Blackstone Mortgage Trust, Inc.

Good day and welcome to the Blackstone Mortgage Trust second quarter 2024 investor call. Today's call is being recorded. At this time, all participants are in a listen-only mode. If you require operator assistance at any time, please press star zero. If you'd 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 second quarter 2024 earnings conference call. I am 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 for 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 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 in 10-Q. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the second quarter, we reported a GAAP net loss of 35 cents per share, while distributable earnings and distributable earnings prior to charge-offs were 49 cents and 56 cents per share, respectively. A few weeks ago, we paid a dividend of 62 cents per share with respect to the second quarter. Additionally, our board of directors declared a dividend of 47 cents per share with respect to the third quarter and authorized a 150 million common stock repurchase program. The dividend is payable on October 15, 2024 to stockholders of record on September 30, 2024. Please let me know if you have any other questions following today's call. With that, I'll now turn things over to Katie.

Thanks, Tim. Since the onset of this credit cycle, we have strategically positioned BXMT to navigate a volatile period driven by the steep rise in interest rates and a secular shift in office demand. Entering 2024, we saw the pillars of the recovery taking shape with the stabilization of rates and thawing of capital markets. Greater transaction flow has created greater liquidity and greater transparency on reset values, accelerating repayments, resolutions, and in some cases, reserves, all of which we saw this quarter. Portfolio resolutions, of course, impact earnings, but are a necessary transition point to move through the cycle and free up capital for reinvestment and rebuilding of earnings power. This remains our primary focus as we position BXMT to maximize stockholder value over the long term. This quarter, we made significant progress. With a 90% performing portfolio at quarter end and the continued healing of the capital markets, much of our portfolio is well positioned for refinancing. Through the first half of the year, we've collected $1.7 billion of repayments through a variety of takeout lender profiles. We see increased acquisition and financing activity broadly across the market. And while office liquidity remains challenged, it is reemerging, with over $700 million of office repayments year to date. And repayment momentum is accelerating. We've collected more repayments so far in July, over $700 million, than we did for the entire second quarter, and we are tracking over $1 billion of incremental repayments across nearly 20 individual loans. And we see ongoing commitment from borrowers, supporting their assets where they continue to have equity value, even at today's reset valuation. To that end, in the last several months, we have closed on three major office modifications in London and West LA, bringing in significant borrower equity commitments totaling over $100 million subordinate to our basis. We had nine upgrades this quarter, mostly hospitality, industrial, and multifamily loans on the way to refinancing. And of the $5.1 billion of performing loans that reached a maturity or extension test in the first half, $4.6 billion either repaid, satisfied their extension test, or were extended with new equity commitments or economics. Multifamily and industrial loans are 99% performing, given favorable sector fundamentals. Credit issues remain concentrated in U.S. office, which, away from three pre-COVID hotel loans, represent virtually all of the considerable specific reserves we carry in book value. Altogether, we have specific reserves representing 29% of our impaired office assets, implying asset values down more than 50% from origination. And despite the substantial challenges in office, we are in a different environment today than we were last year. Our risk-rated one to two office assets, 26% of our U.S. office portfolio, are well positioned for takeout with several assets currently in the market for refi. Across most major U.S. markets, availability levels are stabilizing. Leasing activity is up this quarter in the U.S., in New York City, our largest market, and within our own portfolio. These dynamics do not preclude the need for capital structure resets to reflect today's values. but they do lay the groundwork for more transparency, liquidity, and therefore expedited resolution. Resolving challenged assets remains a key priority for the business. We provide no free options and exercise remedies when it is in the best interest of our shareholders. This approach brings forward decision points, resulting in periods of low non-performance and in some cases reserves. But it also allows us to utilize our deep real estate expertise to maximize value and exit outcomes. This quarter, we sold a Brooklyn office building with no seller financing, 14% above our mark. We impaired this asset last year, collected on a guarantee, facilitated the execution of a detenanting plan we determined would maximize exit value, and ultimately completed a sale to recover 85% of our pre-impairment OPP. Through the first half of the year, we resolved five non-performing assets altogether, and we are on track for several more in the coming quarters. While we have made significant progress, we expect near-term earnings to continue to be encumbered by assets on non-accrual as we work to maximize recovery. At the same time, we are highly focused on allocating capital to capture the historically attractive investment environment before us. Values have reset lower, affording a more attractive entry point. Emerging transaction activity is creating demand for new loans, while a pullback in bank capital has created a structural shift in the competitive landscape. Lending standards are therefore more conservative and spreads are wider. And of course, base rates remain high, supporting strong all-in returns for lenders. We also see compelling valuations in our own capital structure, effectively buying into a largely performing loan portfolio at a significant discount, which our board has recently authorized through a $150 million stock buyback plan. Delivering current income continues to be an important priority for BXMT. But stockholder return is also well served by balancing current payout with optimization of book value and long-term earnings potential through our capital allocation decisions. As we've commented previously, our board evaluates the dividend each quarter, focused on the longer-term earnings power of the business, considering a variety of factors, including interest rates, a range of credit outcomes, and the market environment. With this in mind, our board has declared a third quarter dividend of 47 cents per share, which we believe reflects a sustainable level relative to long-term earnings power. While we are likely to have quarters where distributable earnings vary from this level depending on the timing of asset impairments and resolutions, we also see many upside scenarios over time. This adjustment allows us to strategically deploy more capital, generating incremental earnings while still delivering continued current income yields, which at our reset dividend remains a favorable 10% on our closing price yesterday. With green shoots emerging in the market, a more predictable macro outlook, and increasing transaction flow, coupled with our capital allocation strategy, we expect the second half of 2024 to be more active on the investment front. We've already gotten started with our recent new origination and capital structure buyback activity. And more broadly within the Blackstone real estate debt platform, we have originated or acquired over $8 billion in the last six months. Our continued position as a market leader affords us differentiated insight and access to new loan opportunities across products and geographies. With BSMT's strong balance sheet position and continued repayments, we expect to capitalize on these dynamics more actively going forward, planting the seeds to enhance our overall earnings generation. To that end, we are also constantly evaluating ways to innovate our business model and leverage our market presence to benefit our investors and clients. This quarter, we announced a partnership with M&T Realty Capital to provide borrowers access to multifamily agency loan execution through M&T's Fannie Mae Dust and Freddie Mac Optigo lending platforms. This is an important evolution in BXMT's business model, adding the potential for capital-light, long-duration income over time, with essentially no incremental cost. And at the same time, it is a natural complement to our bridge multifamily lending business. Many of BXMT's $10 billion of bridge multiloans have been refinanced by Fannie Mae and Freddie Mac over the years. We had six in July alone. And given Blackstone's vast multifamily portfolio, we have deep knowledge of market fundamentals. This partnership affords BXMT the ability to capitalize on our multifamily market presence and generate fee and servicing income while partnering with the highly experienced team at M&T. While it will take time to accumulate a portfolio that drives meaningful earnings impact, we are excited about this investment in the long-term positioning of the BXMT business. Looking out to the back half of the year, we are encouraged by the direction of travel. Inflation is decelerating, with lower rates the base case. Markets continue to heal, with corporate debt and CMBS issuance both up meaningfully year over year. And the steep drop-off in new supply across real estate sectors is a strong catalyst for long-term fundamental performance. With these tailwinds in place and the competitive advantages of our platform as strong as ever, BXMT is well positioned to continue navigating the cycle and capturing the market opportunity going forward. Thank you, and with that, I'll turn things over to Tony.