Blackstone Mortgage Trust reports mixed Q3 results

In major developed markets, short rates are decreasing due to a slowdown in inflation. Economic indicators remain strong, suggesting a soft landing is likely. This positive outlook, combined with lower rates, has created an inflection point in the real estate cycle. Liquidity has returned to the market, leading to increased transaction activity and rising real estate valuations. BXMT is experiencing strong momentum in its business, with a significant increase in repayments and portfolio turnover. With $1.8 billion in pay-offs in the third quarter, BXMT is actively redeploying capital into attractive investment opportunities. The current lending environment offers lower basis, stronger cash flow coverage, and higher returns. BXMT has closed nearly $700 million in new originations this year, focusing on sectors such as multi-family, industrial, self storage, and resort hotels. The company’s competitive edge lies in its ability to source differentiated investments and drive strong returns. The future deployment outlook is supported by an increase in U.S. transaction volume and a growing pipeline of new loans. BXMT’s short duration portfolio positions it well for an accelerated repayment period as borrowers refinance into the next phase of their business plans. The company expects to resolve over half of its impaired loans in the coming quarters through a combination of full cash sales, note restructuring, and REO. Overall, BXMT remains optimistic about its future prospects and continues to pursue value-enhancing strategies in its portfolio. The progress we have achieved is a critical step in repositioning our portfolio for consistent performance and reflects the positive credit trends we are seeing. In the last quarter, every performing loan that matured either repaid, passed its performance test, or extended, resulting in over $400 million in new equity commitments or additional economics to BXMT, including over $1 billion in office loans. Rate cap renewals are not a concern, with the multi-family sector performing at 99.5% and lower short rates supporting stronger debt service coverage ratios in the future.

We have successfully collected repayments on several watch-listed multi-loans, with plans for the remaining loans to be repaid. Significant repayments were also collected across large portfolios of hotels in Australia and Europe, as well as in the office sector. Despite two impaired office loans this quarter, we anticipate resolutions to exceed impairments moving forward, with the non-performing loan measure for this quarter expected to be the peak.

Looking ahead to 2025, we anticipate a rebuilding period in the fourth quarter, with resolutions and redeployments providing a boost to earnings power and dividend coverage. Despite the current market pricing in additional credit losses, we believe the potential for market value recovery in our impaired assets presents an opportunity for shareholders. With a 10% dividend yield and a strong position to capitalize on market opportunities, Blackstone is well-positioned for growth and success in the real estate sector. In the last quarter, we carefully considered various factors, including short-term earnings variability and our long-term earnings potential, when setting our dividend level. Since then, we have observed a narrowing range of potential earnings scenarios due to the ongoing recovery in capital markets, which has boosted demand and values for institutional real estate assets, particularly office properties, and facilitated loan resolutions at favorable levels. These trends reinforce our belief that our current dividend level is sustainable relative to our long-term earnings power.

In terms of our quarterly results, we reported a book value of $22.17 per share in the third quarter, which includes $1 billion or $5.89 per share of CECL reserves, up from $906 million in the previous quarter. The increase in our CECL reserve was primarily due to the downgrade of two office loans to a risk rating of 5 during the quarter. We also added two new REO assets to our balance sheet at levels consistent with prior quarter carrying values, with minimal impact on book value.

Looking ahead, we anticipate support to book value through near-term resolutions of non-performing loans at or above current carrying values, as well as strong credit performance across the majority of our loans. Our portfolio outside of U.S. office assets is 95% performing, with no risk rating downgrades except for one mixed-use loan with a significant office component. We have upgraded three multi-family loans and observed stable performance across multi-family, industrial, hospitality, and non-U.S. office sectors.

The performance of our multi-family portfolio is highlighted by robust repayment activity, with over $350 million collected from seven full loan repayments in the quarter, predominantly through agency take-out. With interest rates lower and transaction activity increasing, we expect heightened activity from government-sponsored entities, which will benefit our agency lending partnership with M&T. We closed our first three loans with M&T after the quarter ended, launching this new capital-light business for BXMT.

During the quarter, we collected $1.8 billion in repayments, marking our fourth-highest quarterly repayment volume and bringing our year-to-date total to $3.6 billion. Additionally, we repurchased $41 million of corporate debt at discounts, reducing our leverage and generating a modest book value gain. We also repurchased $11 million of our common stock at a discount to book value, reflecting our confidence in BXMT’s equity value.

Looking ahead, we are optimistic about the future of BXMT as we navigate legacy loan resolutions and deploy capital into new investments, supported by improving market fundamentals, our well-structured balance sheet, and Blackstone’s real estate platform. Thank you for joining today’s call, and we welcome any questions. The increased liquidity in the space has been beneficial for our performing loans, not only through repayments but also through increased value transparency, liquidity, urgency to close deals, and more capital coming into the space. This has allowed us to quickly put our capital back to work. With over $500 million in loans closed and closing, we have a strong pipeline and the ability to identify targeted investments for BXMT. As we continue to ramp up our originations, we are focused on driving attractive opportunities for our capital. The $0.47 dividend level is viewed as appropriate over the long term, with short-term fluctuations possible. The decline in rates has a modest impact on earnings, but the resolution of non-performing loans and redeployment of capital into new loans will ultimately benefit us. We anticipate a short-term dip in earnings in the near term, but expect earnings to rebound in 2025. We are focused on deploying repayments into new loans and believe the risk-adjusted return on commercial real estate loans remains favorable, despite tightening spreads. Our target investment has shifted to SOFR plus 2.75, and we are weighing new originations against returning capital to shareholders. One of the things we appreciate most about our business is our strategic approach to capital allocation. In the last quarter, we explored various investment avenues and will continue to assess the relative value of our investments. We see attractive opportunities in new loan origination, with strong credit profiles and attractive returns. We also plan to strategically buy back in the capital structure where opportunities arise. The spread dynamic in the real estate market is favorable for our leveraged business, with wider spreads and favorable borrowing rates. We believe this presents an attractive investment opportunity for us and our shareholders.

Regarding SOFR floors, we are focused on incorporating them into our portfolio to mitigate the impact of lower rates. We expect to see continued progress in resolving NPLs, with $1.1 billion in deals expected to close soon. While the timing of closings may vary, we remain committed to resolving impaired loans and REO assets efficiently.

Regarding loan ratings, we conduct thorough portfolio reviews to stay ahead of potential issues. While there have been some downgrades from 3s to 4s, we are confident in our approach to managing risk and addressing any potential challenges in the portfolio. We have modified many of those loans, which have been stable performers for years. Within that bucket, there are different sub-categories that we have outlined in the past and today. As for potential downgrades, we thoroughly analyze the portfolio. The momentum has shifted, primarily in the U.S. office sector. The composition of the loans in the three-rated category consists mostly of new construction or high cash flow sunbelt properties, with some European office assets as well. Anything that didn’t fit into those categories was downgraded, leading to the recent changes from threes to fours. We continue to closely monitor the 149 loans in the portfolio for any potential issues. The Spain and Australia deals are progressing positively, with the Spain portfolio steadily paying down and the Australia portfolio being a focus for the firm. In terms of returns on new investments, we are seeing attractive spreads and mid-teens returns on invested equity. The credit metrics are more favorable compared to the 2021 vintage loans. As for the ROE target, we believe our dividend yield is attractive relative to long-term base rates, providing investors with a competitive option for longer duration investments. We are not a burn down company and are focused on generating sustainable returns for our shareholders. This company is supported by the largest real estate owner in the world and one of the strongest real estate credit businesses. Our ability to create a new generation of portfolio and attractive investment opportunities in the coming years is not currently reflected in the market price. We aim to provide a current income yield, portfolio turnover, and improve the existing portfolio. The potential for reaching hurdle rates by 2025 is realistic, especially with the acceleration in capital markets. The narrowing bid-ask spread is driving transaction volume and contributing to our progress. The rate backdrop and potential credit deterioration are concerns, but the direction of rates is clear, especially in Europe. We see growth opportunities in multi-family, industrial, and data centers, as well as in various geographical markets. Thank you for joining the call, and feel free to reach out with any further questions.