Blackstone Mortgage Trust, Inc.

Good day and welcome everyone to the Blackstone Mortgage Trust Fourth Order and Full Year 2022 Investor Call. At this time, all participants are in listen-only mode. If you require assistance at any time, please press star zero on your telephone and the coordinator will be happy to assist you. If you would like to ask a question during the call, please press star one. I would like to advise all parties that this conference is being recorded. And with that, let me hand it over to Tim Hayes, Vice President with Shareholder Relations. Please go ahead.

Thank you, and good morning, and welcome to Blackstone Mortgage Trust's fourth quarter and full year 2022 conference call. I'm joined today by Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, and Austin Pena, Executive Vice President of Investments. This morning, we filed our 10-K and issued a press release with 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 uncertain and outside of the company's control. Actual results may differ materially. For discussion of some of the risks that could affect our results, please see the risk factor 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-K. 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 gap net loss of 28 cents per share, while distributable earnings were 87 cents per share. A few weeks ago, we paid a dividend of 62 cents per share with respect to the fourth quarter. If you have any questions following today's call, please let me know. With that, I'll now turn things over to Katie.

Thanks, Tim. The snapshot of this quarter's earnings comes down to two key numbers. Eighty-seven cents per share are distributable earnings, an all-time record for BXMT. And 94 cents per share are net change to book value, reflecting the impact of our CECL reserve increase given the more challenging credit environment. The two are integrally related. The primary factor pressuring credit performance is also driving record income for our business, and that is the precipitous rise in short-term interest rates. 425 basis points over the course of 2022, the steepest tightening cycle in 50 years. They are also integrally related for our company. Our powerful earnings stream protects the lion's share of returns for our investors as we work through a credit cycle. Our dividend is delivering a nearly 10.5% current income yield, well in excess of the 3.5% impact on book value of our reserve increase. That dividend is well protected. 140% coverage this quarter, creating meaningful cushion against non-accruals. It is recurring. We've paid it for 30 straight quarters. And when we out-earn our dividend, the difference is retained as additional equity, further offsetting the impact of increased credit reserves on our book value. This interplay will persist. Rates are still increasing, and the Fed has made clear that they will stay high for some time. This will continue to pressure credit performance for the most challenged real estate assets. At the same time, elevated rates drive outsized earnings power and current return, a powerful hedge for businesses like ours. The broader market has figured this out. After a year of massive outflows from all sectors, inflows into fixed income so far in 2023 are robust. Credit assets are inherently defensive, and floating rate credit is even better today. This does not mean we will be immune from an economic slowdown. Few businesses can be. but we believe our business is well positioned to withstand it. We start with an asset base of loans made to best-in-class borrowers with significant subordinate equity. With the benefit of insights gleaned from the far-reaching Blackstone footprint, we then built up our defenses for a more difficult environment. Having seen cracks in the capital markets, we shifted BXMT to a more conservative posture at the outset of 2022. We raised the bar for our lending activities. focusing on our highest conviction themes and top-tier borrowers. We raised over a billion dollars of corporate capital, accumulating a deep well of liquidity. And we proactively worked with our existing borrowers to collect paydowns and recourse, reaping the benefits of our well-structured loans to enhance our credit cushion, while importantly, maintaining constructive relationships. At the same time, the impact of rates on carry costs, valuations, and market liquidity will continue to weigh on the most vulnerable assets. This is an important concept. The impact of the current economic and interest rate environment on real estate is uneven. Income growth in multifamily, industrial, and hospitality assets remains robust, and supply has become more constrained due to rising construction costs, providing a longer-term tailwind to fundamentals. Capital demand is even more concentrated in these best-performing assets, providing strong support to valuation. On the other hand, office is facing well-known headwinds from post-COVID work patterns and the slowing economy. But here, too, the outcomes are uneven. The segment is not monolithic, and basis and quality matter. There is scarcity in true Class A office space, as evidenced by record-setting rents at trophy assets. Meanwhile, commodity office in cities that were already experiencing slowing growth prior to COVID are facing the sharpest headwinds. Our reserves are concentrated in these assets, as are the bulk of our asset management efforts. The four loans with new specific reserves this quarter date back to well before COVID, 2017 on average, on assets that were well suited to their markets at the time. But COVID was not in the model, and three of these loans are backed by office properties that are bearing the brunt of the post-COVID realignment in demand, most notably a significant reduction in government tenant office utilization. The loans also share the commonality of a material change in sponsor wherewithal toward the assets. We are sober about the value declines impacting the most challenged of commodity office. On average, our reserves are 20% of our loan balance and imply asset value reductions of nearly 50%. But these assets are not typical of our broader office portfolio. 54% of our office loans are backed by assets that are newly built or recently substantially renovated, with an average vintage of 2021 and an average origination LTV of 60%. 34% of the office portfolio, most of the remainder, carries one or more significant credit-enhancing qualities, such as particularly low leverage, high debt yield, location in high-growth Sunbelt markets, or material additional sponsor equity commitment in the last year. Our four and five rated office loans round out the rest and represent only 5% of the overall BXMT portfolio, a small fraction where we have meaningfully increased our reserves to account for the credit challenges we see today. Our overall loan portfolio is 97% performing. This year, we collected $3.7 billion of repayments, nearly 50% of which were on office loans. Our borrowers contributed $675 million of incremental equity, continuing to invest in their assets. We captured nearly $350 million of partial paydowns or increased recourse on 17 existing loans, primarily office, resulting in an average 16% reduction in our basis. We were able to negotiate this deleveraging because our loans carry many structural protections, performance tests, cash flow sweeps, guarantees, and rate cap requirements. And of course, the most important protection for a lender is leverage plan. The insulation provided by our loan basis should not be overlooked. It would take lasting declines of 30 to 40% in real estate values for us to experience a loss at our position in the capital structure. And because the vast majority of our sponsors remain committed to their assets and have contributed more equity along the way, our basis has been further de-risked over time, enhancing the embedded credit protection in our portfolio. In 2020, we encountered an unprecedented disruption for the real estate market. We addressed that challenge much as we are addressing the delayed COVID impact on office today. Actively asset managing our loans, making appropriate risk rating and reserve adjustments, negotiating for credit enhancement, and providing time where appropriate. It is our job as a fundamental investor to look past the broad brush sentiment and judiciously and proactively manage our portfolio based on Blackstone's deep experience taking the long view. And where the impacts of asset underperformance, capital markets, and sponsor behavior combine to create a workout dynamic. We have the experience and the infrastructure as one of the largest owners of real estate in the world to identify and execute the best path for value preservation over time, a differentiator that will become increasingly important through the credit cycle. At the same time, we believe the origination environment will become still more opportunistic as values adjust and new capital is needed. We started the Blackstone debt business in the GFC. and we are uniquely positioned to access the once-in-a-cycle capital relief trades that create outsized returns on well-underwritten risk. In the current market, we have found pockets of attractive regular-way lending opportunities as well, exemplified by our nearly $700 million of second-half originations that were 70% industrial, with yields 173 basis points wider than our overall portfolio. But with transaction activity far below the norm, the addressable universe of standard new originations is smaller. And to stand up to the opportunity cost of our capital, new deals today must be more attractive from both a risk and return perspective. Most importantly, the outstanding earnings power we've already established with our existing portfolio means we can well afford to be patient. As we look ahead, the market outlook is mixed. We see some green shoots with the turn of the calendar. The CMBS market has reopened, with AAA spreads retracing 50 to 75% from historic wides in December. The corporate debt market is active. Banks, having cleared their stress tests, are thawing. Stabilizing long-term rates create support for asset values and rational long-term borrowing costs, an important dynamic that should lead to more liquid markets. But there are still headwinds. The accumulating pressure of sustained high interest rates geopolitical uncertainty, and slowing economies around the world. As a result, we continue to position the business to withstand a more challenging period while continuing to capitalize on the advantages that supported our performance this year, a well-performing portfolio, record earnings power, substantial liquidity, and a well-structured balance sheet. While the coming year may present challenges, challenge creates opportunity, and there is no platform better placed to navigate this environment than Blackstone. We are the largest alternative asset manager in the world with unparalleled information, experience, and relationships. We have a four-decade track record of performance for our investors in all market cycles. And here at BXMT, we look forward to continuing to deliver for our shareholders. With that, I'll turn it over to Tony.