Good day, and welcome to the Blackstone Mortgage Trust Second Quarter 2021 Investor Call. My name is Deborah, and I'm your event manager. . I would like to advise all parties the call is being recorded. And now I'd like to hand on to Weston Tucker, Head of Shareholder Relations. Weston, thank you. Go ahead.

Great. Thanks, Deborah, and good morning, everyone, and welcome to Blackstone Mortgage Trust's second quarter conference call. I'm joined today by Mike Nash, Executive Chairman; Katie Keenan, Chief Executive Officer; Jonathan Pollack, Global Head of Blackstone Real Estate Debt Strategies; Tony Marone, Chief Financial Officer; and Doug Armer, Executive Vice President, Capital Markets.

Thanks, Weston. I'd like to start the call today by thanking Steve Plavin for his exceptional leadership of BXMT. Steve ran the company as CEO from its re-IPO in 2013, driving 8 years of outstanding performance, growth and returns for investors, 11.1% annualized over his tenure. The premier position BXMT has maintained through its history, is a testament to his vision and expertise, and we are thrilled that he will be taking his talents over to London to manage our best-in-class European real estate debt business through its next phase of expansion. I'd also like to express my gratitude to Steve on a personal basis for his collaboration with me over the years, as well as his partnership in ensuring a seamless transition to the next phase of leadership for BXMT. Thank you again, Steve. Turning to our second quarter results. As the economic reopening continues to take hold, BXMT hit its stride with strong activity across all aspects of the business. We had one of our most productive new origination quarters ever with $2.2 billion of loans across 21 transactions, driving both portfolio and earnings growth in the period. We ended June at a record portfolio size of $19.2 billion, reflecting positive net investment of nearly $1 billion so far this year and our fourth consecutive quarter of portfolio growth. We continue to enjoy superior access to attractive sources of financing across asset level and corporate debt markets, sustaining our low-cost of capital, and the recovery of economic activity drove ongoing business plan progress on our collateral assets, supporting continued credit performance and a partial release of our CECL reserve.

Thank you, Katie, and good morning, everyone. As Katie noted, BXMT posted very strong performance this quarter. Our GAAP net income increased $0.35 to $0.89 per share and our book value similarly increased $0.33 to $26.68 per share. In both cases driven by a $0.34 reduction in our CECL loan loss reserve during the quarter. Distributable earnings, which is not impacted by unrealized items, such as CECL, increased to $0.61 per share, up from 1Q, as we continue to deploy our balance sheet capital into new loan originations during the quarter. Similar to our commentary last quarter our 2Q results did not include meaningful prepayment income, as our repayments remain concentrated in more seasoned loans. We do, however, expect this income to return to more typical levels over time, as newer vintage loans become a larger portion of the portfolio and repayments continue to occur. To provide more color on the change in our CECL reserve, we ended the quarter with a reserve of $133 million or $0.90 per share, which is down $51 million from 1Q, as we continue to see improvements in the performance of our collateral assets along with positive trends in the broader economy and real estate markets. We believe our current level of reserves is appropriate at this time and reflects a return to more typical market fundamentals. However, we will continue to reassess and make any necessary adjustments to our reserve as conditions evolve over time.

. And the first question we do have from Jade Rahmani from KBW.

I'm curious, what you all think about current inflation rates in construction materials costs? And what impact, if any, do you think that this inflation will have on loans originated with a construction element, more of the heavy transition, particularly those originated pre-COVID?

I think the main impact of inflation on construction cost we're seeing is going to be lower new supply going forward, as well as, the benefit of the value of our existing assets as replacement cost increases. When we go into a more transitional asset, it's especially construction loan. We have a guaranteed max price contract when we close. So -- and we also have completion guarantees from our sponsors. So from a lending perspective, we're really protected from the potential increase in construction costs. But I think the broader point is really the enhancement of value of our existing portfolio as replacement cost increases and supply probably is lower.

So in terms of completion, probability of completion, probability of lease-up, executing the business plan, you don't believe that construction costs will have a material impact?

These projects were priced, and put under guaranteed max price contracts years ago. So what's going on today, really isn't going to have a material impact on that.

Secondly, on repayments. Do you anticipate a similar level, as what was experienced during the second quarter? Or is there potentially an increase in repayments, which is what some of the other lending companies that have reported have shown?

I don't think, we anticipate an increase. We -- our portfolio, obviously, is larger. And while we have large loans, just the overall scale of the portfolio means the repayment of any one loan is less lumpy than it maybe if we didn't have such a large portfolio. So I think the pace is going to be what we've seen historically pre-COVID on a pretty smooth level.

The next one now is Rick Shane, J.P. Morgan. Thank you, Rick.

And Steve, I'm assuming you're listening here. Thank you for all of your time and attention over the years. We've really appreciated it. When we think about interest rates right now and sort of the headwinds that you guys faced in terms of rolling off of floors. Can you give us an idea of how you're managing this? Obviously, low base rates for a longer period of time creates challenges, but there's also the opportunity to perhaps pick something up and spread. And I'm curious how sensitive your borrowers are in this environment.

I think that from the borrower perspective, what we've seen is very consistent ROIs over time in different rate environments. So I think that, obviously, depending on where base rates are and spreads are, there's a little bit of back and forth there, but it doesn't change the overall return so much from a borrower perspective or from our perspective.

I mean, I think you're touching on a very important point about our business model, and that is how organically hedged the model is. And you know the story in 2020, elevated liquidity and a slowdown in portfolio velocity created some earnings headwinds. And the floors kicked in, and that correlated to lower rates, the floors kicked in and largely offset the earnings impact there. Now portfolio growth and velocity are returning, unlocking the earnings power from the capital raising that we did in 2020. Last year, the average floor was 1.43% now it's 1.12% only a minority of the floors at this point are above 25 basis points. I think it's just over 40%. So the increasing earnings power that we're seeing in the portfolio now is correlating naturally to a return of the asset-sensitive position inherent in our floating rate business model. And that upside relative to rates is something that it's really one of the favorite things about our floating rate business model for us. And I think we're seeing that play out over time in 2021, more or less exactly as designed in putting together that business model back in 2013.

And so the point being in dos the trade-off, as those floors roll off and you're putting in place new lower floors, you're picking up that asset sensitivity that would have been lost if we'd looked at this 6 months ago. That totally makes sense.

I think to your point, and as Katie said, what we see is a lot of stability in yields in our business. And that's a function of this organic hedging that's inherent in our business model. And the other thing that's inherent in our business model that we like a lot is that asset sensitivity and the upside relative to rates and the potential for increase in LIBOR in particular over time. And we feel very good about the way that we're positioned in that regard.

And the next one now is, Timothy Hayes, BTIG.

Congrats, Katie on your first official quarter ahead of the ship here. First question on just the cap structure. Obviously, you've done a lot there. The CRE, CLO, you upsized and refinanced that Term Loan B tranche. What else interest you? Or do you kind of target right now in the capital markets world? I know you have converts coming due in May of next year. So you have a little bit of time before -- I assume you plan to address that. But I'm just curious how you feel, especially given what seems like to be a very strong pipeline and doing another CRE, CLO or maybe doing some unsecured debt or anything else you're entertaining?

Jim, it's Doug. I'll take that one. I mean, I think the short answer is all of it. To your point, our stock is trading well, our corporate debt is trading very well, executing very well. We're executing very well in terms of asset level leverage across the whole array of executions available to us. I think what's most important to us is that we have the broadest array of options available to us so that we can maximize the efficiency of our cost of capital and also minimize the risk on the right-hand side of our balance sheet. And we've done a great job of that in 2020. The markets are favorable, I think, for us to continue optimizing that going forward. I think with regard to what's new, I think high-yield stands out as an opportunity for us. That space has been active or issuers in our space have been active in high yields. We have the rating. I think we have a good following from our term loan, and so that's something that could certainly be an alternative for us in the future.

You guys have obviously been very successful in that front. So echo that. And then just on warehouse lines. I know that costs had been coming down a bit on repo. And I'm just curious if you're seeing that trend continue and how much room you think there is for spreads to come in on those financing lines before the bank say it's not really worth it to go any lower?

The costs have come in. It is a very competitive environment, as Katie alluded to. I think there are two aspects to that. There's the relative spread. So the net interest margin, we've been able to keep that in a historical range between 150 and $200 million. That's edged up a little closer to $200 million in 2021, just in terms of incremental borrowings. And then there's also just the overall mix, the weighted average. That continues to fluctuate. And I think in this lower LIBOR environment, there probably is something of a floor. I don't think we're at it at this point. But I do think we will -- we would approach a limit at some point. In a different LIBOR environment, I think there's a lot more room for continued efficiency in terms of the spreads on those bank executions. It also ties to the other business that we're doing with the banks. In terms of the CLO business in terms of the corporate capital markets business that we're doing. And all of those working in concert together, both increasing the competitive dynamic and also increasing the touch points between us and the market and the banks helps us drive that cost down significantly. We've seen some of the benefit of that in 2021, and we expect that to increase as we increase the scale and diversification of our funding structure.

You now have Doug Harter from Credit Suisse.

Your liquidity position continues to remain strong. Can you just talk about now that the environment has continued to normalize? What you think the right level of liquidity is? And therefore, how much more growth the balance sheet can support at current equity levels?

Doug, I think I would answer that more in terms of your latter point. What we think about in terms of our current capital structure can support significant portfolio growth. I think in terms of our covenants, that's a high single-digit billion-dollar number. I think in terms of what we would target relative to the way we're currently capitalized, that's some multiple number of billions of dollars of growth. That said, the capital markets alternatives available to us are accretive. Scale is a big advantage for us, both technically on the capital market side and also in terms of our portfolio construction. And success breeds success, growth breeds growth and quality breeds quality. So we're not targeting a specific level of liquidity. I think what we're targeting is the maximum amount of high-quality growth in our portfolio, and we have a lot of latitude do that in our current capital structure and also in terms of alternatives for growing that capital structure.

Yes. I would just add. We're really driven by ensuring that we're in a position to access the most high-quality lending opportunities that we can. And we're in a really favorable position today where we can really capture, as many of those high-quality loans as we see because we have strong liquidity to support our growth.

I mean, I guess, obviously, you already -- relative to a lot of participants already have scale. I guess, how do you weigh the size of the market opportunity today versus the comfort in being able to deploy that run off 2, 3, 4 years from now when -- obviously, no one's crystal ball knows what the environment will look like a couple of years out.

Sure. I think we've grown the portfolio every year and a very consistent track record, and I think we have a lot of runway to continue the momentum. I think the thing to focus on is that our business in a lot of ways is fundamentally unique. We're backed by a scalable platform in terms of market access, relationships, ability to transact in different geographies. That really is just on a different playing field from what we had before and really just continues to grow and create a virtuous cycle. We've seen that even this quarter, the more loans we do, the more familiarity we get with different markets. The deeper the borrower relationships and the more borrower relationships we have that translates in a very sort of multiplying effect way into more lending opportunities. And just this quarter, we developed a new borrower relationship with one of our very strong sponsors on the multifamily side and did 3 or 4 follow-on transactions. So it really just creates a very positive reinforcing cycle of having more scale and more touch points in the market that create more lending opportunities.

So Stephen Laws from Raymond James.

First, I want to ask for a little color -- more color on CECL. Looks like the European reserve declined a little bit more than the mix, but not that out of weighting. I don't see in the Q a breakdown by property type. But can you talk about the main assumptions that drove the decrease in CECL reserves? And if you could remind us, too, I think maybe Blackstone doesn't use the same warm model than others. Can you talk about the model you guys use for the CECL? Trying to get some idea of potential GAAP book value volatility if there's more exposure here.

This is Tony, happy to talk CECL. So first, to hit one of your last points. We do use the WARM model, and which I do believe some others in the space use. A lot of others in the space use more of a, I'll say, computerized systemic approach, so the WARM model is actually less prevalent. But there are others who use it in addition to us. It's a very judgmental standard CECL overall. And when you look at what drives the change, and I wouldn't speak of it in terms of a specific asset class or geography per se. I think what you're seeing is two things: one, very specifically, changes in our risk ratings. So as we're upgrading the risk ratings and moving 4s to 3s and 3s to 2s, that naturally helps because CECL is designed to capture the current risk in your portfolio. CECL is also designed to capture the future risk in your portfolio. So as we see the broader markets improve and we see the general performance of the properties underlying our loans improve, and we're making new high-quality loans that we think are very similar to loans in our portfolio we're feeling better and better about that macro point. When I -- you're noting that we have a decent decrease in the reserve this quarter, last quarter, we didn't really change our reserve much at all, notwithstanding the improvements in the markets. If you look at some of the larger banks, they released a good chunk of their reserve last quarter and a good chunk of their reserve this quarter. I think last quarter, we were in a little bit more of a wait and see. We see the market conditions improving, but we wanted to have a little more time for…

And one follow-up. I think a quick one, but I think on Page 25 of the Q, it talks about two multifamily loans at $340 million going on nonaccrual on July 1. How much interest income did those two loans contribute in Q2?

The nonaccrual loans did not contribute any interest income in Q2.

That's great. That's for now.

So our final question comes from Steven Delaney, JMP Securities.

Good morning everyone, and congrats on a great quarter to kick off Katie's tenure. Tony, you mentioned that the prepayments did have a meaningful impact in terms of acceleration of fee income. Is it possible you could give us a little -- quantify that for us in terms of cents per share?

Sure. Maybe I mumbled through it in my script, but it did not have a meaningful impact if there were not somehow didn't make it in there than I apologize.

No, my bad. I heard the word meaningful, and I jotted that down, and I must have missed the not. So my apologies there. Then I'll go straight to my follow-up then. Hotels, 17% of the portfolio, about $3 billion. Katie, you talked about robust activity. And would that apply to the hotel sector as well in terms of occupancy? And maybe more important, in my mind, just a level of sponsor commitment you were seeing behind your hotels? And maybe any updated color on your loan number 14?

So I think, as far as the existing portfolio, what we're seeing on the hotel side is, one, very significant recovery in a number of our hotel assets, especially on the resort side. And that's reflected on the risk rating that we upgraded this quarter, as well as what we're seeing more generally. For the assets that are a little bit further behind, whether they're urban center assets are where the recovery is a little bit behind we are seeing recovery in the performance of those assets. It's just, as I said, it's taking a bit longer, and where necessary, we are continuing to see very strong sponsor commitments. A lot of our hotel assets have moved to covering perry and debt service this quarter, which is great to see. But for the ones that are still lagging a bit and still earlier in the recovery, we're seeing continued sponsor commitment. I think on the new hotel investment side, as I mentioned, especially in those areas of the hotel space that are seeing strong recovery we are seeing very attractive relative value opportunities to make new loans at low leverage points and assets that are clearly benefiting from the recovery of travel spending from built up consumer savings. And so while I don't think that we're going to -- our bar remains very high for hotels. And of course, our underwriting is very detailed and taking into account everything we're seeing, we feel good about the recovery in fundamentals and hotels generally and especially in those more resort-focused assets.

And are you seeing some improvement in New York City as well, although, maybe not as broad or?

Yes. I mean, you can look at the overall market statistics. Market occupancy in New York City was 63% in June, that's certainly very far off where it was at trough levels. I think New York is going to take longer just given the dependence of New York on international travel, which obviously is still impacted by COVID travel restrictions. But I think if you look at what we've seen in fundamentals and other markets as travel restrictions have loosened over time, I think we'll see a similar dynamic on our international travel as the restrictions loosen, which will happen at some point. And as the overall sort of desire for travel to have those experiences, people building up savings and wanting to spend them on the ability to have a travel experience. That will come, but it will take longer, given the international travel aspect.

And now, I'll hand back to Weston for final comments.

Great. Thank you, everyone, for joining us today. And I look forward to following up after the call.

Thank you. That concludes your conference call for today. You may now disconnect. Thank you for joining and all take care.