Q1 2024 Blackstone Mortgage Trust Inc Earnings Call

Participants

Timothy Hayes; Vice President - Shareholder Relations; Blackstone Mortgage Trust Inc

Katharine Keenan; President, Chief Executive Officer, Director; Blackstone Mortgage Trust Inc

Anthony Marone; Chief Financial Officer, Treasurer, Assistant Secretary, Principal Accounting Officer; Blackstone Mortgage Trust Inc

Doug Harter; Analyst; UBS

Stephen Laws; Analyst; Raymond James

Sarah Barcomb; Analyst; BTIG

Jade Rahmani; Analyst; KBW

Rick Shane; Analyst; JP Morgan

Presentation

Operator

Good day and welcome to the Blackstone Mortgage Trust first-quarter 2024 investor call. Today's conference is being recorded. (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 first-quarter 2024 earnings conference call. I'm joined today by Tim Johnson, Chair of the Board of Directors; Katie Keenan, Chief Executive Officer, Anthony Marone, Chief Financial Officer; Autsin Pena, Executive Vice President of Investments.
This morning, we filed our 10Q and issued a press release a 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 10K.
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 10Q. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. In the first quarter, we reported a GAAP net loss of $0.71 per share, while distributable earnings and distributable earnings prior to charge-offs were $0.33 and $0.65 per share, respectively. Few weeks ago, we paid a dividend of $0.62 per share. With respect to the first quarter, please let me know if you have any questions following today's call, but that I'll now turn things over to Katie.

Katharine Keenan

Thanks, Tim. For quarter into the year, we continue to see a positive direction of travel for real estate liquidity has returned to the market with CMBS issuance multiples above year ago levels. New supply is down dramatically, with starts 50% to 90% below peak across asset classes, while expectations for the pace of rate cuts have been tempered. Overall cost of capital is lower, with spreads compressing across public and private lending markets.
We believe values in commercial real estate are bottoming, creating an attractive entry point for new investments. With this backdrop, we continue to see strong performance on the vast majority of our portfolio, providing ballast for the subset of more challenged loans. Our portfolio remains 92% performing. We produced $0.65 of distributable earnings prior to charge-offs covering our $0.62 dividend.
We collected over $1 billion of repayments this quarter, including the refinancing of one of our largest office loans through a CMBS transaction with deep investor demand. And we maintained near record liquidity levels, ending the quarter at $1.7 billion. We continue to address the ongoing credit cycle and reset in office values with impact in both our earnings and reserve builds.
And of course, higher for longer rates while good for income as a floating rate lender put additional pressure on borrowers, but more liquidity creates more transparency, prompting borrowers to more definitively pick a path for their assets selling or refinancing where they see equity value moving on where they don't in both cases, prompting capital structure resets at more appropriate levels. This process is the necessary transition point to get to a healthier and more normalized market.
The recovery will take time with additional reserves and losses along the way as we've seen this quarter. But BXMT is well prepared to navigate this period. We fortified our balance sheet with plenty of liquidity and a $1.8 billion reduction in our financings. Over the last year, we wrapped up our asset management collecting $1.5 billion of incremental equity from our borrowers over the last 12 months, which enhances our credit position.
And we marshaled our experts from across the Blackstone real estate platform, bringing to bear the insights and experience of the largest owner of commercial real estate globally. We are actively seeking to accelerate portfolio turnover to move through the credit cycle and return to our core lending business. Some of these conversations materialized as credit enhancing modifications, others workouts, where we maintain a highly disciplined approach, no free options quickly taking control from sponsors if they are unwilling to demonstrate commitments.
We resolved 4 of the 13 impairments. We started the quarter with three sales restructurings and foreclosures, and we expect continued progress next quarter we strongly believe our proactive approach will result in the best long-term outcome for our investors and with Blackstone and its employees, a top three shareholder of the company.
We are firmly aligned. Most importantly, our core performing portfolio continues to show stability and generate strong income of the $1.8 billion of performing loans that faced interim or final maturities this quarter 95% repaid past their extension tests or were extended with new equity or enhanced economics. We closed our agreed nine credit positive loan modification. We negotiated pay-downs on five loans representing 11% of the respective loan balance on average.
And in total, our borrowers contributed over $300 million of incremental equity across our portfolio. Just this quarter, real time indications of sponsor commitment and confidence in asset values. Included in these modifications was one of our largest multifamily loans, a newly renovated New York City asset with a minority office component, which we work surrendered following the recent bankruptcy.
This disruption presented, the opportunity for our sophisticated well-capitalized sponsor to replace the office was 75 new apartments, enhancing the value and ultimate liquidity of the collateral. We granted time to pursue this accretive business plan in exchange for significant increased equity, both to pay down our loan and capitalized value add CapEx.
In addition to the positive result for this collateral. The modification leaves us with virtually no ongoing rework exposure in our portfolio across Blackstone, we are highly constructive on multifamily given this long-term structural shortage of housing within BXMT, our multi-family portfolio ended the quarter at 100% performance. Our loans benefit from a weighted average LTV of 67% at origination and NOI was up 35% across the portfolio since then across $1.5 billion of multi loans with first quarter rate CapEx aspirations, 100% of our borrowers renewed caps or replace them with guarantees a clear demonstration of commitments.
Our largest multi-family concentrations are in New York City and Dallas markets, which are performing well. We upgraded five loans in Q1 that have reached stabilization and are likely to repay in the coming quarters, given temporary supply pressures in certain Sunbelt markets compounded by higher rates. We also watch listed for loans, but these together are just 1% of the portfolio.
And with deep capital markets, liquidity and fundamentally stable long-term demand for multifamily from users and owners alike, we believe our portfolio is largely insulated from these headwinds and that any credit impacts will be marginal and contained in closing. While the timing of the cycle will remain dynamic, we believe 2024 will bring additional clarity to the market and our portfolio. And we are highly focused on placing ourselves in the best position to capture the historically attractive investment opportunity that inevitably follows a period of distress.
We are not waiting for the all-clear side. Exceptional lending opportunities are available today and given our strong liquidity position, we will selectively take advantage. We capitalized on one such opportunity post-quarter end committing to a $69 million senior loan on a resort hotel at 39% LTV and a 16% debt yields, which sets up to a double digit unlevered return.
This loan is the result of the core principles that have always underpinned our lending business, real estate knowledge, analytical expertise, intellectual creativity, and deep relationships across the market. These strengths have driven our investors to entrust the Blackstone Real Estate Debt Strategies platform with $85 billion of their capital, and they will continue to drive our performance through And following this cycle.
And with that, I will now turn the call over to Tony.

Anthony Marone

Thank you, Katie, and good morning, everyone. In the first quarter, the S&T reported a GAAP net loss of $0.71 per share and distributable earnings of $0.33 per share. Excluding realized losses, distributable earnings were $0.65 per share and supporting our dividend of $0.62 per share. And we added this loss adjusted metric to our disclosures this quarter labeled as distributable earnings prior to charge-offs as we believe it is more reflective of the ongoing earnings power of the business and therefore, helpful for investors to consider when assessing our cash flows and dividend coverage.
We recognized $61 million of realized losses in the first quarter as we made significant progress on asset management initiatives, resolving several impaired loans and crystallizing the existing CECL reserves, which impacted the but not GAAP earnings for our book value. We acquired legal title to our first REO assets. Our newly renovated office campus located in a desirable submarket of Silicon Valley asset is currently vacant but is well positioned to capture leasing demand over time without the need for material CapEx investment, we are leveraging the broader resources of the Blackstone platform to manage the property with the goal of maximizing recovery value beyond what we believe is achievable in the current market.
With liquidity for the office sector is still limited. Asset is recorded at its fair value of $60 million on our balance sheet, 35% lower than our private loan. Further on loan resolutions, we expect to complete the sale of another collateral asset underlying impaired office line in the second quarter with collective realized losses from the loan resolutions discussed last quarter, in line with our [1231] reserves validating the accuracy of our CECL process.
As Katie noted earlier, loan resolutions are focused for BXMT. They're also an important catalyst for future earnings generation. As a reminder, we currently do not recognize any income from impaired loans, but the interest expense associated with these plans continues to burden our results impacting 1Q earnings by $0.16 per share.
Over time, we expect we will recoup these earnings as loan resolutions generate capital that can be immediately applied to repay debt and eliminate the earnings drag in advance of eventually redeploying capital into new investments. In the interim, we expect to benefit from the cash flows currently generated by many of these loans and cents per share this quarter. It's not recognized in earnings, but instead it reduces our loan principal balance and supports book value in the near term.
The net impact of new cost recovery loans, loan modifications and net portfolio contraction will contribute to more variability in the equities earnings and outweigh the longer-term earnings tailwinds from impaired loan resolutions. As we've discussed in the past, we determine our dividend each quarter with our Board of Directors focused on the long-term earnings power of our business.
Considering a variety of factors including interest rates, the range of credit outcomes and the environment for new originations more broadly on credit, we upgraded nine loans this quarter reflecting continued business plan progression within multifamily and hospitality assets and the resolution of two impaired loans that are now once again performing for these two loans, borrowers injected new cash equity and capital structures were reset to improve our basis and sustained strong current income generation.
We also downgraded 13 loans this quarter, 7 of which were US office loans that were placed on cost recovery. Enercare. Our CECL reserves increased by $174 million quarter over quarter to $766 million, largely reflecting these new impaired loans. Our aggregate CECL reserves of $4.40 per share are embedded in our book value of $23.83 as of March 31st.
Importantly, our balance sheet remains solid and is built to withstand the pressure we face in the current market environment, diversified funding sources, term match financing, no capital markets driven mark-to-market provisions. These are the key tenets on which we constructed our balance sheet has to be X & T's business launched in 2013 and which continue to underpin our stability today.
Over the past year, BXMT increased liquidity to near record levels $1.7 billion, while also reducing asset level and corporate financing by $1.8 billion. This included $60 million of senior secured note repurchases, which we executed at a significant discount to face value, generating$8 million of gains over the past four quarters and $3 million in Q1.
Specifically, debt to equity has increased slightly this quarter to 3.8 times as a result of higher CECL reserves, but remains within our target range. And we remain in compliance with all financial covenants. Prepayments continue to exceed loan fundings, $1 billion collected versus $353 million funded in Q1.
This dynamic has yielded net cash proceeds that have fortified our balance sheet and liquidity position for five consecutive quarters and while repayments can be lumpy, we see this overall trend continuing with clear indications of demand for our highest quality collateral, including elements.
Looking ahead, we expect near-term results will reflect the realities of a higher interest rate environment and also the proactive portfolio management measures we are taking to pursue the best long-term outcomes for our investors. Our business is well positioned with strong liquidity and stable balance sheet and the substantial current income generated by our portfolio.
Thank you for joining the call. I will now ask the operator to open the call to questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Doug Harter, UBS

Doug Harter

Thanks. On the loan extensions that you completed this quarter, can you talk about how long are the extensions are you typically granted.

Katharine Keenan

And Doug, are you referring to the extension, the sort of credit positive mode that we're doing, where we're getting paydowns and giving borrowers more time or specifically on the multifamily or two.

Doug Harter

Just kind of in general on the on the pie chart you had with the 1Q maturities and paydowns kind of getting a sense as to how much additional time is being granted.

Katharine Keenan

Sure. So it falls into a couple of categories. So when you look at that pie chart, the loans that are extending and passing their task, that's generally just a one-year extension that's provided for under the typical structure of the loans for situations where borrowers are putting in more equity and we're granting them more time. It's really a continuum and it comes down to how much equity we're getting.
And we're really just making an investment decision at that point about where our basis is, where our credit position is what we see as the business plan for the asset, is it capitalized appropriately based on the new equity we're getting in? And how do we optimize our outcomes between return and recovery over that period of time. So that it's one to two years.
Generally, we're not talking about longer than that. But within that continuum, it's really about making an investment decision at the point when we're doing the math.

Doug Harter

Great. Thank you for that, Katie. And then just on the loans that were downgraded this quarter, kind of what changed during the quarter that led to a downgrade in 1Q versus kind of how they were positioned in 4Q?

Katharine Keenan

Sure. So it's each one of these loans obviously has specific situations that can change over time, but it's largely US office, reflecting the well-known challenges we've seen in the market, but also some changes in occupancy and sort of tenant dynamics in the individual assets and then on the multifamily side, as I mentioned, really looking at at temporary impacts of supply in certain markets compounded by higher rates. But they are, you know, those are watchlist assets, just 1% of the overall portfolio and where we expect it to be pretty marginal.

Doug Harter

Great.
Thank you, Kate.

Katharine Keenan

Thank you.

Operator

Stephen Laws, Raymond James.

Stephen Laws

Hi, good morning. Tony, I wanted to start with a question on the numbers. I think you've on the positive side. You mentioned some of the resolutions I believe in Q1 and expected one in Q2 will help remove some drag off the financing of non-accrual assets. And then around the downgrades, I think you mentioned that seven of those are new nonaccrual loans. Can you talk about the net impact and how we should see? Are those two things going to balance out in the near term?

Anthony Marone

Sure. So as we're resolving some of these were without getting into specific guidance on next quarter, in particular, I think you could expect to see a similar impact from moving loans to cost recovery as we've seen in the past. So given the magnitude of that portfolio, you could think of that as something in the $0.08 to $0.1 range is something that you might expect and then on the resolutions, those will be there will be dependent on how much leverage we have against them. So it will be a more muted impact.
And maybe a couple of cents per share. Adding importantly, I would like I mentioned in my remarks, when you're thinking about the earnings impact of the loans going to cost recovery, many of these loans in particular, some of the more recently impaired loans continue to pay. So we're still getting that cash flow. It's benefiting our basis, even though it's not coming through our DMS.

Stephen Laws

Great, appreciate the clarification there. And then I know you've mentioned kind of one outlook for expectation for one resolution here in Q2. But as you look over the balance of the year, and you consider the current five rated loans for those specific reserves, you know, how much of that? I think it was $1.2 billion or maybe that was office, but how much of that do you think you can get resolved? Yes, this calendar year? And how do we think about resolutions in the second half?

Katharine Keenan

Yes. It's a great question. And I think from a general overall market perspective, you know, we are very focused on taking advantage of the fact that there is more liquidity, more transparency in the market. There's capital coming back, including for office, obviously was one of the loads we resolved this quarter or two of those. We resolved this quarter from a sale and restructuring perspective were both office loads. We also took one REO and our overall approach is going to be one of maximizing recovery for our investors.
But where we see the opportunity to sell or move on from an asset at a level that makes sense. When we look at our wholesale analysis from a return perspective, we are absolutely going to do that. And I think that the fact that there is more liquidity in the market, more turnover, more stuff is moving, it's going to create some noise, but it's ultimately the best thing in order to move us through this cycle and get to the other side, get back focused on our core business.
So we have a couple of others that are in process relatively near term. We're obviously you know, all our systems go in terms of trying to make sure we resolve these things as soon as possible. So I think it's tough to project for the second half of the year, but we're very focused on moving these assets to resolution and getting through it.

Stephen Laws

Great. Appreciate the comments this morning. Thank you.

Operator

Sarah Barcomb, BTIG.

Sarah Barcomb

Hi, good morning, everyone. My question is related to leverage on watch list assets. Could you walk me through some of the resolutions of the five rated assets from CLO, meaning was there an additional cash need to avoid losses at the CLO level when those resolution proceeds came in and approximately how much leverage is on the new five rated assets? Thank you.

Katharine Keenan

Sure. So thinking about our our general approach there for most of the five rated assets, we generally have delevered them along the way. So the typical advance rate on a five rated asset is materially lower than our overall portfolio. So usually, we've already sort of put ourselves into a more stable position on the CLO. Specifically when we look at these assets.
We're really looking at optimizing recovery and return for our investors and for all of our investors throughout the capital structure, sometimes that will involve buying portions of the loan out of the CLO or in some cases, all of the loans out of CLOs. And in other cases, we'll look at it and say the best thing really is to continue with an asset in the CLO, and it's really going to come down to a decision looking at all of the factors to maximize the outcome for the overall company.
So in terms of capital. We really have seen for the most part, along the way impact with these loans because obviously impaired assets, they're on the watch list for a while. We know what's going on. We're talking to our lenders.
This is not something that was happening overnight. So we don't see a material change in liquidity. And it's really just about making sure each one of these assets is optimally capitalize to it, maximize sort of the return and recovery value as we move through our business plan.

Sarah Barcomb

Okay, thank you. And then just a quick modeling question. So you mentioned you are expecting one more resolution in the second quarter. Are you still expecting about $70 to $80 million total realized losses for the first half of this year? And how are those expectations expectations shaping up for the full year?

Anthony Marone

And I would stick with that expectation, as I mentioned in our remarks of the losses between the first and second quarter are coming in right on top of our year-end CECL reserves, which we think is a great validation of our valuation process. So I would stick to that that expectation as it relates to the back half of the year. I think he covered that earlier that it's going to be very dependent upon what kind of transactions that we see in the market, what kind of equity there is. So I don't know there's a specific number that I would focus on this point.

Operator

Thank you.
Jade Rahmani, KBW.

Jade Rahmani

Thank you very much. How is the higher rate outlook impacting borrowers? I attended craft C in January and everyone is ecstatic about the prospect for lower rates clearly that's changed. And if you could address multifamily in particular?

Katharine Keenan

Sure. Yes, it's a great question. And I think that obviously the expectation for the pace of rate cuts has been tempered but I think the important thing to keep in mind, we still have the view that the overall path of rates from here is downward. We're seeing that as we look across on inflation data that we see here internally is all happening at a slower pace, but the direction of travel has not changed.
And I think that importantly, when you think about the impact of rates. A lot of it has to do with market liquidity, spreads, overall cost of capital and despite a month of volatility or sort of going back and forth on expectations of rate cuts. We've continued to see liquidity continue in the market.
We've seen cost of capital come down. Spreads are normalizing across real estate lending markets, both public and private. And so that all has kept sort of the direction of travel in the same direction here, I think are more marginal situations, obviously, higher rates and in particular, the pace of rate cuts could have an impact in terms of carry costs in terms of conversations on on liquidity for sponsors.
I think that's going to be you're going to see that particularly in multifamily, more in the corner of the market with sponsors who were really less well capitalized. And it's going to create a lot of headlines, but it's not indicative of the overall market. So I think that the rate impact, obviously not helpful, but I think it's really about long-term rates, the direction of travel for rates and critically liquidity in the market.

Jade Rahmani

Thank you. I'm just thinking about the dividend. Cash flow from operations this quarter was below the dividend at $96.4 million. You mentioned the $16.8 million of interest that was accrued. That's now on nonaccrual. You received the cash, but that will be a detriment two earnings. And there other factors, including the smaller portfolio given repayments should we think about the dividend as being steady-state because it's based on a long-term premise about returns?
Or does it make sense to think about, you know, a lower dividend, which would give the company some additional liquidity and also some flexibility in managing through the current turbulence. And it seems that with a 13% yield in the stock, in fact is already pricing in dividend reduction one or your peers, similar type of company trade at around a 10% yield on its reduced dividend?

Anthony Marone

Thanks for the question, Jade. So maybe hit the first point quickly, we would point you to the DE before charge-offs as the metric more so than cash flow from operations, there's different things that impact the GAAP cash flow. And we think the best metric for folks to look at is the prior charge-offs when you're contextualizing the dividend. So, the $0.65 this quarter relative to the $0.62.
As it relates to the dividend, longer term, we've had the same dividend level, $0.62 for almost nine years. Some times we've borrowed on that level. Sometimes we've been slightly below that level. I think that shows that we've continued to set our dividend with a long-term view in mind. As I mentioned in the remarks, we're looking at this quarterly we discuss with our Board of Directors and what we think really drives the decision is where is the long-term earnings power of this company over time and what dividend makes sense relative to that. And we're not going to overreact to one quarter or another along the way.

Jade Rahmani

Thank you.

Operator

Rick Shane, JPMorgan.

Rick Shane

Hey, thank you. It's actually almost a perfect segue. So if we think about setting a dividend policy on distributable earnings ex of realized losses, essentially kind of takes credit out of the equation, which I'm not really convinced it is and the best way to look at the business. One of the outcomes of that is that, Tom, particularly given the start to '24, it looks like on book value will be down for the third year in a row.
You talk about sort of the sustainable dividend and the economics and given where book value is today to earn that dividend will require about a 10.5% return on capital or economic return, which is a pretty high watermark for you guys. So I really do wonder or I guess I would ask the question. Do you think that a 10- plus percent our returns given the near term headwind of nonaccruals and potentially as we move into '25 lower base rates and achievable long-term targets?

Katharine Keenan

I think it's a great question, and the way we look at it is very much in that way. So I think putting aside sort of short term and the encumbrance of nonaccruals, it really is about the long-term earnings power of the business, which relates to the equity value the book value at ROE. If you look back over the history of the business, we have very consistently generated a return that is about 900 basis points over base rates.
And so base rates are a really important part of the equation for most of the history of the business. Base rates have been well below even what we see as sort of the terminal rate when we look at the so for curve today. So I think that when you're thinking about where that normalized ROE could be over time, you need to think about sort of where are we levels off and obviously, there's other puts and takes in the overall business.
But ultimately, the impact of credit is where equity value or book value ultimately ends up. But obviously, that's how we take it into account. It's just less impactful. When you think about sort of this quarter or that quarter realized losses coming through the DE, it's about the long term equity and have the long-term earnings power of that equity.

Rick Shane

Got it. And given that, how should we think about the nature of the dividend for '24, given where we've started the year, should we assume that that will be a return of capital as opposed to a true dividend?

Anthony Marone

I think it's early in the year to give tax attributes for a dividend.

Rick Shane

Fair enough. Thanks, guys.

Katharine Keenan

Thanks so much.

Operator

That will conclude our question and answer session. At this time, I would like to turn the call back over to you, Mr. Hayes, for any additional or closing remarks.

Timothy Hayes

Thank you, Katie and everyone joining today's call and please reach out with any questions.