Blackstone Mortgage Trust, Inc.

Good day and welcome to the Blackstone Mortgage Trust first quarter 2023 investor call. Today's call is being recorded. If you require operator assistance at any time, please press star zero. At this time, all participants are in a listen-only mode. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead.

Good morning, and welcome everyone to Blackstone Mortgage Trust's first quarter 2023 conference call. I'm joined today by Katie Kanin, Chief Executive Officer, Tony Marrone, Chief Financial Officer, and Austin Pena, Executive Vice President of Investments. This morning, we filed our 10-Q 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 a discussion of some of the risks that could affect 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-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 gap net income of 68 cents per share, while distributable earnings were 79 cents per share. A few weeks ago, we paid a dividend of 62 cents per share with respect to the first 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 XMTs results this quarter stand in clear contrast to the negative macro backdrop. We reported 79 cents per share of distributable earnings, an increase of 27% year over year. Our earnings covered our dividend by a considerable margin of 127%. Our credit performance was steady with no defaults. Our CECL reserve increase was therefore modest and more than offset by the earnings we retained in excess of our dividend, maintaining our book value. And we ended the quarter with a substantial $1.6 billion of liquidity to insulate our balance sheet and capitalize on opportunities. More than a year into one of the most aggressive Fed tightening cycles in history, the resilience of our business continues to come through in our results. With the outsized income across the 97% of our loans that are performing, offsetting the challenges of the 3% that aren't. We've taken our reserves up substantially, 2.7 times over the last year. but the strong current dividend we've delivered far outstrips the book value impact of these reserves for our shareholders. On the current share price, that return dynamic is even more powerful. We're trading at a 14.7% dividend yield and an 18.7% earnings yield, with significant downside protection given the deep discount to book. Being a lender is distinct from being an equity owner. Today, the divergence is particularly meaningful in the economic experience along the way. As a floating rate lender, our cash flows are growing, and the interest we collect on each loan each payment date de-risks our return and that of our investors with every passing quarter. This is the power of current income, a critical differentiator for any business in a volatile period. And in addition to the significant cash flow generation of our portfolio, as a senior lender, we start with a 36-point margin of safety. Credit enhancement that ensures value declines are first absorbed by the equity before we feel any impact on our recovery. Put a different way, if the value of an asset is down 10, 20, or even 30%, the expected outcome is the same, full recovery of our loan. We are well aware of the liquidity challenges and credit headwinds in the market, and they are not new in the last 90 days. We proactively positioned the business to withstand them. starting with our first principles of low leverage floating rate senior lending and a well-structured match-funded balance sheet. And more recently, with the conservative strategic positioning we adopted a year ago. At the outset of 2022, we raised the bar on originations, shifted our asset management strategy to reduce credit risk at every opportunity, and executed on a plan to bolster liquidity ahead of the volatility. raising $1.2 billion of fresh capital during the year and terming out all of our corporate debt. We will not be immune from credit impact, especially in the office market. That is why we have booked significant reserves against our most challenged five-rated office loans, over 20% of carrying value on average, implying a roughly 50% reduction in real estate value from origination. We are realistic that there will be more challenges over the coming quarters, hence our watch list. but our four and five rated office loans remain just 7% of our overall portfolio. We have been extremely proactive in managing our office loans. On many of our four rated office deals, we are in active negotiations for additional equity commitments, something we have already achieved on 16 office loans in the last year, including two on the West Coast just in the last few weeks. This quarter, we were paid off on 700, excuse me, on 300 million of office loans, adding to the $1.5 billion of office repayments we collected last year, and reflecting the benefit of our basis and position as a senior lender. Twenty-five percent of our overall loan portfolio is U.S. office. While our pre-COVID underwriting did not contemplate today's hybrid work pressures, we've always been deliberate and selective about real estate quality, location, and sponsorships. As a result, we believe our office portfolio is meaningfully better positioned than the market as a whole. Across the top U.S. markets, less than 5% of office stock has been built since 2015. But our performing portfolio is nearly 50% post-2015 ground-up or substantially renovated new construction. In contrast to the capital-starved assets that populate the CMBS market, As a transitional lender, our assets by definition have gone through recent CapEx plans. This makes them better positioned to compete for tenants, particularly as capital for renovation and leasing costs becomes more scarce. And we have substantial concentration in Europe and Sunbelt markets, together 48% of our office portfolio, where fundamentals are more stable. Moreover, the office risk is deeply priced into our market valuation. We are trading today at .64 times book value. To dimension the loss this implies, it equates to an impairment of over 90% across all of our four and five rated office loans, effectively a full principal loss on first mortgage loans. This is extremely punitive, and credit outcomes take time, during which period we benefit from current income. For the five rated office loans we put on cost recovery as of the beginning of the year, We have already reduced our basis as we continued to collect interest across all of our loans, including these. And all else equal, our highly attractive dividend would remain covered by DE even if we placed all of our four-rated office on cost recovery as well. Across the overall portfolio, we are seeing strong performance. For multifamily, hotels, essential retail, and many other segments of the real estate market, cash flows are robust. Though rent growth has decelerated in some areas, absolute rents are still well above levels at origination. Rising costs and capital markets illiquidity have significantly reduced the new supply pipeline. And as a result, we see business plan progress as well as repayments, despite the highly illiquid environment. We had 10 upgrades this quarter, primarily multifamily and hotel loans. This included a four-rated New York City hotel, reflecting its strong cash flow growth over the last 12 months. We see the same recovery story across many of our four rated hotel loans, as well as in the one to three risk rating segment of our portfolio. Our upgrades also included one of our largest office loans, Burbank Studios, a Frank Gehry designed trophy new build asset where construction is substantially completed and WarnerMedia took occupancy. Unsurprisingly, given the environment, we saw some downgrades as well, primarily office loans in New York and San Francisco. All together, our weighted average risk rating has moved negligibly in the last year, reflecting improvement across many assets, balancing the deterioration we see in some segments of our office portfolio. Today, one in two rated loans represent 29% of our portfolio, the highest level since before COVID. Nearly 600 million of loans repaid this quarter, with more than half in office and the remainder virtually all in retail and hotel. While we continue to expect the absolute levels of repayments to be tempered, the diversification of our portfolio makes them likely to continue apace. New originations will also be measured, a result of the much slower transaction environment, as well as our preference for maintaining maximum optionality in this environment, which we can well afford to do given our robust earnings power. As a balance sheet lender, our earnings are not dependent on the pace of new originations. but rather on the interest income we derive from our well-invested portfolio. And that income is at near-record levels. There is no doubt the coming quarters will continue to be challenging. We expect short rates to remain elevated. The failures in the regional banking sector will likely tighten the regulatory environment for all banks. While long-term rates are lower, recession concerns are driving sustained dislocation in the capital markets. But for our business, we have not lost sight of the opportunity on the other side of this storm. Direct lending is tailor-made for this environment. Many banks will have less money to lend, and their capital will be more expensive. With quickly changing markets and more opaque underwriting conditions, fewer platforms will have the real-time knowledge to skillfully assess opportunities. Available lending capital will become more scarce and command a higher return. While the transaction environment is subdued at the moment, the passage of time will eventually push deals into the market. We started the Blackstone real estate debt business in the aftermath of the global financial crisis, stepping into the void of a similar realignment of the bank regulatory framework. Since then, we have built a $60 billion AUM platform with truly differentiated information, expertise, relationships, and investment talent. On the other side of this turmoil is a singular investment opportunity for our business, and no platform is better equipped to capitalize on it than Blackstone. With that, I'll turn the call over to Tony.