Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q1 2024 Earnings Call Transcript

Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q1 2024 Earnings Call Transcript April 24, 2024

Blackstone Mortgage Trust, Inc. beats earnings expectations. Reported EPS is $1, expectations were $0.53. BXMT 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 First Quarter 2024 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 first quarter 2024 earnings conference call. I’m joined today by Tim Johnson, 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 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 $0.55 per share. A 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. With that, I’ll now turn things over to Katie.

Katie Keenan: Thanks Tim. A 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 produce $0.65 of distributable earnings prior to charge-off 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 maintain near record liquidity levels, ending the quarter at $1.7 billion. We continue to address the ongoing credit cycle and reset and office values with impact in both our earnings and reserve bills. 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.

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Q&A Session

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 revved-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 is workouts where we maintain a highly disciplined approach. No free options quickly taking control from sponsors if they are unwilling to demonstrate commitment. We resolved four of the 13 impairments we started the quarter with through 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, pass their extension tasks, or were extended with new equity or enhanced economics. We closed or agreed nine credit positive loan modification. We negotiated paid outs 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 with 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 capitalize the value add CapEx. In addition to the positive result for this collateral, the modification leaves us with virtually no ongoing WeWork exposure in our portfolio. Across Blackstone, we are highly constructive on multifamily given the long-term structural shortage of housing. Within BXMT, our multifamily portfolio ended the quarter at 100% performance [ph]. Our loans benefit from a weighted average LTV of 67% at origination and NOI is up 35% across the portfolio since then, across $1.5 billion of multi-loans with first quarter rate cap expirations. 100% of our borrowers renewed caps or replaced them with guarantees, a clear demonstration of commitment.

Our largest multifamily 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 four 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 sign. Exceptional lending opportunities are available today and given our strong liquidity position, we will selectively take advantage. We capitalize on one such opportunity posts quarter end, committing to a $69 million senior loan on a resort hotel at 39% LTV and a 16% debt yield, 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, BXMT 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, supporting our dividends of $0.62 per share. We added this loss adjusted metric to our disclosures this quarter, labeled as distributable earnings prior to charge-off, as we believe 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 recognize $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 DE but not GAAP earnings or our book value.

We acquired a legal title to our first REO asset, a newly renovated office campus located in a desirable sub market of Silicon Valley. This 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. The asset is recorded at its fair value of $60 million on our balance sheet, 35% lower than our private loan amount. Further on loan resolutions, we expect to complete the sale of another collateral asset underlying impaired office loan in the second quarter, with collective realized losses from the loan resolution discussed last quarter in line with our 12/31 reserves, validating the accuracy of our CECL process.