Good day, and welcome to the Blackstone Mortgage Trust First Quarter 2024 Investor Call. Today's conference is being recorded. 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 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 and 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 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 10-Q. This audiocast 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 $0.65 per share, respectively. 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.

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 hampered, the 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. We maintained near-record liquidity levels, ending the quarter at $1.7 billion. We continue to address the ongoing credit cycle and reset office values, impacting both our earnings and reserve build. Higher for longer rates, while good for income as a floating rate lender, put additional pressure on borrowers. However, more liquidity creates more transparency, prompting borrowers to more definitively pick a path for their assets—selling or refinancing where they see equity value and moving on where they don't. In both cases, this prompts capital structure resets at more appropriate levels. This process is the necessary transition point to achieve 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 enhanced our asset management, collecting $1.5 billion of incremental equity from our borrowers over the last 12 months, which enhances our credit position. We utilized the expertise of our experts from across the Blackstone real estate platform. We are actively seeking to accelerate portfolio turnover to transition through the credit cycle and return to our core lending business. Some of these conversations materialized as credit-enhancing modifications, while others ended as 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 4 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 as a top 3 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 or agreed on 9 credit-positive loan modifications and negotiated paydowns on 5 loans, representing 11% of the respective loan balance on average. 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 WeWork 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 significantly 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 this long-term structural shortage of housing. Within BXMT, our multifamily portfolio ended the quarter at 100% performing. Our loans benefit from a weighted average LTV of 67% at origination and NOIs 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 5 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 are also monitoring 4 loans on the watch list, but these together are just 1% of the portfolio. With these 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 impact 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 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 yield, which sets us up for 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.

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 dividend of $0.62 per share. 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 DE, but non-GAAP earnings or our book value. We acquired legal title to our first REO asset, a newly renovated office campus located in a desirable submarket 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 still limited. The asset is recorded at its fair value of $60 million on our balance sheet, 35% lower than our prior loan amount. Further on loan resolutions, we expect to complete the sale of another collateral asset underlying an impaired office line in the second quarter, with collective realized losses from the loan resolutions discussed last quarter, in line with our 12/31 reserves, validating the accuracy of our CECL process. As Katie noted earlier, loan resolutions are a focus for BXMT. They are 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 loans 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 this 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, $0.10 per share this quarter. This amount is not recognized in earnings but instead reduces our loan principal balance and supports its 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 BXMT's 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, taking into account various factors including interest rates, a range of credit outcomes, and the environment for new originations. More broadly on credit, we upgraded 9 loans this quarter, reflecting continued business plan progression within multifamily and hospitality assets and the resolution of 2 impaired loans that are now once again performing. For these 2 loans, borrowers injected new cash equity, and capital structures were reset to improve our basis and sustain strong current income generation. We also downgraded 13 loans this quarter, 7 of which were U.S. office loans that were placed on cost recovery and impaired. Our CECL reserves increased by $174 million quarter-over-quarter to $766 million, largely reflecting these new impaired loans. Our aggregate fees for reserves of $4.40 per share are embedded in our book value of $23.83 as of March 31. Importantly, our balance sheet remains solid and is built to withstand the pressure we face in the current market environment, with diversified funding sources, term match financing, and no capital market-driven mark-to-market provisions. These are the key tenets on which we constructed our balance sheet for BXMT's business launched in 2013 and continue to underpin our stability today. Over the past year, BXMT increased liquidity to near-record levels of $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 4 quarters and $3 million in Q1 specifically. Debt-to-equity has increased slightly this quarter to 3.8x as a result of higher CECL reserves but remains within our target range, and we remain in compliance with all financial covenants. Repayments continue to exceed loan fundings: $1 billion collected versus $353 million funded in Q1. This dynamic has yielded net cash proceeds that fortify our balance sheet and liquidity position for 5 consecutive quarters. While repayments can be lumpy, we see this overall trend continuing with clear indications of demand for our highest quality collateral, including an office. 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, a 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.

We'll go first to Doug Harter with UBS.

On the loan extensions that you completed this quarter, can you talk about how long the extensions were you typically granted?

Doug, are you referring to the extensions, the sort of credit positive modifications that we're doing, where we're getting paydowns and giving borrowers more time or specifically on the multifamily I referred to?

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

Sure. So it falls into a couple of categories. When you look at that pie chart, the loans that are extending and passing their tests, that's generally just a 1-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. 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, whether it is 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 it's typically 1 to 2 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 extensions.

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

Sure. Each one of these loans obviously has specific situations that can change over time, but it's largely U.S. 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. On the multifamily side, as I mentioned, you're really looking at temporary impacts of supply in certain markets, compounded by higher rates. But those are watch list assets, just 1% of the overall portfolio and where we expect it to be pretty marginal.

We'll go next to Stephen Laws with Raymond James.

Tony, I wanted to start with a question on the numbers. I think 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 7 of those are new non-accrual loans. Can you talk about the net impact and how we should see those 2 things balance out in the near term?

Sure. As we're resolving some of these, without getting into specific guidance on next quarter, in particular, you could expect to see a similar impact from moving loans to cost recovery as we've seen in the past. Given the magnitude of that portfolio, you could think of that as something in the $0.08 to $0.10 range is something that you might expect. On the resolutions, those will depend on how much leverage we have against them, so it will be a more muted impact—maybe a couple of cents per share. Importantly, when you're thinking about the earnings impact of the loans going across 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 and it's benefiting our basis, even though it's not coming through our DE metrics.

Great. Appreciate the clarification there. And then I know you've mentioned kind of one outlook or expectation for one resolution here in Q2. But as you look over the balance of the year and consider the current 5 rated loans for those specific reserves, how much of that I think it was $1.2 billion, maybe that was office. But how much of that do you think you can get resolved this calendar year? And how do we think about resolutions in the second half?

Yes, it's a great question. From a general overall market perspective, we are very focused on taking advantage of the fact that there is more liquidity and transparency in the market. Capital is coming back, including for office. Obviously, it's one of the loans we resolved this quarter, or 2 of the loans we resolved this quarter from a sale and restructuring perspective, where both office loans, we also took 1 REO. 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. The fact that there is more liquidity in the market and more turnover, more activity is ultimately the best thing to move us through this cycle and return to our core business. We have a couple of others that are in process, relatively near term. We're obviously all systems go in terms of trying to resolve these things as soon as possible. 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.

We'll go next to Sarah Barcomb with BTIG.

My question is related to leverage on watch list assets. Could you walk me through some of the resolutions of the 5 rated assets in CLOs? 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 5-rated assets?

Sure. Thinking about our general approach there, for most of the 5 rated assets, we generally have delevered them along the way. The typical advance rate on a vibrated asset is materially lower than our overall portfolio. We have 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 throughout the capital structure. Sometimes that involves buying portions of the loan out of the CLO or, in some cases, all of the loans out of CLOs; in other cases, we conclude that the best approach is to continue with an asset in the CLO. The decision is based on a careful evaluation of all factors to maximize the outcome for the overall company. As for capital, you have seen no material change in liquidity for these loans because obviously, impaired assets have been on the watch list for a while, and we're in constant communication with our lenders. Therefore, we don't foresee any significant changes in capital needs; it’s merely about ensuring each asset is optimally capitalized to enhance return and recovery value as we execute our business plan.

Okay. 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 million to $80 million total realized losses for the first half of this year? And how are those expectations shaping up for the full year?

I would stick with that expectation. As I mentioned in our remarks, the losses between the first and second quarter are coming in right on top of our year-end SEC reserves, which we think is a great validation of our valuation process, so I would stick to that expectation. As it relates to the back half of the year, I think Katie covered that earlier; it's going to be very dependent on what kind of transactions we see in the market and the liquidity available. Therefore, I don't have a specific number that I would focus on at this point.

We'll go next to Jade Rahmani with KBW.

How is the higher rate outlook impacting borrowers? I attended CREFC in January, and everyone was ecstatic about the prospect for lower rates. Clearly, that's changed. If you could address multifamily in particular.

Sure. Yes, it's a great question. Obviously, the expectation for the pace of rate cuts has been tempered. However, we still believe that the overall path of rates from here is downward. We're seeing that as we look across inflation data that we observe internally. It's all happening at a slower pace, but the direction of travel has not changed. Importantly, when you consider the impact of rates, a lot of it relates to market liquidity and spreads—the overall cost of capital. Despite a month of volatility in expectations around rate cuts, we've continued to see liquidity in the market, and we've seen the cost of capital decrease, with spreads normalizing across real estate lending markets, both public and private. Although higher interest rates may impact sponsors—especially less well-capitalized ones—the overall market remains solid, with long-term rates trending towards normalization. The focus on liquidity in the market will mitigate short-term rate impacts.

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 to earnings. There are 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 view a lower dividend that would give the company additional liquidity and flexibility to manage through current turbulence? It seems the stock is already pricing in a dividend reduction, with one of your peers, a similar type of company, trading around a 10% yield on its reduced dividend.

Thanks for the question, Jade. We would advise you to look at the distributable earnings before charge-offs as the metric rather than cash flow from operations. There are different factors impacting GAAP cash flow, and we believe the prior-to-charge-offs metric is the most informative for contextualizing the dividend. So the $0.65 this quarter relative to the $0.62 dividend is quite solid. As it relates to the long-term dividend policy, we've maintained the same dividend level of $0.62 for almost 9 years. Occasionally, we've far out earned it, while at other times we've been slightly below, which reflects our long-term outlook in determining the dividend. We're not inclined to overreact to any single quarter and instead consider the long-term earnings potential of the company when evaluating the dividend.

We'll go next to our last question from Rick Shane with JPMorgan.

It's actually almost a perfect segue. If we think about setting a dividend policy on distributable earnings excluding realized losses, that effectively takes credit out of the equation, which I'm not convinced is the best way to look at the business. One outcome of that is that particularly given the start to '24, it looks like book value will decline for the third consecutive year. You discussed the sustainable dividend and economics, noting that given where book value is today, earning that dividend would require about a 10.5% return on capital, or economic return, which is quite high for you guys. So I wonder if you believe that a 10-plus percent return, given the near-term headwind of non-accruals and potentially lower base rates into '25, is an achievable long-term target?

It's a great question. We view it similarly. Setting aside short-term impacts and the burden of non-accruals, the focus should be on the long-term earnings potential of the business, which ties directly to equity value, book value, and return on equity (ROE). Historically, we've consistently generated a return that's approximately 900 basis points over base rates. Notably, in most of our history, base rates have been significantly lower than current projections based on the SOFR curve. Thus, when considering our normalized ROE moving forward, we will need to account for where the ROE levels off. While there are ongoing dynamics affecting our business, remember, credit is crucial in determining equity value and book value over time. Hence, we take that context into account—the impact of realized losses on distributed earnings across specific quarters matters less when focusing on the equity long-term performance.

Got it. Given that, how should we think about the nature of the dividend for '24, considering where we've started the year? Should we assume that it will return capital rather than a true dividend?

I think it's early in the year to provide tax attributes for our dividend, if that's what you're asking.

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