Welcome to the Blackstone Mortgage Trust Second Quarter 2022 Investor Conference Call. I would like to advise everyone that this conference is being recorded. And with that, I am handing over to Weston Tucker, Head of Shareholder Relations.

Terrific. Thank you and good morning and welcome to Blackstone Mortgage Trust Second Quarter Conference Call. I am joined today by Mike Nash, Executive Chairman; Katie Keenan, Chief Executive Officer; Austin Pena, Executive Vice President, Investment; Anthony Marone, Chief Financial Officer; and Tim Hayes, Shareholder Relations. This morning, we filed our 10-Q and issued a press release with a 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. We'll also refer to certain non-GAAP measures on the 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 per share of $0.55, while distributable earnings were $0.67 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the second quarter. If you have any questions following today's call, please let Tim or I know. And with that, I'll now turn things over to Katie.

Thanks, Weston. BXMT's standout results this quarter are a testament to the resilience of our business model, even in turbulent markets. Despite a backdrop characterized by widespread volatility, tighter financing availability and slowing real estate transaction volume, we generated higher distributable earnings, grew our portfolio and increased our liquidity position, all while maintaining our strong credit quality. These results underscore the 4 key advantages I outlined last quarter which positioned BXMT exceptionally well to outperform in today's environment. First, as a floating rate lender, our earnings are enhanced, not pressured by rising rates. Second, we have defensive assets. Our low leverage senior loans have strong downside protection and well-capitalized sponsors, supporting credit performance in a wide range of macro scenarios. Third, Blackstone's unparalleled real estate platform gives us access to the broadest pipeline of investment opportunities globally and the tools to select the most compelling among them. And fourth, our continued access to a wide variety of capital sources across asset level and corporate markets allows us to capitalize our investments accretively and continuously enhance the diversity and stability of our balance sheet. The real-world impact of these dynamics proved out in our results this quarter and we expect they will continue to power our business forward. Starting with earnings, we achieved $0.67 per share of distributable earnings for the second quarter, up from $0.62 last quarter. The combination of a fully scaled portfolio and higher interest rates is yielding a strong growing earnings stream, covering our dividend by 108%. Our business has several inherent benefits that support the stability and expansion of this income. Because our portfolio is match funded, we lock in an attractive levered spread but also benefit as base rates increase and drive earnings higher in our floating rate loan portfolio. And our income generation is…

Thank you, Katie and good morning, everyone. This quarter's results reflect the strong tailwind to BXMT's earnings in the current rising rate environment, set against the backdrop of portfolio and balance sheet stability as we enter more challenging market conditions. We reported GAAP net income of $0.55 per share and diluted GAAP earnings of $0.54 per share. As we discussed last quarter, this diluted earnings metric is a result of a new accounting standard that requires us to assume all convertible notes will be settled in shares and therefore dilute earnings prospectively. We continue to believe that basic EPS is a better indicator of our performance than our diluted earnings. Our distributable earnings per share for the quarter was $0.67 which is up $0.05 from 1Q as a result of incremental portfolio growth and the early stage impacts of rising interest rates on our portfolio. As an index-matched floating rate lender, we will continue to benefit from rising rates with an incremental 100 basis point increase in base rates, translating to $0.15 of annual earnings, assuming all else equal. Of course, underpinning the earnings growth this quarter is the stable credit performance of our loan portfolio. We have no new impairments, nonaccrual loans or risk rating downgrades this quarter and our portfolio LTV of 64% and average risk rating of 2.8 remain 1Q levels. As Katie noted earlier, the types of assets we lend against, with transitional business plans that can adapt to changing conditions, are well suited to perform in the current market environment. Another point of consistency this quarter is our book value per share which is effectively reflects incremental uncertainty in the macro environment for this forward-leaning, life of loan loss reserve calculation and it's not reflective of any particular credit concerns in our portfolio. A more…

Our first question is coming from Stephen Laws from Raymond James.

Katie, appreciate the comments around the pipeline, the originations. Wonder to see if you could touch on kind of the relative attractiveness here in the States versus in U.K. and Europe. Maybe how that shifted respectively over the last few months and how you guys have responded with your originations in those regions.

Sure. Thanks, Stephen. I think that, generally, we're taking a very high bar sort of collective approach globally. And our goal is to create the broadest pipeline we can and be very selective within that pipeline to get the most compelling opportunities. I think in terms of relative value, the U.S. has become perhaps a little bit more attractive on a relative basis versus Europe as compared to years ago. I think that really speaks to the competitive dynamic, this CMBS dislocation and the sort of broader impact for that in the U.S. financing market are more pronounced because CMBS is such a more relevant part of the U.S. market as compared to Europe, for example. So I think that's created a lot of dislocation on the competitive side which is, as I said in the remarks, sort of clear the field for lenders such as ourselves who are active and well capitalized.

Great. And as a follow-up, to touch on your comments above. It's pretty competitive out there for financing. You guys have recently been able to put more in place. Can you talk about kind of opportunities to continue growing the non-mark-to-market financing facilities while certain securitization markets are really not an option at this point?

Yes, absolutely. I think that we have been evolving the structure in terms of our financing structure over time. With each new deal we do, we improve the terms. That's just sort of in our nature, always trying to strive for better. So I think that given our track record as a borrower, given our bank relationships, we've really been able to sort of put the envelope in terms of structure as a result of the fact that we have these very high-quality, well-performing, diversified facilities that we can use in different ways to create advantageous financing structures that are really attractive to the banks and also attractive from our balance sheet perspective.

The next question is from Don Fandetti from Wells Fargo.

Can you talk a little bit about the -- it looks like the allowance went up. Can you maybe provide some color on what assumption you're making for CECL? Is it a recession-type scenario? And then secondarily, what are you seeing on property values in commercial real estate? It seems like values are coming down at a decent clip in certain markets.

Sure, Don. I'll start on your CECL question. So as I covered in the remarks, we -- when we were going through our CECL process this quarter, sort of looking at the market, we felt that it was prudent to nudge up the general reserve to reflect the incremental uncertainty. We're not per se modeling a recession when you think about the different qualitative judgments you make in setting the CECL reserve and you compare what we are doing this quarter to COVID, for example. We were making more conservative assumptions around the macro environment in 2020 and sort of transitioning into early 2021. In this quarter, as we sort of looked at the world, we felt like it made sense to move back a partial step. So not anything super, super conservative like a recession but we did think it made sense to notch up the macro conservatism a little bit.

I think on property values, if you look across the overall market, clearly, the impact of rising rates is going to have an impact on property values. But I think the key is the impact isn't felt evenly, right, across all different types of assets. If you think about where you want to be in this environment, it's hard assets with short-duration leases where you can see growth. And that growth is really sort of the third variable when you think about the impact of rising rates, rising cap rates and property value. We're not lending on the market. We're lending on individual assets that we've selected with a view towards inflation. And I think that, combined with the insulation that our 64% LTV credit position provides, makes us feel very good about whatever volatility is happening in property values being removed from our basis in the assets. But I think in general, across the market, clearly, particularly for assets that have more long-duration cash flows with less growth, the impact in cap rates is certainly going to be negative for property values.

The next question is coming from Jade Rahmani from KBW.

Katie, as you're approaching managing this $25 billion portfolio, can you give us some sense as to what your dashboard looks like, what your primary focus is at this point in time? Is it defense? Is it opportunistic which was mentioned a couple of times in the slide deck? Is it even portfolio rotation into those resilient asset classes with the favorable rent growth characteristics? And finally, is it also engagement with borrowers to make sure the asset management function is performing up to your expectations? How do you approach that?

Sure. I mean I think it will probably come as no surprise that the answer is all of the above. We are really fortunate to manage this business with the backbone of a tremendously talented and deep team on the origination side, the asset management side, portfolio management, data analytics. And we have invested tremendously in those areas over the last several years to really make sure that we have great real-time information as to what's going on in our portfolio, both to inform our new investment decisions and make sure we're accelerating in those areas where we see more growth, as well as be proactive and really understand exactly what's going on in our existing portfolio in real time. So I think that having the information and the organization of the information within our platform here, both on the BXMT portfolio specifically but also more broadly across the overall Blackstone real estate platform puts us in a tremendously advantaged position as things are changing because it allows us to be really up to the minute in terms of what's going on in the market and manage our investment decisions and our borrower discussions with that information in mind.

In terms of the transitional lending business, you did mention CMBS to dislocation there. But is there a loan yield, a treasury yield or a spread you think is most insightful at this point in time? CMBS spreads are near record highs, expressing dislocation in that space. The CLO market is also in turmoil, avalanched by excess supply but also demand is weak in that space. So there is some flow-through pricing impact to the transitional lending market that we should be aware of. But what do you think we should be looking at in terms of a yield, in terms of a spread as indicative of the health of this business?

Yes. I think that if you look at public markets generally relative to private markets, they tend to be a lot more volatile for obvious reasons. It's just a market that has more technical aspects around supply-demand. It creates more volatility in terms of the prints of deals, one after another. That's true. In the REIT market. It's true in the CLO market, the CMBS market. And I think the private markets really are generally just a lot more stable on both sides of the coin. So I think that looking at private market dynamics, whether it's where we've been originating loans or our peers or other sort of private market data points is probably more indicative of the broader health of the real estate debt market. And again, I think it really -- when we think about sort of credit performance, it really comes down to LTV's value. I think that when we're talking about transitional lending, there have been spread moves. But when you think about the ability of business plans that are creating value and cash flow growth over time, to withstand the type of spread movements we're talking about as we provided some information on that in our portfolio. But I think in general, these are sophisticated borrowers who are creating value. And I think that, that is really what matters over the long term. So I think that's sort of the way I look at it, when I look at over the market.

Our last question is coming from Rick Shane from JPMorgan.

And before I forget, Doug, thank you for all of the help over the years. We're going to miss you. Katie, when we look at the investment opportunity and think about both funding -- or about loan originations and funding, we all understand the NIM implications but I'm curious, given your funding structure, whether or not there is opportunity to enhance spreads. So let's imagine for a minute that loan yields -- loan spreads are widening a little bit. I'm curious within your funding structure, if you have sources that have tighter spreads so that you can increase financing efficiency and see spreads widen in addition to NIM.

Yes, that's a great question. I think that's why we're looking at the diversity of our lending base really comes in handy. Having 14 different credit facility providers, all of them like sort of different flavors of assets at a given time, they're all in different places in terms of their desires to grow their portfolios, their funding costs. We have different counterparties globally. So obviously, what's happening with banks in the U.S. might not be the same dynamic in Europe. And that really allows us to match with whoever is most interested in extending credit to us at a given time and having a broad-based approach really allows us to find that best match point. And I think that extends even further to our syndications which Tony mentioned. We have a big and growing stable of different syndication relationships as well. Everything from insurance companies to sovereigns to the much broader group of potential senior lending counterparties. So all of that, I think it's really about looking across the market to where the capital is most available and using that to drive the benefit in terms of our balance sheet. And providing product that's attractive to those different banks and other lending counterparties. I think the other interesting part of your question or answer to your question is this is also something that happens over time. Because when we finance new assets, we obviously do term matched financing at the time of closing but we do have the opportunity to opportunistically go to the CLO market over time. That's obviously not something that we're doing at this moment because of the dislocation in the CLO market. But I think we've proven in the past history and I would expect at some point again, we'll come back to the CLO market when the market is healthier. We'll still have the loan spreads on our asset side. And to the extent we're borrowing at somewhat wider spreads today versus historical levels, we may be able to recapture some of that in terms of doing a refinancing into the CLO market.

Got it. And I think -- I mean, like when I look at the spread chart on Page 31 of the Q, it looks like you guys picked up a couple of basis points in terms of spread year-to-date. Nothing huge but again, directionally, it's moving in the right way. Do you think that your brand, your relationships give you -- this is the opportunity to leverage all of that?

I mean I certainly think that our relationships, the overall scale of our platform of our counterparties in the market, the information we have, all of that just puts us in a tremendously compelling position in this market. That applies to the deals we're able to source, Our relationships with borrowers who are much more likely to trust someone that they know is going to act with high integrity in a market like this. Our lenders who are trying to lend more to their best relationships, all of that inures to the benefit of our platform. I think this is an environment where the sponsorship really matters. And we have the various sort of tools in the toolkit between the experience, our investment acumen and the relationships. I think that's all going to allow us to navigate this period in a very strong and manner that allows us to outperform.

And now I am turning it back to Weston Tucker for closing remarks.

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