Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q4 2023 Earnings Call Transcript

Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q4 2023 Earnings Call Transcript February 14, 2024

Blackstone Mortgage Trust, Inc. beats earnings expectations. Reported EPS is $0.69, expectations were $0.66. Blackstone Mortgage Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Blackstone Mortgage Trust Fourth Quarter and Full Year 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 fourth quarter and full year quarter 2023 conference call. I’m joined today by Jonathan Pollock, Blackstone’s Global Head of Real Estate Credit, Tim Johnson, Global Head of BREDS and Chair of the Board of Directors, Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, and Austin Pena, 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 fourth quarter, we reported a GAAP net loss of $0.01 per share, while distributable earnings were $0.69 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the fourth 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. The BXMT weathered a challenging 2023 with results that underscore the resilience of our business. We reported record interest income and distributable earnings, generating $3.05 per share for the year and covering our dividend 123%. This dividend delivered $2.48 per share of current income to our shareholders, exceeding the $1.10 net reduction in our book value from CECL reserve increases and underpinning a positive total return in 2023. And we maintained near record levels of liquidity and reduced our leverage over the course of the year. Moving into 2024, while the path clearly will not be linear, we see an improving backdrop with inflation receding, rates moving lower, and the economy showing stability.

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Q&A Session

It will take time for the tale of legacy credit issues to work through the system and our portfolio, but macro momentum has shifted. Benchmark commercial real estate borrowing costs are down 150 basis points in the last four months. Issuance pipelines across corporate debt and CMBS markets have rebounded sharply. New construction starts are 30 to 60% below recent peak levels. This will not alleviate fundamental issues in certain segments like older vintage office. But for most of the real estate market, these dynamics are driving renewed confidence among lenders, incumbent owners, and new buyers. At BXMT, we also enter 2024 with greater visibility. Our portfolio is 93% performing. Of $10 billion of loans that hit interim or final maturities in 2023, 89% repaid past their extension performance tests are extended with substantial new equity commitments.

And notably, this includes nearly $6 billion of office. Those loans that didn’t are already impaired, part of the nearly $600 million of reserves that are already incorporated in our book value. Our borrowers renewed or replaced 93% of the nearly $15 billion of rate caps that rolled in 2023 with new caps or guarantees. Fourth quarter outcomes were similar to the full year. $4.6 billion rolled, 89% replaced at in the money strike prices of 3.6% at renewal. And when borrower business plans were impacted by higher interest costs or other headwinds, the vast majority chose to support their assets, committing over $1.6 billion of incremental equity subordinate to our loans. These are sophisticated, well-capitalized investors who carefully evaluate incremental investments.

Their support is a powerful indicator. On multifamily specifically, we see continued resilience. Our multi-loans were 99.4% performing at year end, and we subsequently sold the single non-performer. We lent at 67% average LTV at origination, and our operating collateral has seen average NOI growth of 35% since then. And we have virtually no exposure to New York City or San Francisco rent regulated multifamily. Perhaps most importantly, across the portfolio, our loans continue to repay. We collected $3.8 billion of repayments in 2023, including over $600 million in 4Q. This included $1 billion of office loans, three in the fourth quarter alone. How does this work? A lot has to do with the types of loans we make. BXMT finances value-add business plans where high-quality sponsors invest capital to drive cash flow growth.

Our underwriting is based on current and potential real estate value, and we lend at a meaningful discount to those levels For transitional assets, real estate value cannot be measured by current cash flow alone. 40% of the loans that repaid this quarter had in-place debt service coverage ratios under one time, as take-out investors credited hard asset value and the potential for cash flow growth over time. Our outcomes also have to do with our asset management approach. We have substantial structure in our loans, guarantees, performance tests, rebalancing rates, and sweep triggers that give us the path to enhancing our credit position. We can trade additional equity for rate or time when we deem it accretive. We have the full toolkit of execution strategies and the benefit of deep experience and extensive real-time data.

And we channel all of this toward improving our credit position over time, putting our portfolio in a better position to perform. We saw this strategy at work in 4Q on two vacant office buildings where we secured incremental pay-downs or recourse over our loan term, moving the path to full repayments this quarter. This included a London office loan originated in 2019 to vacate, renovate, and deliver a full building to WeWork. We heavily structured the deal up front given the tenant profile and used our structure over time to negotiate a 40% reduction in our loan commitment. The asset sold in October, empty to an institutional buyer, resulting in a full repayment at our lower basis. In other cases, we manage our loans to add collateral value over time.

It is a clear positive for a senior lender to support accretive office leasing, and we generally fund leasing in concert with our borrowers. As a lender, we get 100% of the benefit of incremental rent while funding a portion of the cost. We recently did this on a Chicago office loan where our borrower signed one of the city’s largest leases of the year, a testament to the asset’s strong positioning in the market. The BXMT expects to fund 70% of TILC costs going forward, capital that goes in only when leases are signed. We gave our borrower additional term and a partial spread reduction in exchange for guarantees, an increased floor, and $21 million of additional equity commitment. While this deal remains on our watch list, this modification enhances the value of our collateral, secures additional equity support, and places this loan on stronger footing.

In total, we have completed modifications on 50% of our watch list at office, stabilizing performance on these loans. We expect to take a similar tack on impaired assets, where we see the potential for better recovery over time through capital investments. Our overall approach to impaired assets is guided by a singular focus on maximizing shareholder returns. We will exit assets when that’s the best path, but with our robust liquidity and long duration balance sheet, we are not a forced seller. Instead, we carefully evaluate strategies on an asset by asset basis, informed by Blackstone’s deep experience as one of the largest real estate investors in the world. With this approach, we are making progress on our five rated assets. Post year end, we sold one loan, placed two others under hard contract, and completed a loan restructure, all generally in line with our reserves.

We also expect to take one small office REO in the coming months, where we believe we can leverage our deep real estate operational expertise and reset basis to add value over time. This deliberate and strategic approach to asset management is supported by the strong balance sheet positioning we have established over the last several years. We ended 2023 with $1.7 billion of liquidity, while reducing our leverage over the course of the year. Our financing complex, with an average cost of $195 over on our loan level financing and no corporate maturities until 2026, is a meaningful asset for our business, which enables us to pursue value maximizing resolutions while preserving distributable earnings and dividend coverage. Our relationship with our lenders remains highly constructive.

Loan on loan facility lending has performed very well for banks through this cycle. And with capital rules tightening, it provides them significantly better relative value than direct real estate lending. This evolution of the lending market is a distinct advantage for BXMT. As one of the top counterparties in the industry, we regularly hear from banks that wish to expand their relationships with us. And the rebound of the securitization market should provide further tailwinds for financing capacity. To close, in late 2022 and into 2023, we fortified BXMT with a staying power to navigate a highly volatile period. We raised and preserved capital, extended our corporate maturities, and proactively managed our portfolio to reduce credit risk where we could.

Now in 2024, we see the backdrop improving. We will continue to talk about residual credit challenges in the portfolio with some potential reserves along the way. But market conditions are aligning for a more active 2024, both on legacy asset resolutions and new investments. While we expect to maintain a highly disciplined approach to deployment, we are starting to see new transactions that stand up to the opportunity cost of preserving our liquidity. Our four key distributable earnings of $0.69, which are off the record levels earlier in 2023, but still comfortably above our dividend, are encumbered both by loans on cost recovery and excess liquidity, earnings power we can recapture over time. And while rate cuts affect interest income for a floating rate lender, they also provide a more constructive environment to deploy capital and resolve challenged credits.

Our stock valuation, in contrast, prices in a far more punitive outlook. Trading at $0.72 of book value implies $1.2 billion of incremental losses beyond our reserves, over 43% across all of our watch-listed assets. Meanwhile, our dividend delivers a 13.5% current income yield, cash return that is highly attractive relative to now lower rates and spreads. Finally, I want to end with a word about Mike Nash, whose long-planned retirement from Blackstone came at the end of 2023. Mike founded the Blackstone Real Estate Debt Strategies business, launched BXMT in 2013, and was the heart of our platform for over 15 years. In concert with his retirement, Mike has stepped down as chair of the BXMT Board of Directors, but BXMT is privileged to have him continuing as a director.

Tim Johnson, the global head of Blackstone Real Estate Debt Strategies, will succeed Mike as chair. Tim has been an integral part of the BXMT business since its inception, working closely with Mike and the entire BXMT team, and leads the overall BREADS business today. We sincerely wish Mike all the best and welcome Tim as BXMT’s new chair. Thank you for your time, and I will now turn it over to Tony.

Anthony Marone: Thank you, Katie. Good morning, everyone. Starting with our results, BXMT reported distributable earnings of $0.69 per share for the fourth quarter and $3.05 per share for full year 2023, our highest annual earnings level since we launched BXMT in 2013. We incurred a gap net loss of $0.01 per share for the fourth quarter, which reflects the sequential increase in our CECL reserves, primarily related to three new loans we impaired and placed on cost recovery accounting in the fourth quarter. Our 4Q earnings, while still above our $0.62 dividend, have come down from the levels we reported earlier this year, reflecting the cumulative impact of loans we have placed on cost recovery status and $1.7 billion of net portfolio contraction.