Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q2 2023 Earnings Call Transcript July 26, 2023
Blackstone Mortgage Trust, Inc. misses on earnings expectations. Reported EPS is $0.62 EPS, expectations were $0.66.
Operator: Good day, and welcome to the Blackstone Mortgage Trust Second Quarter 2023 Conference Call. Today’s call is being recorded. All participants are in a listen-mode only. [Operator Instructions] At this time, I’d like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead, sir.
Tim Hayes : Good morning, and welcome, everyone, to Blackstone Mortgage Trust’s second quarter 2023 conference call. I’m joined today by Mike Nash, Executive Chairman; Katie Keenan, Chief Executive Officer; Tony Marone, Chief Financial Officer; and Austin Peña, Executive Vice President of Investments. This morning, we filed our 10-Q and issued a press release with 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 our 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 GAAP net income of $0.59 per share, while distributable earnings were $0.79 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the second quarter. Please let me know if you have any questions following today’s call. With that, I’ll now turn things over to Katie.
Katie Keenan: Thanks, Tim. Since the onset of the rate hike cycle, BXMT has consistently delivered for our shareholders, with the strength of our business moderating the impact of credit headwinds. This quarter’s results again underscored our continued resilience. For the second quarter, we earned $0.79 of distributable earnings per share, up 18% year-over-year and covering our dividend by 127%. We delivered this result while reducing leverage and growing liquidity to a record $1.8 billion. Our book value was stable, as retained earnings offset our reserve build. The enduring credit performance of the vast majority of our loan portfolio is a critical ingredient to this outcome. We’ve highlighted in the past the importance of our low LTV strategy, asset, borrower and market selection and thorough underwriting informed by the deep knowledge and experience of our platform.
This put us in a strong starting point coming into this cycle. Today, we are directing our rigorous forward-looking approach to actively managing our portfolio, executing on numerous deal-by-deal transactions with a focus on enhancing our credit position and reinforcing sponsor commitment. An outcome we achieved through pay-downs, recourse and additional sponsor cash equity. When sponsors step up to commit more dollars, we can give them more time to complete their business plans, and in certain cases, some economic relief to lighten the burden of carry. It’s a win-win for these deals, reducing our credit exposure and maintaining our interest income at coupons well above our expectations at origination, while putting our borrowers in a more stable position.
In the second quarter, our borrowers invested or agreed terms on over $700 million of incremental equity subordinate to our loans. We closed 10 transactions where we reduced our basis by 11% on average through paydowns or principal guarantees. We have deals to address over 80% of the four-rated office loans we had on our watch list at the start of the quarter, with paydowns or incremental equity on each, significantly reducing the risk of near-term credit deterioration and further protecting our investment position. These asset management wins are the latest examples of a proactive derisking strategy we’ve pursued for over a year. Each deal requires a bespoke approach, something we are particularly well positioned to do, given our deep bench of 26 dedicated asset managers globally and the real-time data and observations we collect from across Blackstone’s vast real estate footprint.
Our portfolio also benefited this quarter from green shoots in the broader capital markets. We collected $1.5 billion of repayments, a strong indication of the refinanceability of our loans as well as the liquidity of our underlying collateral assets in the market. These repayments reflected a healthy mix of sales and refis and notably included over $350 million of office loans. We also took the opportunity to bring forward repayments by selling two loans essentially at par. We still have more to go on the credit cycle and US commodity office remains extremely challenged. Our office downgrades this quarter reflect these dynamics. But we have a diverse portfolio with nearly 200 loans and watch listed and impaired office to remain a small portion, just 10%.
I mentioned earlier the credit-enhancing modifications we’ve achieved on many of our previously four-rated loans. On our five-rated loans, still just 4% of our portfolio, we are taking a tailored approach. This means near-term sales for some assets, which we are pursuing in several cases. But we have also set up our business with long-dated liabilities and plenty of liquidity to afford us the flexibility to reinvest and reposition assets where we feel it is most accretive leveraging Blackstone’s skills as a highly experienced real estate owner to maximize recovery over time. Away from office, we continue to see good performance across most other asset classes. This quarter, we upgraded eight loans, including two loans from four to three as a result of both cash flow recovery and significant paydowns from our sponsors.
On the multifamily side, which is 26% of our portfolio, we are benefiting from our selective approach to sponsors, assets and submarkets. While we expect rent growth to decelerate in some markets, it remains positive, continuing to support cash flow in the underlying assets and the performance of our loans. Our US traditional multi-assets are in locations with market rent growth 35% higher than the national average and new supply, 22% lower than their respective markets as a whole. As a result, our multifamily loans, which averaged 66% LTV have demonstrated NOI growth of over 25% on average since origination, with many value-add improvements still in process. In this quarter, we saw $317 million of multi-repayments through agency refis at valuations implying a 10-point decrease in our LTV from 2021 origination to today.
Industrial remains robust, essential retail is doing well. Hotels and resort and many urban locations like New York City are demonstrating sustained RevPARs above 2019 levels and capital markets are open. Just last week, a $363 million hotel loan, one of our largest repaid with the SASB,CMBS execution, 40% higher than our loan basis, implying an LTV for our position of just 39%. This loan was watch-listed during COVID as pandemic travel restrictions took a severe toll, but we work closely with our borrower to chart a pass through a task period and in time, demand snap back for this high-quality asset paving away for a refi. While real estate capital markets are signed, they will likely move in fits and starts and office liquidity remains scarce.
designer491/Shutterstock.com
Credit outcomes for more challenged assets will take time to play out, and we may see more pockets of deterioration along the way. But through over a year of this dynamic, BXMT has consistently generated outsized dividend coverage and protected book value, evidence of our business model at work. Over the past 12 months, we’ve retained nearly $120 million of distributable earnings in excess of very healthy dividends, bolstering our liquidity, reducing our leverage and preserving our book value even as we add reserves to reflect the market environment. With term matched asset financing and no capital markets mark-to-market, we’ve created a durable net interest margin on performing loans. And through active portfolio management, as well as natural turnover, we have maintained near-record liquidity levels throughout this period, while at the same time, preserving a low-cost liability structure with no corporate debt maturities until 2026.
Our positioning affords us valuable optionality to navigate this volatile environment. Liquidity is returning in pockets of the market at new normal levels of return, turning over balance sheet and advancing an orderly deleveraging cycle in many areas. The bar for new investment remains high, but the opportunity set is expanding. We’re seeing increased loan requests and have evaluated multiple loan portfolio acquisitions over the past few months. With the scale of the Blackstone platform and our pool of dry powder, we are uniquely positioned to our strong earnings and dividend coverage, we have no pressure to redeploy capital. Running our business with more liquidity and a more conservative balance sheet, puts us in an advantageous position to manage a range of economic outcomes and maintain our war chest to capitalize on truly differentiated opportunities.
We will continue to proactively manage our business for resilience, as we progress through the cycle, prioritizing optionality, capital preservation and our consistent attractive dividend to our investors. Thank you for joining us, and I will now turn the call over to Tony.
Tony Marone : Thank you, Katie, and good morning, everyone. In the second quarter, BXMT again delivered strong results with our distributable earnings, or DE of $0.79 per share in line with 1Q levels. We continue to benefit from the impact of rising rates on our floating rate business model, which generated an incremental $0.03 of earnings this quarter relative to 1Q level. On the other hand, 2Q earnings faced a modest headwind in the form of loan modifications, cost recovery accounting and net portfolio contraction, which had a collective downward impact on earnings of about $0.03 relative to 1Q levels, and offset the benefit of rising rates. These transactions generally occurred later in 2Q, and we would expect a larger impact of around $0.06 per share on a full quarter basis.
To unpack these elements further, we have made proactive loan modifications with certain of our borrowers to trade lower rates for partial repayments or borrower equity contributions to reduce our risk in these loans. We view this as a prudent strategy in the current environment, and believe the benefits of long-term reduced credit risk far outweigh the modestly reduced earnings power of these loans. In terms of cost recovery accounting, all of our five rated impaired loans continue to pay interest this quarter, $12 million in total. However, we reflect those payments as a reduction to our loan basis rather than income. As I’ve highlighted in prior calls, this income will eventually be recognized if these loans recover, or will otherwise reduce future realized losses should credit continue to deteriorate.
Our loan portfolio decreased by $1 billion as repayments outpaced loan funding, which were limited to fundings under existing loans. Note this includes two opportunistic loan sales at our carrying value of 99.8% of principal outstanding, where we effectively brought forward the future part repayment of these loans. We remain selective with respect to new investment originations and focus on maximizing optionality by running our business with more liquidity and lower leverage. With the strong dividend coverage generated by our floating rate portfolio today, we can easily absorb this modest earnings headwind over the near term in favor of maximizing stockholder performance in the long run. We closed the quarter with $1.8 billion of total liquidity, a record level for BXMT and one that puts us in a strong position for both offense and defense as the commercial real estate markets continue to evolve.
Our adjusted debt-to-equity ratio of 3.4 times continued its downward trend from 3.5 times last quarter and 3.6% at the start of the year, reflecting our prioritization of balance sheet resiliency in this uncertain economic environment. Our balance sheet continues to benefit from our stable capital structure with no corporate debt maturities until 2026. And no capital markets margin call provisions across our term matched credit facilities and fully non-mark-to-market provision on the majority of our liabilities. Turning to credit. We booked an incremental $28 million CECL reserve this quarter, which does not impact DE, but reduced our GAAP net income to $0.59 per share from $0.68 per share 1Q. Similarly, the CECL reserve impacts our book value.
However, our ability to retain excess earnings over our dividend fully covered this incremental reserve and contributed to a slight uptick in book value to $26.30 per share from $26.28 at 3/31. Our CECL reserve this quarter includes one new asset specific reserve on a five rated loan, bringing our total specific reserves to $214 million, which is about 20% of the related loan balance, and implies a 50% decline in underlying real estate value from origination. In addition, we further increased our general reserve by $11 million to $166 million this quarter, or 74 basis points of our loan portfolio, double our reserve level in 2Q ’22. Our aggregate CECL reserve of $380 million or $2.20 per share reflects our comprehensive review of the risks in our portfolio and current market conditions for commercial real estate lending in our key markets and asset classes.
Overall, our portfolio is 96% performing with relatively limited tough credit situations, which we have reflected in our risk ratings, CECL reserves and cost recovery accounting for impaired loans. We continue to see somewhat barbelled credit migration in our portfolio with some assets hitting challenges as the credit cycle continues and others improving with cash flows, excuse me, and others with improving cash flows and completing their business plans as expected. We see this in our risk rating migration with one new five rated loan and four new four rated loans on one hand, but two upgrades of prior four rated loans to threes on the other. Overall, we have a balanced eight loan upgrades and seven downgrades this quarter and maintained our portfolio’s average risk rating of 2.9 consistent with last quarter remain focused on actively engaging with our borrowers to proactively identify and address risks in our portfolio and maximize long-term value for our stockholders.
To that end, we enjoy the benefit of operating BXMT within the broader Blackstone real estate business, giving us unparalleled access to information and insight into the markets in which we lend and allowing us to make the best credit decisions possible, as well as unique relationships with banks and other lenders, allowing us access to scale capital on attractive terms to support our business across market cycles. Last week, Blackstone announced hitting a milestone $1 trillion of assets under management, which reflects the scale of the broader business supporting BXMT. We are proud of our 2Q performance and look forward to continuing our strategy of actively managing our business through the credit cycle and delivering reliable long-term value for stockholders.
Thank you for your support, and I’ll now ask the operator to open the call to question.
See also 10 Undervalued Canadian Stocks To Invest In and 12 Undervalued European Stocks to Buy.
To continue reading the Q&A session, please click here.