Welcome everyone to the Blackstone Mortgage Trust first quarter 2022 investor call. [Operator Instruction] And with that, I would like to turn the call over now to Weston Tucker, Head of Shareholder Relations. Please go ahead.

Thank you and good morning and welcome to Blackstone Mortgage Trust's first quarter conference call. I am joined today by Katie Keenan, Chief Executive Officer; Austin Pena, Executive Vice President, Investments; Tony Marone, Chief Financial Officer; and Doug Armer, Executive Vice President, Capital Markets. I'd also like to introduce Tim Hayes who recently joined the BXMT leadership team and will be working across a number of initiatives including shareholder relations. This morning, we filed our 10-Q 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 uncertain and 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, and we'll also refer to certain non-GAAP measures on the call. 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 first quarter, we reported GAAP net income per share of $0.59, while distributable earnings were $0.62 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the first quarter. If you have any questions following today's call, please let me know. And with that, I'll now turn things over to Katie.

Thanks, Weston. We had another strong quarter of investment activity, portfolio growth, credit and earning, further demonstrating the strength and resilience of our business model in a dynamic market environment. Perhaps more importantly, as we look ahead, BXMT is particularly well positioned to continue delivering for our investors. Today, we see 4 key advantages powering our company forward. First, we have a floating-rate business, put simply, higher interest rates mean we earn more on our loans. The magnitude of rate hikes widely expected this year creates a powerful tailwind for our earnings profile. Second, the credit of our portfolio is secure. With a portfolio of 65% LTV loans on institutional quality assets to many of the best sponsors in the business, our capital is well protected even if we experience a period of greater market headwinds. Third, our ability to generate investments is unparalleled. We believe we are entering a more opportunistic investing environment for lenders. And BXMT's deep global origination platform allows us to source attractive relative value investments around the world. And fourth, we have broad access to capital. Our fully scaled, diversified balance sheet comprises a wide variety of asset level and corporate debt as well as premium equity. This gives us the consistent ability to efficiently tap the capital markets, enhance our balance sheet and deploy capital accretively. Starting with our floating rate model and portfolio. The investment environment over the last 12 months has been highly productive for our growing origination team. We closed $3.4 billion of new loans in the quarter, $16.2 billion over the last 12 months, driving 37% portfolio growth year-over-year to a record $25.6 billion. Through our strategic portfolio management, we have reoriented both the earnings profile and the collateral mix of our book. While LIBOR floors provided us with earnings…

Thank you, Katie. And good morning, everyone. I'm excited to run through the results for the quarter and, as importantly, our position as we move forward in 2022. Starting with the 1Q results. We reported GAAP net income of $0.59 per share and diluted GAAP earnings, a new metric for us, of $0.58 per share. This diluted earnings metric is the result of a new accounting standard that came into effect this year, which requires us to assume all convertible notes will be settled in shares and, therefore, dilute earnings. We've always settled our convertible notes in cash and have the intention to do so in the future, so EPS was not previously impacted. The new accounting rules eliminate that optionality and require earnings dilution to be calculated for all outstanding convertible notes. Our distributable earnings per share for the quarter was $0.62, which is unaffected by the GAAP earnings dilution and properly considers only our shares currently outstanding. Our DE is down slightly from the $0.66 run rate level we discussed last quarter as 1Q earnings included no material fee acceleration income and has the typical seasonality of the reduced day count compared to other quarters. Importantly, the growth in our portfolio largely absorbed the new capital we raised, which muted some of the J-curve impacts on our 1Q results. Finally, our book value per share of $27.21 was flat relative to 4Q and our $0.62 dividend, a level we have maintained for 27 consecutive quarters was fully covered by our 1Q distributable earnings with 106% dividend coverage over the last 12 months. Perhaps more important than our 1Q earnings is where we ended the quarter from a rate sensitivity perspective. Our business model has consistently focused on floating rate assets matched with floating rate liabilities, creating a positive…

[Operator Instructions] And our first question comes from Don Fandetti with Wells Fargo.

Katie, I was wondering if you could talk a little bit about, are you positioning the portfolio for recession? It feels like you're not. And if you did feel like a recession was imminent, what kind of actions would you take?

Thanks, Don. I think we feel that it's a little early to be focusing too much on a recession, record low unemployment, 6% wage growth. We see strong demand for the types of real estate we invested on the ground. But I think as I mentioned in my remarks, the critical piece to our portfolio, which we've really been focused on for years is low leverage lending, the very well-capitalized, experienced sponsors who can withstand volatility. So we feel that our portfolio and our overall investment strategy, which has been consistent over time, puts our loans in a position of being really insulated from any market volatility. I think that strategy was really validated during COVID when our credit performance was very strong. And we think that it continues to put our portfolio in a strong position.

And then it sounds like you think this is a good environment where some of the marginal players stepped to the sidelines because of the volatility. Does that mean that you think you can have a pretty strong asset growth again this year or loan growth, I should say?

Yes. I think that -- sure, we've seen asset growth every year in the history of the company, I think, in strong environments and less active environment. And I think that the key part of our business is that originations and repayments tend to be correlated. So over time, we've been able to very consistently grow the portfolio in various market environments. And I think that, yes, right now, the competitive dynamic is such that scaled, well-capitalized platforms with diverse access to capital, I think will be in a better position. That's what we're seeing out there in the market. So I think that will result in us being able to be very discerning on credit, very selective on the assets that we're doing and capture a broader market share of the opportunities that we find most interesting.

And next we have Steve Delaney with JPM Securities.

Katie, you made positive comments, I thought, about office and obviously rent escalations. About 4 years ago, Blackstone made a pretty large loan in Hudson Yards and it was a construction loan, I believe, to related property, I think, was the Spiral. I think it's loan number 6 that appears in your deck. Just using that as an example to how you view the office market and you used the term opportunistic when you were talking about the U.K. How does this -- how is this loan playing out? And do you see this as like an example of what Blackstone with its relationships with sponsors is able to consistently accomplish?

Yes. I think that the Spiral is a great example of our philosophy and thesis on office. That is a sub-50% loan-to-cost construction loan to Tishman Speyer actually who's one of our strongest, most experienced and most strategic sort of development sponsors. We've been in that loan. The leasing has been very favorable. There's been a couple of recent news articles about it. Construction has proceeded as expected. And overall, our thesis about newer, higher-quality office in the right location is really outperforming, has very much been borne out by that asset, and we feel great about that exposure and we actively look to make more loans like that. I think that thesis, as we've talked -- I've spoken about consistently is really true throughout markets. We see that the newer well-amenitized office, it provides an office environment for employees, for users that is really differentiated and really fosters the type of collaboration that drives companies ahead being in the office. And so we are looking for those opportunities as lending opportunities. We like being in best-in-class assets. We like being at very low leverage points, obviously. And we're seeing a lot of those types of opportunities around the world.

Next is Jade Rahmani with KBW.

Do you agree that mark-to-market portfolio LTV ratios would be lower than the 65% you're showing, considering that in terms of your recent originations, still probably at least half the portfolio might be originated prior to the middle of last year? And we've seen a big run-up in commercial real estate prices. So do you think something in the mid-50s is reasonable to assume?

I think directionally, your philosophy is right. I think that, a, there's been increase in real estate values driven by demand fundamentals driven by lack of new supply, rising replacement costs especially in the markets and assets we're focusing on. And even more importantly, as a transitional lender, we're lending into value-add business plan. So the value of the assets we lend on by virtue of the capital going into them, the repositioning that our sponsors are typically doing should increase value in assets over time. In terms of the magnitude, I'm not sure exactly where that would land. But I think directionally, you're on the right track.

Secondly, do you believe that the overall commercial real estate market is positioned to absorb the higher rate environment without experiencing an uptick in loan defaults? What we experienced during COVID was a shock to the system with an immediate spike in loan delinquency rates and defaults and then a lot of government assistance as well as forbearance that mitigated that impact and then, of course, the improving economy. So delinquency rates have continued to improve. But at this point, we will have a substantial amount of debt maturing this year that we'll be refinancing into likely a 5% coupon, potentially higher depending on term. So do you think that the market can absorb that coupon rate based on fundamentals? Or do you expect the market rate of delinquency and default to increase?

I think it's important to think about the fact that we see the market as not monolithic. And we're most focused on the parts of the market, obviously, that we think are well positioned to absorb the types of rising rates we're looking at. Our borrowers are sophisticated. They're investing in assets, as I mentioned, that have value-add plans that should increase cash flow over time. And importantly, rising rates obviously vary driven by the inflation that we're seeing, which when you're investing in hard assets is really a place that can realize the benefit of increasing income in the face of inflation. I think the other thing to really focus on is that leverage in the system is still quite low generally. So looking at the refinancing opportunities for assets that are in the market, if we were in a position like pre last GFC when leverage was 80%, 85%, that's a completely different story than today when leverage really has been more in that mid-60s level across all markets and asset classes at a much lower level. And in particular, obviously, in our portfolio, we think that the combination of low leverage assets that can grow their incomes in the face of rising inflation to outpace rates and importantly, sponsors that are sophisticated and have been preparing for the prospect of rising rates for a long time, really should inure to the benefit in terms of the performance of the assets and the loans that we're making.

And the next question is coming from Rick Shane with JPMorgan.

I just wanted to talk a little bit about execution on the loans given the transitional nature. I'm curious if you were seeing any delays in terms of build-out or construction and then are you also seeing any delays in terms of absorption of properties?

Thanks, Rick. That's a great question. I think that we talk a lot about sponsor selection. And that's important from a financial perspective, but it's also really important from an execution perspective. And as far as value-add business plans, when we're lending to some of the most active and experienced developers in the world, that really creates a difference in their ability to source materials and their relationships with the trades, with GCs and their ability to really get their projects done. So on the margin, have we seen one-off examples of one particular material that's been a little bit delayed, of course, I think no one is immune from that. But I think that by and large, because we're lending to sponsors that are really the best able to manage these pressures, we've really seen very on-track performance for our assets in terms of the execution of the value-add business plans. I think on the absorption side, it really depends on the asset and the market, obviously. I think the growth market has exceeded all expectations in terms of occupancy, rent growth, absorption really across all sectors. Multifamily is the most obvious example of that, but we're seeing it in all sectors. And I think that in some of the New York and San Franciscos of the world, I mean, those markets have been a little bit slower, but we're still seeing positive trends for the types of assets that we lend on.

And next, we have Derek Hewett with Bank of America.

So excluding the prior quarter, I believe prepayment fees were -- still remains well below pre-COVID level. So could you provide any additional color when prepayment fees could potentially normalize?

Derek, it's Doug. Prepayment fees are lumpy. And of course, in the fourth quarter, we did have an outsized amount of prepayment income. This quarter, we happen to have vanishingly little, effectively none. Typically, we've had close to $0.04 on average if you look back over the last 3 to 4 years. It does fluctuate quarter by quarter. I think with the velocity that we've seen return to the portfolio in 2021, which is maintained through 2022 thus far, we would expect to see that $0.02 to $0.04 of prepayment income on a normalized or annual basis going forward. So I think we're through the slowdown in prepayment income that we saw due to the stasis in the portfolio during COVID. But we're never going to be away from the fact that it's generally very lumpy and it can fluctuate quarter-to-quarter.

And then my follow-up is just given the asset sensitivity disclosures, are there other factors that we -- investors need to potentially consider in terms of either maybe tighter credit spreads to meet the -- those higher rate resets or maybe even higher delinquency rates that could potentially offset at least a portion of that asset sensitivity?

Hello, Derek, Doug again. That is a good question. No doubt, this is an all else equal analysis that we've included in the earnings release and that Tony has alluded to, and there are lots of variables that go into our earnings. We certainly don't expect in our portfolio any drag from nonperformance. There are no signs of that. With regard to the loans that are currently on the books, obviously, the spreads are locked in, our financing spreads are locked in as well. So we wouldn't expect a lot of variability in that in the time frame that we're expecting these rate changes to happen. Is there a correlation between -- an inverse correlation between rates and spreads generally? We think there probably is. It's not necessarily one for one. So I wouldn't read too much into that. Generally speaking, we're able to maintain the net interest margin that ultimately drops to the bottom line by moving the spreads on our debt and our assets in tandem. I think an interesting sort of beneath the surface layer to the interest rate sensitivity is really the sensitivity to the different rates in the different currencies. So for example, LIBOR -- U.S. dollar LIBOR moved further faster than Euribor. We would see significant upside in these numbers due to the way our FX hedges work. So there is a lot to it in terms of variability, as you suggest. We think there's probably variability to the upside to these numbers, which we presented.

And our final question comes from Doug Harter with Credit Suisse.

Following up on that last question about the rate sensitivity. How are you thinking about the dividend given the potential for meaningfully higher earnings coming from higher short-term rates?

Sure. Thanks, Doug. We obviously review the dividend with the board quarterly, and it's a discussion every quarter around our thoughts on earnings and the sustainability of the earnings profile. The increasing earnings in creating the most attractive, stable stream of dividend income for our shareholders is our key priority. And we also like the benefit of building book value through retained earnings along the way. We feel very good about the trajectory of our earnings. We've talked a lot about that today, especially given interest rate sensitivity and our ability to continue seeing portfolio growth. And I think with that context, we'll continue to reevaluate the dividend on a quarterly basis.

And just on that, how much or how do you view your flexibility about how much capital or how much earnings you could retain versus kind of needing to pay out for the REIT test?

We pass our REIT test pretty cleanly. So the $0.62 dividend level that we have today, I would say, from a technical perspective isn't in jeopardy. To Katie's point, it is something that we're regularly, when I say in jeopardy, meaning that we would need to increase the dividend just for compliance purposes. To Katie's point, we do reassess this quarterly and at some level, if you started to get really far out along the tail that you made at that point. But at present, we don't have a lot of technical pressure on the dividend level.

And with that, I would like to turn the call back to Weston Tucker for closing remarks.

Great. Well, thank you, everyone, for joining us. And if you have any questions, please follow up with Tim or myself after the call. Thank you.