Earnings Call Transcript - BXMT Q4 2024

Operator, Operator

Good day, and welcome to the Blackstone Mortgage Trust Fourth Quarter and Full Year 2024 Investor Call. Today's conference 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 would like to ask a question, please ensure your device is unmuted 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.

Timothy Hayes, Vice President, Shareholder Relations

Good morning. Welcome everyone to Blackstone Mortgage Trust Fourth Quarter and Full Year 2024 Earnings 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 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 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-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 GAAP net income of $0.21 per share, distributable earnings of negative $1.25 per share. Distributable earnings prior to charge-offs were $0.44 per share. A few weeks ago, we paid a dividend of $0.47 per share with respect to the fourth quarter. Let me know if you have any questions following today's call. With that, I'll now turn things over to Katie.

Katie Keenan, CEO

Thanks, Tim. The fourth quarter marked a meaningful positive inflection point for Blackstone Mortgage Trust. We resolved $1.1 billion or 49% of our impaired loans, proving our view that credit performance troughed last quarter and bringing our performing loan percentage to 93% today. Book value ended the quarter within 1% of 3Q levels, the combined result of limited further credit migration and upside gains on impaired asset resolutions above our marks. Robust repayments continued with $1.6 billion in the quarter, bringing us to $5.2 billion for the year, including $2 billion of office. We’ve seen another $1.6 billion year to date, bringing our liquidity to a record $1.9 billion today. Our capital markets access continues to prove exceptional. We completed the largest corporate debt transaction in our history, a $1.1 billion deal, which turned out our maturities and attracted robust demand, being four times oversubscribed. Simultaneously, we reduced overall debt to equity to 3.5 times, our lowest level in eleven quarters. With all the pillars in place—a healthy balance sheet, plenty of liquidity, a more normalized credit outlook, and a historically attractive environment for real estate lending—we've turned our attention to offense. We enter 2025 poised for portfolio and earnings growth with $2 billion of pipeline closed or in closing today. While not V-shaped, we are squarely amidst a real estate recovery. Values have shown four straight quarters of improvement. Through the end of last year and coming into the first quarter, we've seen a meaningful return of liquidity across real estate markets. Despite the uptick in long rates, a robust macroeconomic backdrop and strong fund flows have driven tightening risk premium across the credit space, reducing the cost of capital and creating a solid baseline for real estate markets. The MBS issuance, which eclipsed $100 billion last year, is off to a strong start in 2025, with $20 billion already closed, and another $20 billion anticipated in the coming weeks, including the sixth office SaaS deal this year. Transaction volumes were up 30% quarter over quarter, representing a 72% increase from the 1Q24 trough. Underpinning the recovery are solid real estate fundamentals, with demand bolstered by resilient economic activity and new supply roughly two-thirds lower than recent peak levels across core asset classes, which is a powerful long-term driver of performance. We believe real estate credit offers highly compelling relative value. Reset values mean better credit, higher debt yields, and more cash flow coverage for our loans. Spreads, while compressing, remain attractive, especially relative to credit alternatives which are pushing all-time tight. With elevated base rates, all-in yields are high. Moreover, within Blackstone Mortgage Trust, our returns are generated based on the difference between where we lend and where we borrow. The cost of capital for more stabilized senior risk is compressing most rapidly. With market-leading access to a diversified base of bank lenders and securitized markets, we are uniquely positioned to capitalize on this dynamic and drive incrementally improving net interest margin. This backdrop offers a fruitful environment for new investment I'll cover shortly. It also spells a meaningful uptick in repayments and resolutions, accelerating the turnover of our portfolio. Our $5.2 billion of repayments this year were 36% above last year's levels and indeed represent our second-highest repayment year ever. Notably, our office loans continue to repay roughly proportionately to our overall portfolio. We have therefore reduced our office exposure by over $3 billion since the beginning of 2022 through repayments of 27 individual loans, and that's before $1.5 billion of office repayments so far this year. Our loan portfolio continues to show meaningful liquidity, powerful evidence of the resilient credit of the vast majority of our pre-rate hike portfolio, and the institutional demand for our high-quality collateral. This is now a cycle-tested business multiple times over. Through two years of difficult market conditions, our loans continued to repay, our liability structure proved durable, and we maintained near-record liquidity levels throughout. The stability of our balance sheet through this extended credit cycle allowed for patience, affording us the flexibility to proactively manage challenged assets and resolve or monetize them now when markets are healthier rather than fire selling at the illiquid depths of the cycle. Case in point, the sale of New York City and West LA office buildings this quarter through competitive institutional bidding processes, ultimately selling within 10% of our par balance on average. Overall, we resolved ten impaired loans this quarter, generating $32 million of book value as sale proceeds came in above our aggregate reserve levels. On our REO assets, we see longer-term upside potential as we implement business plans in coordination with our highly experienced real estate asset management team. Despite rates moving at the end of the year, we've seen no slowdown in the pace of our resolution, with several deals closing at year-end and an incremental $400 million of resolution closed during closing in 1Q. We believe credit performance troughed in the third quarter and while it won't be linear, the direction of travel is clearly positive. More broadly, the substantial portfolio turnover underway will enable us over time to shift our asset base with larger concentration in new investments originated at reset bases in today's attractive credit environment. Depending on the pace of repayments, we estimate that nearly 40% of our year-end portfolio could constitute 2025 origination. We're off to a great start with a robust global pipeline. Our current $2 billion of closed and committed deals are concentrated in strong lending sectors like multifamily, industrial, and self-storage, with levered yields averaging more than 900 basis points over base rates, and safe overall credit characteristics. We are leveraging our sourcing capabilities to drive differentiated opportunities. In addition to nine deals in the US, our pipeline is over 60% Canada, Europe, UK, and Australia, markets which offer attractive relative value, including a $100 million cash-flowing industrial portfolio in Europe, and a $140 million multifamily loan in Australia, both around 100 basis points wide of comparable US transaction pricing. The Blackstone real estate debt business is the largest alternative manager of real estate credit in the world, which positions Blackstone Mortgage Trust to best capture the investment opportunity today. With over 150 real estate debt professionals, over $100 billion of historical originations, and relationships with over 500 borrowers driving 84% repeat business, our ability to access an attractive pipeline of new deals is exceptional. This is the platform that is uniquely positioned to originate the Spiral loan, a flagship Blackstone Mortgage Trust loan, and the largest in our portfolio, which after seven years, repaid earlier this month. It was a $1.3 billion senior construction loan originated in 2018 at 28% pre-leased and 50% loan to cost, now 94% leased. The loan repaid through a banner CMBS execution, which was five times oversubscribed, priced at the low 100 spread, and yielded proceeds two times our basis, implying an exit LTV on our loan of 29%. While larger and somewhat lower leverage than our typical office loan, this loan shares many qualities with our overall origination philosophy: high-quality real estate that outperforms, strong institutional sponsorship, and moderate leverage. Liquidity has definitively returned for high-quality office, and with more than 75% of our one to three risk-rated office being newer vintage, our portfolio should benefit. As we look ahead, we are leveraging the same Black platform advantages and entrepreneurial DNA to look across the real estate credit universe and identify the best-suited incremental strategic opportunities for our business. With interest rates remaining elevated, a positive outlook for the US consumer, and essential needs-based retail showing resilient performance, we see a compelling setup today to build a credit-oriented diversified net lease strategy. This business produces stable, long-duration cash flows with the potential for value appreciation, elements that naturally complement Blackstone Mortgage Trust's core floating rate lending business. We believe we can acquire assets at a significant discount to replacement cost, with ten to twenty-year leases and strong EBITDAR coverage generated by established businesses. Over time, we expect to curate a diversified portfolio, generating compelling cash yields with durability. We have a differentiated approach, building our business from scratch through a dedicated platform established in partnership with our real estate equity colleagues and an experienced handpicked team. While this strategy will take time to ramp, it is meaningfully scalable, with a total addressable market in the trillions. Furthermore, it brings the benefit of adding another attractive outlet for capital deployment, further expanding the scope of Blackstone Mortgage Trust's new investment pipeline, positioning the company to capture the best relative value across real estate credit markets. In closing, we are optimistic about the trajectory of the real estate cycle and our business. The composition of our portfolio will be enhanced through resolutions, repayments, and redeployment of capital into attractive new opportunities. These drivers have put Blackstone Mortgage Trust on a clear path to rebuilding earnings power over the course of the year and beyond. The credit pressures are easing and at the same time, we are building the potential for long-term value creation, including the net lease and agency strategies and the upside we now own in our REO assets, where valuation resets have been reflected in book value, but we see the potential for upside through value-add as the market recovers. The entry point for Blackstone Mortgage Trust remains highly attractive. The S&P is near all-time highs, corporate bond spreads near all-time highs, and we continue to see retracement and valuations across the real estate market. Commercial mortgage rate dividend yield spreads to base rates are virtually the only liquid real estate credit product that has not tightened materially since the Fed's first rate cut in September. Blackstone Mortgage Trust today trades at a 10% dividend yield and 87% of post-reserve book value, offering the opportunity to buy into a growing portfolio at a substantial discount, and collect meaningful current income with valuation upside. We're expressing this view actively with over $50 million of stock buybacks in the last three months. Before I close, I want to thank our team for their tremendous efforts, taking a tireless unrelenting approach to maximizing outcomes on behalf of our investors. Those efforts put Blackstone Mortgage Trust on excellent footing for growth into an attractive market. I also want to welcome Marcin Urbasek, who I think is well known and highly regarded by many on this call, as he joins our growing Blackstone Mortgage Trust team. Thank you. And with that, I will turn the call over to Tony.

Tony Marone, CFO

Thank you, Katie, and good morning, everyone. I want to begin by also welcoming Marcin to the team who brings significant mortgage REIT experience and deepens our finance team's bench as Blackstone Mortgage Trust enters this next phase of the cycle. Turning to our fourth quarter results, Blackstone Mortgage Trust reported GAAP net income of $0.21 per share and distributable earnings or DE of negative $1.25 per share. Notably, DE this quarter included $294 million or $1.69 per share of charge-offs related to impaired loan resolution. These resolutions were achieved at levels above our aggregate carrying values and will result in more loans resolved in Q4 than we anticipated on our call last quarter. While these resolutions crystallized DE losses already reflected in our CECL reserves and book value, more importantly, they are a leading indicator of our ability to recapture earnings from this capital forward, which is a natural tailwind to dividend coverage. Although headline DE was negative, the long-term benefits from the substantial progress we have made in resolving our challenged assets far outweigh that short-term impact. With continued strong momentum in loan resolutions and a growing pipeline of new investments, we expect our earnings will grow and more closely align to their longer-term potential as we progress through 2025. Excluding the impact from CECL reserve charge-offs, fourth quarter DE was $0.44 per share, which notably included $0.02 per share related to startup costs incurred in connection with our new net lease strategy and the acceleration of deferred financing cost amortization resulting from the retirement of our 2026 term loan B. We ended the quarter with a book value of $21.87 per share, which benefited from a $32 million reversal of CECL reserve as we executed loan resolutions at an aggregate premium to our carrying value, and from $18 million of common stock repurchased at an average share price of $17.91, nearly a $4 discount to our book value. All in, book value was down just 1% from the third quarter, reflecting the positive market trends driving strong credit performance broadly throughout our portfolio. Importantly, factoring the $0.47 per share dividend paid during the quarter, we delivered a positive 1% economic return to our stockholders. Digging deeper into credit, portfolio performance improved to 93%, up 5% quarter over quarter and the highest level since 4Q23. This improvement was primarily driven by $1.1 billion of impaired loan resolution, representing 49% of the total impaired loan balance as of September 30. These resolutions included four loan sales and PPOs, with realized prices at an 8% premium to our aggregate carrying value, which is an important benefit to our stockholders and validates the accuracy of our reserves. Upon exit, we immediately experienced an earnings benefit by repaying the related financing, thereby reducing associated interest expense, and we expect to see further earnings uplift as we redeploy this capital into new investments. We also completed two loan restructurings, receiving $96 million of incremental subordinate capital from borrowers to significantly de-risk these positions, and acquired four REO assets—all transactions where our basis has been reset to reflect the current environment. Our REO portfolio now stands at $588 million across seven investments and generated $1.6 million of DE in the fourth quarter, which excludes the impact of depreciation and amortization included in GAAP results. Looking ahead, we expect the loan resolutions completed in the fourth quarter will have a positive earnings impact over time as capital is fully redeployed and rotated into new investments in today's attractive environment. We see additional near-term and long-term earnings tailwind through loan resolutions, with another $400 million closed or in closing so far this quarter, bringing aggregate resolutions to over two-thirds of the three-quarter peak, and continued progress on the remainder. For context, our thirteen remaining impaired loans as of December 31 were burdened by $0.10 per share of quarterly interest expense last quarter. Credit trends were stable this quarter, with five upgrades more than offsetting four downgrades. Included in the upgrades was a four risk-rated multifamily loan, where the borrower committed new cash equity, purchased a new rate cap, and continues to execute their business plan. In downgrade, we had one new impairment, a leased UK office loan with long-term development potential where we have visibility into a near-term loan resolution. Overall, our CECL reserve ended the quarter at $746 million, down 27% quarter over quarter, reflecting the impaired loan resolutions and otherwise generally stable credit in our portfolio. We received $1.6 billion of repayments in Q4, including a four risk-rated multifamily loan, and $5.2 billion of repayments throughout 2024, including $2 billion of office loans, which is a strong indication of performance and institutional liquidity for Blackstone Mortgage Trust's loan collateral in outstanding challenging market conditions. So far in 2025, we've collected another $1.6 billion of repayments. In addition to our strong liquidity, nearly $7 billion of available financing capacity positions Blackstone Mortgage Trust well to redeploy low repayment proceeds and capitalize on our growing pipeline of new investment opportunities. To that end, Blackstone Mortgage Trust closed $186 million of loan originations in Q4, largely concentrated in multifamily and industrial sectors, and has over $2 billion of loans closed or in closing so far in the first quarter of 2025. With capital deployment lagging repayments, we expect near-term portfolio contraction to modestly weigh on DE. Given the robust investment pipeline, we see our portfolio balance stabilizing in Q1 and then growing from there. Additionally, the first four loans closed in our M&T multifamily agency lending partner this quarter, generating fee income and creating book value for our participation in the underlying MSRs, all with virtually no incremental expense or capital outlay from the exit date. We continue to maintain a best-in-class balance sheet with well-structured term match financings and no capital markets mark-to-market provision. We reduced debt to equity to 3.5 times from 3.8 times quarter over quarter, which is squarely within our target range of three to four times, while maintaining strong liquidity of $1.5 billion. The ability of our balance sheet, which has been borne out over the recent credit cycle, continues to be a critical differentiator that consistently affords Blackstone Mortgage Trust patience and optionality to maximize economic outcomes for our stockholders. This asset will support the next phase of growth for our business. We completed a $1.1 billion corporate debt transaction in November, which added to liquidity and meaningfully extended the maturity profile of our corporate liabilities. The deal was met with strong institutional demand and emphasized Blackstone Mortgage Trust's broad access to capital markets. Along this line, we see additional opportunities to capitalize on tighter financing spreads to drive further enhancements to our capital structure across several markets, notably in CLOs where we have been an opportunistic issuer in the past and today are building a strong pipeline of new investments that are a natural fit for that market. In closing, we are proud of our 2024 results and the proactive measures we have taken to resolve the majority of our challenged assets while maintaining a strong balance sheet and robust liquidity, positioning Blackstone Mortgage Trust for growth in 2025. While earnings today reflect the natural near-term headwinds from portfolio turnover, the tailwinds of the market recovery, our growing investment pipeline, and our expansion into new diversified investments all combine to generate a positive forward trajectory for our business.

Operator, Operator

Thank you. As a reminder, please press star one to ask a question. We ask you to limit yourself to one question and one follow-up question to allow as many callers to join the queue as possible. We'll take our first question from Stephen Laws with Raymond James.

Stephen Laws, Analyst

Hi. Good morning. Congratulations. You guys got a lot done at the end of the year and year to date as well. Katie, I want to start with a few moving parts. And, you know, I think the towards the end of the prepared remarks about the portfolio balance stabilizing in Q1 and growing helps provide some color. But I'm curious to think about an earnings bridge in the beginning of the year. We think about earnings troughing, you know, you've had additional repayments, you know, one new NPL at year-end. But you've also got the benefit of some, you know, financing on resolved non-accruals that goes away as well as a couple of penny drag from some one-time expenses in Q4. So just trying to think about, you know, what is the, you know, ex-losses, earnings power of the portfolio earlier in the year and how do we think about that ramping as we move forward?

Katie Keenan, CEO

Sure. So I think that, you know, the way we think about it, we had obviously $0.44 in the fourth quarter, $0.46 if you take out, you know, the amortization of cost on the refi and the startup costs. From there, you know, the most impactful driver of earnings is resolution, and we're executing. We have a billion dollars that, you know, over the course of the quarter, another $400 million in closing. The other key driver and, you know, impact in terms of ins and outs, you know, from last quarter to this quarter is repayments. We received a lot. It's a great sign for credit and we're now reinvesting those proceeds with $2 billion closer in closing and growth capacity beyond that. So, you know, both resolutions and reinvestments obviously will take a quarter to see the full run rate impact. I think we're in the trough now, and we'll come through it as we get into the second quarter.

Stephen Laws, Analyst

Great. And that leads to my follow-up about the resolution. I think you mentioned $400 million. As we think about the remaining $1.5 billion of five-rated loans, is the $400 million what you think about maybe as first-half resolution? Is that more first quarter? How do we think about the, you know, if we assume for now no new five-rated loans, how do we think about that existing balance of five-rated loans kind of unwinding over the year?

Katie Keenan, CEO

Yeah. So, you know, the $400 million is assets that we have very clear visibility into, you know, hopefully near-term closings. These things can always move around a bit. But, you know, those are deals that we're, you know, on the ten or fifteen-yard line on. So I would hope that those would be first quarter, and hopefully, we'll have more beyond that in the first half of the year at the risk of, you know, over-promising for my asset management team, but we're extremely focused on getting our impaired loan balance down as quickly as possible, and we're working on every single one of them. The $400 million, it's really just deals that we have effectively, you know, signed and in closing.

Operator, Operator

We'll take our next question from Steve Delaney with Citizens JMP Securities.

Steve Delaney, Analyst

Okay. Thanks. Good morning, everyone, and hello again, Marcin. From my two cents in on that. Katie, if we look at the realized losses, they ran I think I calculated about 13% of UPB. So if we think about the, you know, the $400 million or whatever else is, you know, in the five plays out in, say, the first half of this year, is something in that magnitude, let's just call it round number, like, 13%, is that a reasonable assumed loss on UPB when you resolve these remaining five?

Katie Keenan, CEO

Yeah. What I would point you to, thanks for the question. If you look at our CECL reserves, they tend to be kind of in the mid-twenties. And we're resolving around that mark or slightly better. So I think the 13% we could take offline. I'm not sure exactly the math you're doing, but I would look to our CECL reserves on the which have mostly been down to be accurate or a little bit conservative, and think about that as your assumption for where things play out on future resolutions.

Steve Delaney, Analyst

Okay. I'm asking then off, and I will follow-up on that just to be clear. I had like, $140 million of realized losses on $1.1 billion. And I was at I took $0.81 times 173.5 million shares. But I'll follow-up on that, Tony. Hey, just on the buyback, certainly applaud that. Would you expect that if the stock remains, say, under 85% of book value, should we expect those to continue and would the board do you think the board will consider increasing it once the current authorization is expired? Or has been used up. Thank you.

Katie Keenan, CEO

Sure. Thank you. So, you know, I think our view on, you know, the stock and the economic, you know, the economic proposition on offer is clear. I covered that in my remarks. We have $90 million left on our stock buyback authorization. We also have almost $2 billion of liquidity today, and we're looking to actively deploy into, you know, a myriad of different real estate credit investment opportunities. So I would certainly see the stock as very much, you know, on that list.

Operator, Operator

Thank you. We'll take our question from Tom Catherwood with BTIG.

Tom Catherwood, Analyst

Thanks, and good morning, everybody. Katie, you want clarification here. I think I heard you mention that 40% of the portfolio could be 2025 originations. And if we do a quick back of the envelope and assume the same repayment level as 2024, that would imply something like $10 billion of originations in 2025. Are we thinking of this correctly?

Katie Keenan, CEO

So I think that when we think about our repayment projections for this year, you know, we had $5.2 billion last year, but I think we anticipate that this year will probably be higher than that. That's really a factor of what I mentioned, I think on the last call. There's an element going on right now of a catch-up in our portfolio. We have a lot of loans that are performing well that are in a place in their business plans where they can be repaid. Now that the capital markets have clearly normalized and a lot of liquidity has returned, you know, we would expect a lot of that portfolio to turn over and then for us to then reinvest those proceeds. I think that, you know, we would expect a higher repayment level this year and therefore a higher reinvestment level this year, sort of getting towards that 40% number.

Tom Catherwood, Analyst

Got it. It's really helpful. Thank you for that. Understood. And then switching over to your comments on net leased investing. I know you mentioned total addressable market in the trillions, but this is also a sector with some of the most sophisticated investment platforms anywhere. How would Blackstone Mortgage Trust's approach differentiate itself from that of the other major institutional players in the net lease sector?

Katie Keenan, CEO

Yeah. It's a great question. You know, we think that there are obviously some very high-quality peers in the space, but it is also a very large market and an extremely granular market. When we think about building this platform, you know, a little bit, I think, will go a long way, and we'll look to grow it over time. We’re not in a place where we have, you know, a multibillion-dollar portfolio where we need to be buying, you know, a billion dollars a year or a quarter to show growth. So I think that we can be thoughtful, but also build up a portfolio that is granular, diversified, well protected from a credit perspective, and additive, very complementary to the earnings profile of our overall business. We’re doing that with a thoughtful and well-conceived approach and a very high-quality experienced platform.

Tom Catherwood, Analyst

Got it. Appreciate the answers. Thanks, everyone.

Operator, Operator

Thank you. We'll go next to Doug Harter with UBS.

Doug Harter, Analyst

Thanks. Something you could talk about the types of spreads or IRRs you expect to get on the new loans that you'll be doing in Q1 and all of 2025?

Austin Pena, Executive Vice President of Investments

Sure. Austin, you want to take that one? Yeah. Thanks, Doug. In terms of spreads, you know, I think as Katie alluded to, spreads have come in, but importantly, so have the spreads on the liability side. So when you look at the levered spreads or the IRRs as you referred to, they're really quite consistent with what we've seen historically, you know, around 900 or 1000 over. Importantly, when we look at the risk-adjusted returns today on the investments in our pipeline, we see them as quite compelling, really given the credit profile of the deals in the pipeline. Today, we're making loans at reset bases that reflect today's valuation environments. We feel very good about the risk-adjusted returns we are able to create right now.

Doug Harter, Analyst

I appreciate that. And then as you think about, you know, as the portfolio regrows, how are you thinking about, you know, what type of leverage level you want to be running this business at as the market begins to heal?

Katie Keenan, CEO

Absolutely. So, you know, I think that the performance of our balance sheet and the stability and durability that we've seen over the last couple of years has proven out that the strategy we've run for this business, making senior first mortgage loans at a reasonable leverage and having a leverage level of sort of between three and four times has always been our target. We were three and a half times at the end of the year. We've gotten a lot of repayments since then. We're squarely at the mid to lower end of that range, and we feel good about the prospect of portfolio growth within our target level.

Operator, Operator

Thank you. We'll take our next question from Jade Rahmani with KBW.

Jade Rahmani, Analyst

Thank you very much. Just wondering in terms of rates, has that created any new potential credit challenges just merely as a result of the rate volatility we've seen, or do you feel like you have your arms around the problem set at this point?

Katie Keenan, CEO

Yeah. I think it's a question we think a lot about. The couple of things we see, you know, first of all, we haven't seen any material impact of the rate uptick on repayments. We had a strong fourth quarter and then another significant amount of repayment so far in the first quarter. We monitor the capital markets obviously on a daily basis. We're actively investing in them. There has not been a meaningful change. If anything, the slight uptick in rates has driven more capital into the credit markets, creating more liquidity for repayments, which benefits the credit profile of our portfolio. We have 130, 150 loans, and there's always a little bit of movement, which is normal, and we should expect that. The direction of travel is clearly positive, and that liquidity we see ongoing in the market will likely continue to result in repayments and resolutions.

Jade Rahmani, Analyst

Thank you very much. And then on the net lease strategy, is one component the eventual enabling of access to unsecured debt as one of your peers definitely has done. In addition, how quickly do you think you can ramp up this strategy?

Katie Keenan, CEO

Yeah. So I think that access to different financing markets with the net lease strategy, whether it is the ABS market, other types of securitized markets, or a broader corporate debt strategy, is one of the reasons that we like that business in addition to just the fundamental yields that we're acquiring assets at and the credit profile we can generate there. We're certainly thinking about continuing to expand the diversification and flexibility of our balance sheet, which has always been a big strength of how we deliver sort of consistent returns over time, whether that's unsecured or ABS securitized markets, you know, that's something we'll be thinking about as we ramp this up.

Jade Rahmani, Analyst

And just the follow-up about timing to scale it.

Katie Keenan, CEO

Yeah. I mean, we really like the opportunity for scaling this platform. We have a couple of deals that I think closed today or this week. We're actively out there. We will be guided by the investment opportunities as we always have been. I don’t want to put a number on it, as the key is finding great deals we like and building an appropriate portfolio allocation. We're going to do that with regard to thinking about the underwriting cash flow coverage, the structure of the leases, the performance of the underlying businesses, and be very thoughtful about building a durable, resilient, and diversified high-quality portfolio with credits that we like. We hope to ramp quickly, but, you know, this is also a build. This isn't a buy, and we want to do it the right way.

Operator, Operator

Thank you. We'll go next to Harsh Hemnani with Green Street.

Harsh Hemnani, Analyst

Thank you. You mentioned sort of the improving fundamental backdrop and the improving capital market liquidity for office. It seems like about 4% of 2025 originations are in that sector. I want to ask about the willingness to expand into office, given the improving fundamental backdrop for high-quality office in 2025.

Austin Pena, Executive Vice President of Investments

Yeah. Harsh, it's Austin. I can take that one. You know, we've been very consistent throughout this cycle about our belief in high-quality office, which really is our performing. You're seeing that today in the capital markets, obviously, as Katie alluded to earlier. The bar for us is high for new investment in office. But as you noted, we are seeing opportunities to lend on really high-quality, well-leased assets at a very low basis. Overall, office exposure for us continues to come down. We don’t really see it meaningfully growing from here, but we are going to pursue opportunities that we think make sense and generate attractive returns on high-quality assets.

Harsh Hemnani, Analyst

Got it. And then is there sort of a percentage of your portfolio that you would feel comfortable with in terms of office exposure?

Katie Keenan, CEO

You know, I think it really comes down to the opportunities that we see. I mean, if we could do more deals like the Spiral, we absolutely would. That said, as Austin mentioned, the aperture of the type of office opportunities and where we see performance is quite narrow, and we're going to be extremely selective. I think we would expect that exposure within our portfolio to come down over time because, obviously, we're getting a lot of repayments and we're going to be very selective on new stuff. That's the general approach we're taking. We'll certainly see less office in the portfolio as we move forward here.

Harsh Hemnani, Analyst

Got it. That's helpful. Last one from me. Going back to leverage, I want to ask how you're thinking about leverage. I want to ask how you're thinking about leverage. I want to ask how you’re thinking about leverage.

Katie Keenan, CEO

I want to ask how you're thinking about the long-term leverage of this business changing with the addition of the net lease strategy, if it changes at all in your mind. Yeah. As I mentioned in one of the other questions, there are a lot of opportunities for securitized financing within net lease. That’s obviously been a strategy. It is fundamentally a business that is lower leverage than our core lending business because we're buying assets instead of making 65% senior loans. I think that it’s positive in terms of our overall leverage profile going forward, and we think it generates returns similar to our core strategy. That’s one of the reasons we like it.

Operator, Operator

Thank you. We'll take our next question from Don Fandetti with Wells Fargo.

Don Fandetti, Analyst

Katie, can you talk a little bit about the international markets, how you're thinking about them? It looks like, you know, you're still active on originations and seeing pretty good returns. And then also on the credit perspective from international.

Katie Keenan, CEO

Sure. Absolutely. We’ve seen positive relative value in international markets overall. There are different markets, and we’re active in Australia, which is a very stable market. We’re active in the UK and Europe and Canada. The growth profile of the US is the most positive that we see from a global perspective—that’s clear. But we’re looking at high-quality, high-conviction sectors in these markets such as industrial and multifamily, and we see very stable trends. Supply, if anything, is even lower in a lot of these markets than it is in the U.S.; supply in the U.S. is coming down quite materially. Rates in Europe are declining more quickly than in the U.S. The competitive dynamic really cannot be overstated; it's quite different outside of the U.S. Our ability to drive low leverage, strong credit profiles, and attractive returns is due to the lack of a CMBS market in these areas. In our view, we are generating very high-quality credit opportunities, notwithstanding probably a slower growth profile outside of the U.S. today.

Operator, Operator

We'll take our final question from Rick Shane with JPMorgan.

Richard Shane, Analyst

Marcin, welcome. I just want to confirm, I know there was about $1.6 billion in repayments in the fourth quarter. Did I understand correctly that it's also $1.6 billion in repayments so far this quarter?

Katie Keenan, CEO

That's correct.

Richard Shane, Analyst

And are those repayments at par? Or is there going to be any discounted repayments there?

Katie Keenan, CEO

Those are all at par.

Richard Shane, Analyst

Okay. Great. Next question is, you guys had talked about the $2 billion pipeline for the first quarter. How should we think about that translating into funding as we move through the quarter? Is this a pipeline that is largely sort of funded at time of origination? Or are there going to be substantial draws on this going forward?

Katie Keenan, CEO

Yes. It’s a good question. What we see is a good mix of sort of refinances and acquisitions, which are generally funded at closing, with maybe a little bit of construction. Construction activity has come down across the U.S. We favor that opportunity today due to risk-return perspective, but there's just not a lot of deals there. As we think about the funding, I would expect that it’s largely close to funded balance. Of course, we’ll pursue all opportunities that we like, and if we can find multifamily construction, we’d like to do it. However, this segment of the market is less active today than it's been historically, given the high replacement costs and the overall downtick in new supply starts across sectors.

Richard Shane, Analyst

Got it. Okay. That's helpful. And then last question. It looks like PIK income increased incrementally from the third quarter, I think the run rate to be about $3 million a quarter looks like it's ticked up to at least $7 million. Is that correct? And is that what we should assume as a run rate through '25? Presumably, it will be diluted away, but from a dollar perspective, should we assume $7 million a quarter?

Tony Marone, CFO

I don't know that I would assume that as necessarily a run rate. The PIK income in our portfolio is generally pretty idiosyncratic and varies deal by deal. We don’t have many deals that pick and where they do, they're usually for particular reasons within the structure of the loan, so I think you’re going to see that bounce around in particular, as we have some of these legacy loans repay or resolutions of NPLs. I would probably not assume a straight line there, and it's going to be something that bounces around. In either case, it’s not a material component of our earnings.

Operator, Operator

Thank you. That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Tim Hayes for any additional or closing remarks.

Timothy Hayes, Vice President, Shareholder Relations

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