Good day, everyone, and welcome to the Blackstone Mortgage Trust Third Quarter 2022 Investor Call hosted by Weston Tucker, Head of Investor Relations. My name is Ben, and I'm your event manager. During the presentation, your lines will remain on listen-only. [Operator Instructions] I'd like to advise all parties that this conference is being recorded for replay purposes. And now, I would like to hand it over to your host. Weston, the call is yours.

Great. Thanks, Ben, and good morning and welcome to Blackstone Mortgage Trust's third quarter conference call. I'm 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 will 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. So for the third quarter, we reported GAAP net income per share of $0.60, while distributable earnings were $0.71 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the third quarter. If you have any questions following today's call, please let Tim or me know. And with that, I'll now turn things over to Katie.

Thanks, Weston. The capital markets today reflects significantly heightened uncertainty around global economic conditions. But on the ground, BXMT's fundamental performance this quarter once again underscored the stability, resilience and earnings power of our business. We have always run this company according to our core principles; low leverage, strong borrowers and high-quality real estate, backed by a conservatively structured match-funded balance sheet. The importance of these principles is most apparent in environments like the one we face today. So most institutional real estate owners expected higher rates to come, the speed and slope of the rate hikes have been more aggressive than anticipated. But given the key tenets with which we originated our loans, they are well positioned to withstand the impact of higher rates. At the same time, the growing earnings power across our entire portfolio provides a powerful ballast amid an evolving credit backdrop. This quarter, we generated $0.71 of distributable earnings, up an impressive 13% year-over-year. Our retained earnings grew book value, even as we increased our reserves. And we drove these robust results while maintaining $1.7 billion of liquidity, more than double our March 2020 level. We entered the fourth quarter strategically positioned to play offense in a highly opportunistic investment environment, while continuing to generate attractive durable income for our shareholders. The current market reflects a lack of visibility on the pace of interest rate hikes and where they will sell long term. As a result, asset prices are volatile, impacting liquidity and restraining investment activity. And while the public markets are more reactive to this day-to-day uncertainty, what matters for real estate over time is fundamental performance. High-quality real estate that can capture rent growth is resilient in inflationary environments, as replacement cost rises and cash flows outpace higher OpEx and rates. There's nearly…

Thank you, Katie, and good morning, everyone. This quarter's results show case positive impact of rising rates on BXMT's floating rate loan portfolio with another consecutive quarter of meaningful earnings growth, supported by the stability in our book value, portfolio metrics, and capitalization. We reported GAAP net income of $0.60 per share and distributable earnings of $0.71, which is up $0.04 from 2Q and $0.09 or 15% from 1Q levels. This reflects the positive impact of rising base rates on our 99% performing loan portfolio continuing to flow through to our bottom-line net income. As central banks continue to battle inflation, the market continues to further -- to forecast further increases in base rates, which will similarly provide a tailwind to BXMT's earnings. Comparing to 3Q levels, an incremental 100 basis point increase in base rates, we generate $0.06 of quarterly earnings per share net of incentive fees, assuming all else equal. Similar to 2Q, our earnings this quarter had no meaningful prepayment income as overall market transaction volume has been muted and we collected $443 million of repayments across our portfolio. This compares to $697 million of loan funding, leading to a consistent overall portfolio size of $26 billion and therefore, stability in our capital deployed and net interest income generation. As Katie noted, our portfolio of credit remains strong with no new impairments or non-accrual loans and a net $937 million of loans upgraded with 10 risk rating upgrades this quarter outpacing five downgrades. Overall, our total portfolio is currently 89% risk rated one, two or three, which reflects the overall strength and stability of our borrowers and collateral assets. We increased our CECL loan loss reserve by $0.07 per share this quarter and $0.13 year-to-date, which amount does not include any specific loan reserves. But rather is…

Thank you. Allow me to inform our audience. [Operator Instructions] Thank you. And with that, our first question comes from Don Fandetti from Wells Fargo.

Hi, good morning. Katie, the four office loans that moved to four rating, I believe. Can you talk a little bit about the quality of the sponsor? And do they have -- is their view that there's enough equity in the properties? Because I think that's one of the risks in this environment as the values have gone down. So I think you could see property owners more likely to walk away from an asset?

Sure. Thanks, Don. So we downgraded four loans to four this quarter, just 3% of the portfolio and determine the downgrades were warranted, I think given the unique headwinds each of the asset faces, in some cases, locations in more challenged markets or submarkets like DC or Chicago, as well as looking at the specific circumstances. I think it is important to note, as I mentioned on the call, all of the assets have had recent sponsored cash commitments from very material and so these really are assets that do not underperformance, but where fosters are still investing capital and where we don't expect -- we're not looking at impairments that would be a five rating. I think it's also worth noting, we have eight four-rated loans since COVID and all has been performing consistently for a two-year period. One actually repaid this quarter. So when we look at our four rated loans, we're looking at an increased risk of underperformance. We're looking at our underwriting, what we're seeing in the market. But we do still have committed sponsors in most cases, and we're working towards either repayments or sales to get these assets moving on.

Okay. And then my follow-up is just on net portfolio growth. Is this sort of an environment where it's all about defense. There's not going to be much growth, or do you still plan on growing the portfolio?

I think as we look at the investment environment today, there's a lot of really interesting opportunities. But really, we're in a very fortunate position of having a well-invested portfolio that's creating tremendous earnings power and delivering very strong current income. So we're going to have a very high bar for new investments. We obviously are looking at them. But I think that we should expect a strong well-invested portfolio going forward, but more consistency. And consistency between originations and repayments to keep that earnings power very stable.

Thank you.

Our second question comes from Doug Harter from Credit Suisse. Doug, please go ahead.

Thanks. Then talking about office, can you talk about your willingness or your appetite to look at new office loans and whether you would -- you find any new opportunities attractive?

Sure. I think it's going to start from our overall perspective on the market today, which, as I mentioned, is definitely a high bar and thinking a lot about underwriting debt service type range near, medium, long-term and uses for our capital in more interesting ways, i.e., legacy loan acquisitions, helping the banks reduce some of their exposures those types of unique opportunities that we think can generate really outsized risk return profiles. In the office market, generally, I think we've been very consistent in that we really see a very strong bifurcation in the market. So new builds well positioned in markets with dynamic current demand, pre-leasing things like that. We would certainly look at opportunities like that. And we really see that as a different part of the market than the segment that uses the most challenges.

And then just to follow up on your comment about legacy loan acquisitions. I guess just how do you kind of get comfortable with someone else's underwriting and just kind of the quality of loans versus something that you've underwritten from the start?

Sure. I think this is where the Blackstone platform really shines. I mean, we have incredibly detailed and up to the minute real-time information on what's going on in market. We have a great origination team. This business was really born in a period, whether there were a lot of loan portfolio acquisitions, the GE portfolio acquisition was really formative for the BXMT business generally. And we have, I think, a great capacity to put a plot team of really talented people to sort of crawl all over loan portfolios and get a sense of how we view the underwriting in today's environment and really look at the structure of the documentation and all of that. I think, it's something we've done successfully over time, and we're really well positioned today, both from a team and platform information perspective, as well as our relationships with potential counterparties that might be looking for liquidity.

Great. Thank you.

Our next question comes from Steve DeLaney from JMP Securities. Steve?

Good morning, everyone. Good morning. Thanks for the question and congrats on a nice quarter and a very volatile market. Katie, I'd like to ask about repayments. Obviously, things have slowed down, but it works out -- the $40-some million worked out to about 7% annualized on the portfolio. How should we think about that going forward? Normally, we would think a bridge loan portfolio would be what, 20%, 30% a year in terms of runoff. So just your repay outlook. Thanks.

Yes, absolutely. I mean, I think that, with the way the transaction market is today and looking at all of the factors, we definitely expect overall transaction volumes to come down and that's on the origination side and on the repayment side. With the transaction market cooling, some of the deals that would ordinarily have retained are sticking around longer. In a lot of cases, that's because patient sponsors are doing their sort of hold versus sell analysis and they just like to hold size better. I think you can see that in our risk ratings. We have more ones and twos today as a percentage than is typical. And in other cases, we're going to have situations where people need a little bit more time to execute their business plans. And because of the way we structure our loans, that's really a great opportunity for us to get more equity in the door, to support the business plans, reduce our loan, et cetera. And so, I think, over time, we'll see a little more spaces in portfolio. But most importantly, as we talked about earlier, the earnings power is really dictated by the investment level, the deployment of the portfolio. And so, a more stable portfolio is positive from an earnings perspective.

For sure. And those extensions that you have, in addition to getting more cash in from the borrower, do you have a repricing opportunity at that time as well in some cases?

Yes, we do, potentially. And I think that, we really look at all of those conversations as new investment decisions where we think very carefully about the balance of pricing, term, structure, new equity coming in and really differing to bear what I think is a very sophisticated asset management approach and new information to underwriting to make sure that we're creating the most value that we can for our shareholders.

Great. Thank you for the comments.

The following question comes from Eric Hagan from BTIG. Eric, please go ahead.

Eric, good morning.

Hey, good morning. I’m sorry about that. Can you guys talk about the sensitivity of cap rates in the portfolio to rising interest rates and how you see that developing, especially at the short end of the curve and the sensitivity that you see there? Thank you.

Sure. So, I think, when we think about the rate sensitivity at the short end of the curve, we really look at debt service coverage and the performance of our portfolio. As I mentioned in the remarks, 96% of our loans have either interest rate caps or other very meaningful structural enhancements like carry guarantees. So I think as far as the short end not going to have a material impact on our borrowers' ability to pay, because there really is a lot of structural enhancement already built into the loan As we think about cap rates over time, I think it really depends on a number of factors. Obviously, cap rates are related to interest rates. They are also related to growth in the portfolio, growth in NOI. And we're seeing continued NOI growth in the asset sectors that we've been focused on. Inflation protected sectors like multi-family, hospitality, industrial, things with short duration leases, even very high-quality office is seeing very strong rent growth. And so looking at cap rates in the context of growing NOI, obviously, values will be impacted more so about cap rates going up than if we just had NOI growth, but there's a balance between NOI growth and cap rates, and that's what we really use when we look at the long-term values of our assets, think about the risk in the portfolio, think about new originations.

Very helpful. Thank you very much.

Our next question comes from Jade Rahmani from KBW. Jade, please proceed.

Thank you very much for taking the questions. The upcoming portfolio loan maturities. Can you speak to that? What you have expected for the fourth quarter in 2023? And how much of that is office? Does it resemble the overall portfolio mix, or is there any weighting toward office?

Sure. So I think worth noting when you look at the upcoming loan maturities, they're really pretty minimal. It's about 7% of the portfolio over through the end of 2023. So as we've talked about in past years, most of our loans, we kind of addressed them well ahead whether it's because borrowers are executing their business plans and moving on, or we think about other ways to have borrowers recommit to their assets. So we don't see upcoming maturities as sort of a very heavy schedule. I would say as far as the specific, there's a lot of loans that already have plans in place for refi or sale. And on the other, I would refer back to the remarks I made a bit earlier as far as the approach we take with borrowers. In general, we really are willing to reward rotation borrowers. We're interested in putting more capital in the deals, and that's what we see by and large.

Thank you very much. There was a trade piece noting BXMT made a construction loan $670 million on looks like a Class A potential development in downtown Austin. Can you confirm that, that's the case? And would that be a fourth quarter origination, given its construction, I wouldn't assume there's a large amount of upfront funding there.

Yes. That was actually a second quarter origination. I think the trade picked it up a little later on versus the origination. But we love that project. That is really going to be a best-in-class asset. And I think it really speaks to our broader focus on flight to quality. We think that the best assets well located are going to outperform, whether it's an office or multifamily or hotel that project is a mixed-use project. So, for a low leverage construction loan with one of the best sponsors in our portfolio. So overall, looking at those types of opportunities where we see opportunities to lend at a low leverage level on the newest best quality in the market, we like to see those. But again, that was the second quarter deal. And I think we talked about it a bit on the second quarter call for more detail.

Thank you.

Our final question comes from Stephen Laws from Raymond James. Stephen, please go ahead.

Hi. Good morning. Katie, I'd like to start first with maybe how conversations with counterparties, particularly around the fibre loan didn't change. So maybe the four-rated bucket, when we see four loans with rating changes, that's an internal metric. How are your current conversations going with your counterparties around credit marks? How are they looking at watch-list type assets, specifically around office, kind of any discussions with what you're seeing with -- in those discussions?

Yeah. I think we maintained a really open and active dialogue with all of our lenders. And they're very involved and as to be on everything that's going on in the portfolio in real time. I think in general, when you look at our lenders, we have great long-term relationship shift with them. They trust us to manage the portfolio in the best possible way. They’ve really well-performing portfolios. And of course, they look at our overall business, and we have more income and more liquidity than we've really ever had, and that gives them a strong degree of confidence in us as a borrower and a counterparty. So, really have not seen any material change in terms of our dialogue with our lenders.

Thanks, Katie. And then as a follow-up, appreciate the disclosure and commentary around rate caps and structural protection effectively an old portfolio. But, can you talk a little bit more details there? Where is the weighted average of those rate caps? Your rate caps, how much are in the money, new originations? Where are you putting those in? And is it a different level than where those were going into loans as a spread basis a year or two ago. Any additional color you can provide on the details.

Sure. So starting with new originations, we have always adhered to a policy rate cap on our loans. We're very focused on making sure that we involve us sort of up to the minute structure on the loans that we originate, and that's really been a consistent touchstone of our origination approach over the years and obviously, the same today. I think the rate caps we have in the portfolio. We are seeing more and more of them in the money. They obviously -- they come in at different levels. But I think the credit performance and the interest collection we've seen in the portfolio is indication of the fact that our structures are working. And we continue to have the rate patrol. When loan come upon maturity or the interim maturity, borrowers need to buy new rate caps, and we're seeing that and we're seeing other equity come in more interest reserves, more structural protection. So I think that, that part of the structure is sort of a key difference in terms of how lenders to weather an environment like this and something that we've been very focused on in our portfolio.

Great. Thanks for the comments this morning. Take care. End of Q&A:

Thank you. And now, I'm going to hand it back to Weston Tucker for closing remarks.

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

Thank you for joining everyone. That concludes your conference. You may now disconnect. Please enjoy the rest of your day. Goodbye.