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.

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.

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…

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…

[Operator Instructions] We'll move to our first question, which is Steve Delaney with JP JMP Securities. Please go ahead, sir. Your line is open. I'm sorry. That's Doug Harter with Credit Suisse.

Thanks. Hoping you could talk about the decision to, to sell the two loans in the quarter, given that you already had very strong liquidity before those one sales?

Sure. Thanks Doug. So, you know, we had an opportunity to sell these loans essentially at par and just given the uncertain market environment, we felt it was prudent to execute, really just bringing forward repayments and giving us more optionality for redeployment or accretive use of that capital. We don't expect to see a lot of this, but we're always going to be open to options to maximize value for our shareholders.

And then can you just give us some details as to, you know, what those loans were, you know, what the underlying collateral, what the maturity was, just to better understand, you know, kind of the outcome there of getting essentially par.

Sure. So, one of them was a large mixed-use office asset, where we've been confident in the credit performance of the asset, but it is a large building. And again, have the opportunity to transact essentially a par. The other was a large parking portfolio where the overall portfolio had been exploring the market for a sale, got some very good value indications. Ultimately, the sponsor decided not to transact in terms of selling the portfolio. but the value indications, I think, helps confirm the very safe credit position of our loan and pave the way for potentially a par sale.

Great. Thank you, Katie

And moving now to Steve Delaney with JMP Securities. Please go ahead sir, your line is open.

Thanks. Appreciate the question. High repayments, Katie, this quarter, fairly high. Two things, were there any significant fees associated with those repayments we should be aware of? And what's your outlook? What are you seeing in purchase and sale activity? Kind of what's the outlook for repayments over the balance of the year? Thanks.

Thanks Steve. So, on your first question, no significant prepayment income or outsized prepayment income in the quarter. As far as the second question, I think we really are seeing an increase in transaction activity and liquidity, still low levels relative to historical trends. But if you look at our portfolio, really, in different asset classes, different executions, I mentioned we saw some agency refinancing activity. The SASB market is opening for very high-quality assets. we're seeing insurance getting active and even some bank deals and a couple of sales as well. So, we are seeing, I would say, a reemergence. There's obviously been some big office trades mentioned in the market recently. In contrast to the first quarter, there where there was really no liquidity whatsoever for office. So, I think that as the Fed gets a little bit more -- a narrowing range of outcomes of interest rates and the market feels a little bit more certainty around what the sort of range of path forward could be here? I think you're naturally seeing more liquidity come into the market, and I think that's what was reflected in our repayment

That's very helpful. And one quick follow-up to Doug's question. These loan sales that you were able to negotiate, are you seeing an increase in, what I guess I would call opportunistic loan-to-own type strategies. Is that -- are you seeing real money deep pocket money or are these just more one-off property-specific situations?

So, these were not loan-to-own situations. These are well protected credit situations where we had just created an attractive return profile for that investors were interested in. And because of the duration of the loans in our overall portfolio management strategy is it was something that was attractive to buyers, but also made sense for us. I think more broadly, I think people are looking around for loan to own, but I'm not sure there's been that much transaction activity in that area. But again, I think overall, there really is an increasing level of, I think, capital looking to deploy as the range of economic outcomes. -- seems to be narrowing a bit from the perspective of what's going on with interest rates and --

Thank you very much.

And our next question is from Sarah Barcomb with BTIG. Please go ahead ma'am, your line is open.

Hey everyone. So, I was hoping we could dig into some of the assets on the watchlist. Specifically, I was hoping for a little bit more detail on the Miami office. Just a bit interesting to see that migrate from the three-rated bucket to the five-rated pool. I was just curious what was going on in the ground there? Is it related to insurance or some other issues -- so hoping you could speak to that asset?

Sure. So on that asset, that's an older vintage asset and an old fund in one of the few Class B assets in our office portfolio, which is generally 92% Class A. I'd say ultimately, there were some challenges around that asset specifically, but it is small relative to our portfolio, really doesn't move the needle. And I think big picture, when you look at the overall portfolio, 10% of the portfolio is watch listed or impaired office. And the rest of the portfolio is really performing quite well and producing these earnings, dividend coverage and stable book value the overall portfolio is really mitigating the impact of some of these small pockets of deterioration.

Okay. And as far as the assets that were already watch listed, but have final maturities this year, I was hoping you could kind of speak to any updates there as well, specifically the Woolworths building and the South Wacker office. There's also the retail asset in Chicago maturing this year. If you could give any color on those nearest-term maturities in that four-rated group, that would be helpful.

Yes. So as I mentioned in my script, we have deals on 80% of our four-rated office at the beginning of assets that were four-rated office at the beginning of the quarter, we ceded in getting deals on 80% of them with our borrowers moving to a more stable place, that's generally going to look a lot like what I mentioned in the call script, pay down additional equity contribution stabilizing the asset and giving more time for execution. We are seeing good progress in terms of business plan execution on some of our assets. there's been leasing, we have committed sponsors, which you can see through the equity coming into the deals -- and so it really makes sense from our perspective to collect some of that equity in the form of deleveraging, make sure the assets are well capitalized to continue the leasing and giving more time to our sponsors, which are really working these assets.

Thank you.

And Jade Rahmani has our next question. Jade is with KBW. Please go ahead, sir. Your line is open.

Thank you very much. I was wondering your thoughts on the following. Given Blackstone's strength broad platform and BXMT is generally low LTVs and basis, why not consider offering borrowers preferred equity to buy them some relief while giving BXMT economic upside beyond book value and the turnaround, the equity -- preferred equity would be considered as total equity by lenders and so it would make refinancing away from BXMT more feasible while providing BXMT and economic participation in any upside. Do you have any thoughts on that?

Yes. You're asking about the BXMT providing preferred equity to our borrowers to stabilize credit situation, just so I understand the question.

Yes.

Yes. I mean, look, I think it's certainly something that we look at. As you know, historically, our business model has been very focused on senior lending. But in this environment, we are a very creative and opportunistic lender, and we're looking at a lot of those types of situations across the business, whether it's in BXMT or other platforms. And I think that you're exactly right, that there is going to be opportunities for, GAAP financing, rescue capital, whatever you want to call it, where, you have the situation where an orderly deleveraging is required, otherwise good assets, but loans that are, too high leverage relative to where they should be, maybe a previously 65% loan is now 75% or 80% today. There's a need for capital to come in at an accretive investment level. You might have a borrower that's like less able to invest capital. I think the good news is for our portfolio, when we've seen those types of situations come up we've seen our borrowers want to make those investments. So a lot of these pay-downs look a lot like that. They're effectively buying the bottom of our loans at a reasonable return in order to de-lever their capital structures. And because we lend to borrowers that have a lot of capital, they are able to invest their capital themselves. But I do think that could be a very interesting opportunity in other portfolios, as a new investment opportunity going forward from here.

Thanks very much. And on the new investment side, since you have such great credit performance thus far and such a strong liquidity position, why not kick-start originations to capture some of these outsized opportunities? And if you were to do so, where do you see the greatest opportunities? Would not Office be the best opportunity since there's still very few lenders out there looking at office and you can make such strong risk adjusted returns there?

Yeah. So I mean, I think we're really pleased to be in the liquidity position that we're in, which gives us a ton of optionality in terms of looking at new investment opportunities or really just continuing to maintain that optionality. We start from the perspective where we have very strong earnings power, very strong dividend coverage, and so we can afford to be patient and make sure we have a very high bar for giving away some of that optionality. But it's certainly something that we're looking at. As far as where we like the investment opportunity, I think we are seeing really attractive fundamentals in industrial, in data centers, in certain multi-family markets. We've talked in other venues about the attractive nature of the fundamentals in European industrial and the dislocation of capital markets from fundamentals in that market. And we've actually done some of that, going back a quarter or two in BXMT. So I think we're going to look more in those areas. I think office is certainly an interesting area and we're spending a lot of time thinking about how and when investment would go on there. But I do think that from a portfolio management perspective in BXMT we're going to look to be more active in some of those other sectors that I mentioned.

Thank you.

And our next line, Don Fandetti with Wells Fargo has our question. Please go ahead, sir. Your line is open.

Yes. Katie, if you kind of step back and think about what's happened in office, I mean, the performance of the company has been pretty stable. And I was just curious if you -- if your base case is that we kind of stay in the zone where there's provisioning, but book value remains pretty steady, or is this a type of situation where, you know, there's just enough lumpiness that we could come in and there's a big quarter where the book value's at risk, or do you see more of like a steady path based on your ability to modify and things of that nature?

Thanks, Don. I think that it will still take time for this to play out, but I think we have made a lot of progress in terms of, just working through the issues that have come up, as you mentioned. We've had a lot of situations where we've seen you know assets that are in more challenged position And we've worked with our borrowers to stabilize them as I mentioned sort of 80% of the four rated office coming into the quarter, we have secured deals with our borrowers in terms of more equity coming in and putting those assets, moving them from an unknown to known in terms of what we're going to see going forward from those assets. We'll continue to see some issues crop up in a portfolio of 200 loans. There's always credit migration, both positive as we saw this quarter and negative as we also saw. And I think we'll see that continue, and I do think there could be some lumpiness because we do have some larger loans in the portfolio. But overall, I think the experience we've had to date is a good indicator for what we could have going forward. And while we may have some lumpy quarters here or there, I think in the fullness of time, the earnings power of the portfolio as a whole provides such meaningful cushion against these pockets of deterioration that I think again, when we zoom out from the potential quarter-to-quarter, the strength of the business, the inherent installation of the business from having this earnings power offsetting what we're seeing in a small portion of the portfolio, that dynamic seems to be working well.

Okay. Thank you.

And our last question comes from the line of Stephen Laws with Raymond James. Please go ahead sir. Your line is open.

Hi, good morning. I want to start, Katie, with I think it was referred to in the prepared remarks, kind of, barbell in the portfolio. But when you think about identifying the problem loans, or maybe how should we think about velocity of rating changes going forward? Will they slow down as you really identify the problems, or how much unidentified problems do you feel are left? And how much does that have to do with when you start originating new loans?

So I think that we certainly have progressed through a lot of this. And we've been going through this rate cycle for over a year. We've certainly seen some of the challenges concentrated in older assets. So a lot of them have come to the floor, and at this point, we've -- nearly all of our Chicago, San Francisco, DC office, we've already watch-listed. We've taken impairment on some of those appropriately, just given the environment, and I think we have made a lot of progress in the watch-listed assets of moving them into a more stable position, narrowing the range of outcomes. But as I said before, we do have a large portfolio. In the history of the business, we've always had credit migration. And so I think that we will see that continue, but the more we work through the portfolio and start bringing on new loans or not, but just working through what we have in the existing portfolio. Again, I think we're really narrowing that range of outcomes.

Thanks Katie. And then as a follow-up, I wanted to touch on the CECL reserve. I know I think of the $27 million increase, $7 million was on the new specific loan or refi rated, but it looks like $9 million increase on non-US loans. Can you talk about what drove that increase on the non-US loans and what you're seeing there?

Sure. So the general reserve changes, yeah, as you probably are aware, those are not impairment decisions where we're making decisions loan by loan. That's where we're pooling these loans. Generally speaking, our loans are pretty comparable from a credit perspective across the US and outside the US, but we do run our CECL math on two pools because of the natural geographic differences. So I'd say it's really movements in the macro metrics that drive our general reserve, things like the assumption around repayment date or the timing of future fundings and things like that, that we just saw moved the needle a little bit more in the non-U.S. general reserve relative to the U.S. general reserves. So I wouldn't read too much into that other than how some of those data metrics move quarter-over-quarter.

Great. Appreciate those details. Thank you.

And now I'll turn the call over to Tim Hayes for closing remarks.

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

Goodbye.