeper on credit our challenged assets remain a small part of the overall portfolio, with just 5% on cost recovery. Our watch list represents an additional 13% of the portfolio, loans which are a focus of our asset management efforts but remain current and performing. We collected $1 billion of repayments this quarter, demonstrating liquidity and investor demand for the high quality collateral backing our loans. We recognize partial pay downs on several large office loans and we strategically sold a subordinate interest in a UK office loan reducing our basis by 18%, generating $50 million of proceeds and retaining a lower LTV senior loan, still earning a double-digit ROI. A separate UK office loan repaid post quarter end selling to an institutional fund at 50% above our basis.

While the office headwinds are well established, high quality assets continue to outperform. In addition to physical quality, amenities, and location, tenants are increasingly focused on the capitalization of office assets when making leasing decisions, a clear advantage for our collateral. Notably, we saw several significant leases signed in our portfolio this quarter, including flagship deals in Chicago, West LA, Miami, and New York. With the slow but steady March of RTO, tenants are transacting and we expect the demand that exist in the market will continue to concentrate in the best assets. Our portfolio is far more awaited towards collateral built or substantially renovated since 2015 than the market, and is therefore well positioned to capture an outsized share of demand today and in the future with very little new office development on the horizon.

But despite these bright spots office overall remains challenging. We downgraded and recorded impairments on three of our previously watch listed loads this quarter, office assets in the Bay Area at Chicago. While these loans were current on interest through the quarter, we are taking a forward-looking approach as we anticipate potential deterioration ahead of maturity dates or other decision points. We continue to run a robust quarterly process around our risk ratings and reserve levels. We’ve increased our office reserve by more than 10X in the past year with marks on our 5 rated loans, implying an average decline in asset value of over 50%. And collectively we have now either imperator watch listed nearly 40% of our U.S. office loans as we continue to transparently identify risk within our portfolio.

But away from our watch listed assets our one to three risk rated office portfolio is generally stable. Nearly 60% is backed by new or substantially renovated assets where we are seeing stronger leasing momentum like the Spiral and Hudson Yards, or 545 Win in Miami and another 16% benefits from substantial recent equity investments driven by our active asset management approach. On the asset management side, we continue to leverage the resources of the Blackstone Real Estate platform to pursue the best outcomes for our shareholders across the portfolio. Last quarter we highlighted the substantial progress we’ve made on this front, securing additional capital and improving our credit position. Over the past year we have secured a total of $1.5 billion of additional equity commitments subordinate to our loans, of which over 750 million relates to 3 and 4 rated office loans as we continue to pursue proactive modifications to place seals on more stable footing in the current environment.

These modifications typically exchange substantial additional borrower capital investment for time and in some cases rate relief. Prioritizing credit protection over marginal return is a rational trade in the current environment for our borrowers and for us especially given our substantial dividend coverage. In more challenging situations, we have focused on ensuring we have maximum optionality to pursue recovery outcomes. With our robust liquidity and long duration balance sheet we are never a force seller and as the largest owner of real estate in the world we have a deep well of expertise to take ownership and drive value when appropriate. And at the same time we will actively pursue sales of challenged assets when the opportunity cost of holding exceeds the return potential.

We expect to execute on least one such sale next quarter on a small multi-family loan where we are appropriately reserved. In multifamily more generally, our second largest sector, fundamentals continue to support loan performance with all other multi loans current on interest. In the near term a pocket of new supply is tempering rent growth but looking past this year, the supply demand dynamics are favorable. Multifamily housing starts are down 42% year-over-year and home mortgage race are at a 23 year high, significantly impacting affordability for potential home buyers and supporting rental demand. And further, our loans are typically set up with value add business plans allowing for rent and NOI growth beyond market trends. For example, our largest multifamily asset, a newly constructed trophy building in Brooklyn, is nearing completion of its lease up at rents well above our initial underwriting, resulting in a projected debt yield nearly a 100 basis clients higher than our base case.

This quarter we upgraded six multi loans seeing strong cash flow growth through successful execution of such value add strategies. The financing market for multifamily also remains liquid albeit impacted by rates pressuring DSCRs and loan sizing. With a shrinking universe of targeted asset classes, this sector remains squarely in the strike zone. We see this in our multifamily repayments so far this year. 550 million through bank and agency refis as well as sales well above our basis. We expect 2024 may bring further pressure across this sector as many 2021 originations face maturity. But the combination of robust long-term fundamentals and continued institutional liquidity incentivizes sponsor who have the wherewithal to bridge near term NOI pressures and protect the substantial equity in their deals.

As such we believe our multifamily portfolio, 68% origination LTV on average remains well position to perform. In closing there is no question that we are in a challenging period for the real estate market. Rising rates continue to weigh on credit performance, but as a floating rate lender our earnings and dividend coverage also benefit. In this environment current income is a critical component of investor returns. Since the beginning of the year we have paid out $1.86 per share in dividends while our book value has declined to $0.36. Our dividend, which we’ve paid for 33 consecutive quarters and covered 130% for the past four, currently produces a 12.3% annualized yield on our share price. We’ve intentionally constructed our business for resilience and performance over the long term and our approach has supported distributable earnings stability since the onset of the rate cycle.

We continue to maintain a high bar for new investments but we expect sustained rate pressure will spur the need for capital solutions for both borrowers and banks as we move into next year. With a well-structured balance sheet and $1.8 billion of liquidity we are well positioned to capitalize as this opportunity unfolds. With that I’ll turn it over to Tony.

Anthony F. Marone, Jr: Thank you, Katie and good morning everyone. In the third quarter, BXMT reported distributable earnings or DE of $0.78 per share, our fourth consecutive quarter of exceptionally strong earnings as the tailwind of rising rates has continued to benefit our floating rate business model. Our 3Q earnings include a one-time $0.02 gain on extension of debt, reflecting our repurchase of $33 million of our senior secured notes at 85% of face which helped offset the impact from 2Q loan modifications, loans placed on cost recovery accounting, and net portfolio contraction. This quarter we again posted net portfolio contraction and moved in additional three loans to cost recovery status as of 9/30, which we collectively expect will impact our go forward quarterly earnings by $0.03 to $0.05 per share.

Our debt repurchased this quarter allowed us to opportunistically deploy capital at an attractive yield while also taking an additional step as part of our broader strategy to focus on the strength of our balance sheet and maintain a stable yet dynamic posture as this credit cycle evolves. To that end, we reported our second consecutive quarterly reduction in our debt to equity ratio which is down to 3.6 times as of 9/30 or 3.8 times at the start of the year. At the same time, we have maintained our record liquidity of $1.8 billion, up from $1.6 billion at the start of the year, despite a net repayment of $1.1 billion of debt so far in 2023. As we have highlighted on prior calls, our balance sheet continues to benefit from our stable capital structure with no corporate debt maturities until 2026, no capital markets margin call provisions across our term matched credit facilities, and fully non mark to market provisions on the majority of our liability.