Good day. And welcome everyone to the Blackstone Mortgage Trust Fourth Quarter and Full Year 2022 Investor Call. At this time, all participants are in listen-only mode. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And with that, let me hand it over to Tim Hayes, Vice President with Shareholder Relations. Please go ahead.

Thank you. Good morning. And welcome to Blackstone Mortgage Trust fourth quarter and full year 2022 conference call. I am joined today by Katie Keenan, Chief Executive Officer; Tony Marone, Chief Financial Officer; and Austin Pena, Executive Vice President of Investments. This morning, we filed our 10-K and issued a press release with a presentation of our results, which are available on our website and have been filed with the SEC. 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 our 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 this call and for reconciliations you should refer to the press release and our 10-K. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the fourth quarter, we reported a GAAP net loss of $0.28 per share, while distributable earnings were $0.87 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the fourth quarter. If you have any questions following today’s call, please let me know. With that, I will now turn things over to Katie.

Thanks, Tim. The snapshot of this quarter’s earnings comes down to two key numbers, $0.87 per share, our distributable earnings, an all-time record for BXMT and $0.94 per share, our net change to book value reflecting the impact of our CECL reserve increase given the more challenging credit environment. The two are integrally related. The primary factor pressuring credit performance is also driving record income for our business and that is the precipitous rise in short-term interest rates, 425 basis points over the course of 2022, the status tightening cycle in 50 years. They are also integrally related for our company, our powerful earnings stream protects the lion’s share of returns for our investors, as we work through a credit cycle. Our dividend is delivering a nearly 10.5% current income yields, well in excess of the 3.5% impact on book value of our reserve increase. That dividend is well protected, 140% coverage this quarter, creating meaningful cushion against non-accruals. It is recurring. We paid it for 30 straight quarters. And when we out earn our dividend, the difference is retained as additional equity, further offsetting the impact of increased credit reserves on our book value. This interplay will persist, rates are still increasing and the Fed has made clear that they will stay high for some time. This will continue to pressure credit performance for the most challenged real estate assets. At the same time, elevated rates drive outsized earnings power and current return, a powerful hedge for businesses like ours. The broader market has figured this out. After a year of massive outflows from all sectors, inflows into fixed income so far in 2023 are robust. Credit assets are inherently defensive and floating rate credit is even better today. This does not mean, we will be immune from an…

Thank you, Katie, and morning, everyone. I would like to start by unpacking our financial results for the quarter. We reported a GAAP net loss of $0.28 per share and distributable earnings or DE of $0.87 per share. DE is up $0.16 from the third quarter, driven by continued income growth from our 100% floating rate portfolio, as well as a notable prepayment fee of about $0.07 per share this quarter. Excluding this fee, our regular weighted DE of $0.80 per share is up 13% from 3Q and 21% from the equivalent metric in 4Q of last year, reflecting the significant beneficial impact of rising rates on our portfolio. We continue to see rising rates as a tailwind for our business, but 100-basis-point increase in rates from 4Q levels generating around $0.05 per share of incremental quarterly earnings all else equal. The primary difference between our GAAP net loss and DE is the $189 million increase in our CECL reserve this quarter, primarily related to four loans with specific CECL reserves, as well as an incremental general reserve to reflect the broader market uncertainty and potential risk to our portfolio. Our aggregate asset specific CECL reserve outstands at $190 million or 20% of our five-rated loans and our general CECL reserve of $153 million represent about 55 basis points of our total portfolio, which is up from 35 basis points last quarter. While these reserves will not impact DE unless and until they are realized, we have also placed our loans with specific CECL reserves on cost recovery status effective as of 12/31. These loans received all interest payments due in the fourth quarter and generated about $0.05 per share of interest income. However, as we collect interest payments in the first quarter of 2023 and onward, cost recovery accounting…

[Operator Instructions] Thank you. And the first question is coming from Doug Harter with Credit Suisse. Please go ahead.

Thank you. Katie, hoping you could talk a little bit more about the four loans that you put reserves on kind of what specifically kind of occurred in the quarter that kind of led to that the down grade and specific reserves?

Sure. So the loans that we added specific reserves this quarter were three office loans and one very small rent stabilized multi-loan. We previously had them on the watchlist and talked about a few of them last quarter as areas of concern. They -- we had the general sponsor -- supportive sponsorship behavior, and as Tony mentioned, all of these loans have been paying interest. But we are in a dynamic environment and the performance of these loans have changed over time. In terms of the office loans, which are the lion’s share are in some of the most challenged markets, DC, Long Island City, Orange County. And I think also worth noting, the quality of these buildings is quite distinct from the norm in our portfolio. They are generally more commodity buildings. We made the loans knowing that at low leverage points, because they were relevant to a specific niche of the market that has now changed materially. So the setup of these loans became more challenging in the post-COVID world and then that combined with the impact of higher rates on carry costs and liquidity combined with some upcoming maturity has created a decision point and we made the decision to move those loans to five and take the specific reserves. We are actively working on these loans to resolve them and bring them to a conclusion. And as a reminder, the loans we downgraded our only 2.4% of the overall portfolio and really represent a different paradigm than what we are seeing in the most of the portfolio.

Just on the maturity point, Katie. I guess what are the -- kind of the final maturities or what would be or extension dates that could kind of trigger the next decision point from the sponsors?

So I think we are already in that conversation. They have office loans have their maturities this year and so that’s really part of what is resulting in these reserves and the conversations we are having. So there isn’t another sort of impact or relevant timelines.

Great. Thank you.

And our next question is coming from Don Fandetti with Wells Fargo. Please go ahead. Don, we can’t hear you. Maybe you are on mute.

Hi, Katie. Can you talk a little bit about how higher rates are pressuring borrowers and can they handle much more if the Fed continues to raise and were you able to give modifications in that type of thing to manage through that?

Sure. So I think that clearly higher rates and especially the accumulating impact of higher rates for longer create pressure for borrowers. They may carry costs more expensive. They make the option value more expensive for assets that are already challenged. They changed the perceived cap rate and certainly the higher rates and overall Fed tightening is having a very material impact on liquidity. So those impacts are happening. I think it’s important to note that even with that we still have a 97% performing portfolio. So our assets are withstanding those impacts, which we have been felt for quite a period of time now and I think that’s a testament to the equity value and the assets and our sponsors view about the long-term value of the assets, which we share. I think the other dynamic that you brought up and it’s really important, and I mentioned in my script is that, the impact of higher rates, it creates pressure on assets that were already more susceptible. But for the lion’s share of our portfolio, it creates very substantial excess earnings and that creates insulation in our business in terms of our ability to retain those excess earnings in book value, our ability to cover our dividend and our ability to work with borrowers. If they have a viable business plan and it’s really just the significant increased interest costs that’s causing the pressure we have some flexibility there to put the asset on a better path, allow it to manage carry costs a little bit more reasonably and get to the other side here. And the fact that having much higher rates and the result of that on earnings in our portfolio gives us substantial margin to be able to have those conversations and a lot of optionality in terms of putting these assets on the right foot to manage through this period.

Perfect. Thanks.

And our next question is coming from Steve DeLaney with JMP Securities. Please go ahead.

Good morning. Thank you. Good morning, everyone. Congrats on a strong report in, obviously, a difficult environment. I am curious on the $0.80 of distributable EPS, excluding the $0.07 in prepays. I mean it was very strong, $0.08 to $0.10 above consensus and your own third quarter number of $0.71. Was there anything other than the obviously higher average LIBOR, was there anything unique or one-time in that number, such as maybe recognition of some interest -- accrued interest that had been deferred. Just help us if there is, if you really, I guess, my question is to Tony and to you, Katie, is the $0.80 a reasonable run rate for distributable EPS in the near-term? Thanks.

Sure, Steve. The short answer is, as you highlighted, the $0.07 is really unique and just sort of one-time item.

Sure.

The $0.80 that is the earnings power of the business, it’s the impact of rising rates on the portfolio and the full performance of the portfolio. When me talk about run rate, I’d say, the two things to bear in mind, which I highlighted on the call. On the one hand, we have some of the loan is going to cost recovery that cut against that. On the other hand, we have the benefit of further rising rates that will be a tailwind. Those happen to roughly offset. But if you are thinking about the go forward, those are the three things that I would think about, is the 80% baseline and then those two variables going forward.

Great. Thank you, Tony. And on the $1.10 boost to the CECL reserve, $1.10 per share, about $180 million. Can you clarify how much of that and I think there was certainly the specific, you mentioned, the loans that had been four, five loans that have been put on the cost recovery, but is there a material increase in the general reserve include embedded in that $1.10?

Sure. So the general reserve went from 35 basis points of our loans to 55 basis points, which is about like $0.13. So it’s majority is that change in the impaired loans.

Got it.

But excuse me, it’s about $0.30, I misspoke.

Okay.

So the majority is the move five-rated loans, but you do have the general reserve growing as well.

Yeah. No. I think that’s important, because we at least have some hope or expectation down the road and improving market that some of that may revert to book value. Thank you very much for the comments.

Thank you.

Thank you.

The next question is coming from Jade Rahmani with KBW. Please go ahead.

Thank you very much. I wanted to ask about multifamily. We are seeing negative new lease rent growth, slowing demand, so it’s a matter of time before renewal rents catch up in terms of magnitude of growth? And in addition to that 1 million of multifamily units under construction, so a massive increase in supply will pressure multifamily fundamentals. This sector had the lowest cap rates, a lot of deals done even below 4% caps and many of those deals have challenges with interest rate caps that are coming up. So what are your thoughts on multifamily and how exposed you think BXMT is to any credit issues there over the next 12 months to 24 months?

Sure. Thanks, Jade. I would start by saying, what we are seeing on the ground in multifamily is, perhaps, a little bit distinct and it may speak to the quality of the markets and the assets that are in our portfolio, and more generally Blackstone. While we do see some deceleration in the growth of rents, we are still seeing positive releasing spreads. And I think you alluded to it a little, but it is really critical to focus on the fact that the loss to lease in these rent rolls is still very significant. So even if you see topline market rents decelerating or flattening out, there is still significant loss to lease, that will create positive NOI growth going forward and that’s what we are seeing. I think the other important thing to note is, if you look at the vintage of origination of a lot of these loans, the real question is, where is NOI going to be relative to when we originated these loans and there’s still a lot of growth between those two things, which supports our basis. I think the other thing to focus on it and supports DSCR and other cashless. The other thing to focus on is, there’s a tremendous amount of capital that is focused on multifamily. There has been new capital formation focused on filling some of the gaps in the capital structures that may be caused by interest rates or rate caps rolling off or other needs. And generally, I think, multifamily owners are very positive about the long-term prospects of their assets. The market in general is supported by the agency financing market. And I think as a whole, the combination of continued positive, albeit to your point, probably, somewhat less quick or decelerating growth, but continued positive growth, combined with the fact that there’s a lot of capital markets interest and support for this asset class makes us as a lender feel very good about where our loans are relative to the NOIs and the value of these assets. There will be a little bit of a pop near-term in supply. But beyond what’s already on the ground this year, the supply pipeline is really very significantly falling off. And so, I think, people will also see through interim sort of short-term delivery of some of the assets that are under construction and understand that over the next couple of years after this, there’s going to be very little new supply.

Thanks very much. On the office side, as I go through the portfolio, there’s many markets where we seeing pressure, it’s extremely widespread including markets like Austin, Nashville, parts of Dallas and then the other obvious markets. So how confident are you that your fourth quarter CECL reflects a broad view of the office exposure and that we shouldn’t expect material degradation in credit on that portfolio in the coming quarters?

Yeah. I think a lot of it comes down to quality. I mean, we are in a dynamic environment. So we look at the data and the trends we see today, and that informs what we do with our reserves and our overall risk-rating process and we identified the fives and the fours where we see more susceptibility. But I think in particular with some of the markets you mentioned, there is really a difference in the dynamic between San Francisco and in Nashville. There is still growth in Nashville, may be coming down a little bit. And --but you think about rents and mark-to-market of where those assets were renting out historically versus today and the overall fundamental long-term dynamics. Combine that with the quality of assets we are focused on. I mean, Austin our large office there, is going to be the newest office building in the market. It’s a mixed-use project, 62% of cost with an outstanding sponsorship and it’s really going to be the most premier asset in the market. And I think that that’s part of why we feel good about the overall office portfolio. It’s really looking at quality. We are seeing in most markets is just a continuation of an accelerating flight to quality and so you see the larger market statistics and certainly they have challenges and our portfolio is not immune from that. That’s why we have the fours and fives. But by and large, the very high quality assets in the market. We broke our sort of new and recently constructed at 2015 vintage. Those assets are seeing very different dynamics. They’re seeing good net absorption, growing rents, 5 point to 10 point differential and availability, and while the overall market is slowing, those assets we think are going to continue to outperform.

Thank you.

And the next question is coming from Eric Hagan with BTIG. Please go ahead.

Hey. Thanks. Good morning. How would you describe the approach to reserving and even potentially modifying loans, because of the fact that price discovery is so weak in the market right now. Like how do you handicap for that, in cases where you think there could be more meaningful discrepancies between where you think value sits and where sort of the unknown of where it could realistically transact?

Yeah. And I think for office, we are in a very liquid market, there’s not a lot of transaction activity that’s going on. There is small amounts of transaction activity are generally in the more distressed category. And sorry, I think, it’s fair to say, no one can be perfect in that context. But that said, we have an extremely rigorous process. We do a full deep dive underwriting in coordination with our broader real estate team, using all the best available information we have on our assets, on the market, all of the constant information flow we have coming into Blackstone, both transactions that have occurred and transactions that have not occurred and we inform that all through our process, which has been thoroughly vetted by our senior leadership. The reserves also go through an audit process, so there is a third-party auditor element to it and so it’s an extremely rigorous and detailed process that we think reflects the appropriate level of reserves that we see today.

Great. Thanks. That’s helpful. And how would you maybe describe the outlook for sponsors to capture NOI growth, as a result of the capital investment or the business plan that they are pursuing? Would you say that your sensitivity has changed with respect to unfunded commitments or construction financing in general?

So I think it certainly depends on the asset class. We still feel very good. As I mentioned about the prospects on the majority of our portfolio, multifamily, industrial, hospitality, some other segments that are seeing good growth. On the office side, the majority -- the vast majority of the future funding is a new build office. And as I mentioned earlier, the new build office elements of the portfolio, which is naturally where most of the future fundings are, those assets continue to see very strong growth. There has been just recently in the last month, good leasing coming out of Hudson Yards including at The Spiral, which is our largest office loan. As I mentioned, seeing continued very strong rents on new build offices across markets. And so I think when we look at, think about, our fundings going into new build office buildings, which are also just because of the way we make construction loans tend to be lower leverage on average than the rest of our portfolio, and again by definition, the best quality assets coming into the market. We feel good about continuing to invest capital in those assets.

Yeah. That’s helpful. Thank you guys very much.

The next question is coming from Derek Hewett with Bank of America. Please go ahead.

Good morning, everyone. Kind of following up on some earlier questions, could you provide any update or color on the LTVs for the risk weighted five loans?

Well, I think that, the best indication and where we sort of see that today is really around our reserve levels. And as I mentioned in the call script, we are pretty cautious and pretty sober about where we think values are for the most susceptible or sort of the most vulnerable commodity office assets. We have taken 20% reserves on those assets, reflective of asset values down 50%. That is specific to the assets that we see as most challenged, older vintage, markets that are really tough, situations with the individual assets, where they were addressing a segment of the market that has really changed, the government tenant segment being most significant. So I think that’s really how we think about the metrics on those assets.

Okay. Thank you. And then I realized that BREIT is principally an owner of a real estate, but is there any investment overlap between BXMT and BREIT?

No. It’s a totally separate vehicle.

Okay. Thank you.

The next one is coming from Stephen Laws with Raymond James. Please go ahead.

Hi. Good morning. Katie, can you talk about, what’s your expected resolution path to be for the five-rated loans and how we should think about the timing of those specific reserves moving into realized losses through the -- through distributable earnings?

Sure. So I think that, with these loans and the benefit of what we have here in the platform being the largest owner of real estate in the world, we are really taking a deliberate and thorough approach. These loans do generally cash flow, as Tony mentioned, they all paid interest in the fourth quarter, they are on cost recovery. So we continue to see cashless coming in which will apply to our basis. And in the meantime, what we are doing is assessing the various potential outcomes, whether it’s a sale in due time of structured solution, taking them REO and we are going to make the decision that we think is, most beneficial for long-term value preservation for our shareholders. I think that’s a process that’s going to take some time, because we really want to be deliberate about it and make the right decision and these are a very small part of our portfolio that supported by the tremendous earnings power we have throughout the rest of the portfolio and so our goal is to preserve the most value we count on these assets over time using an ownership mentality.

Thanks. And just a follow-up to that, Katie, can you talk about how these loans are currently financed and in the event that they are on facilities that have credit market exposure. Can you give us an update on how those discussions go and kind of what the options are for financing these loans?

Yeah. Absolutely. So their finance consistently with the rest of our portfolio, which is a mix of different asset level financings. I would say generally our conversations with our -- all of our credit providers are extremely constructive. They have recognized the same thing, we see in terms of our ability to preserve and create an enhanced value over time and they have recognized how responsible we have been with managing views and all of our assets in terms of creating deleveraging, putting ourselves into a better credit position. They know that, we are going to act in the best interest for the long-term preservation of value of these assets, which of course owners to their benefit and they also have the additional credit enhancement of these generally being in crossed pools with a lot of credit enhancement. So we have a lot of flexibility. They are calm. You keep them comfortable. And they are well aware of all of these situations and it’s been a very constructive dialog.

I appreciate the comments, Katie. Thank you.

Our next question is coming from Rick Shane with JPMorgan. Please go ahead.

Hey. Thanks everybody for taking my questions. Katie, you talked about the fact that higher rates are driving higher EAD [ph] and that totally makes sense. But to some extent that is ultimately zero sum, it puts more pressure on your borrowers to the extent yields are going up. I realize that so far a great deal of that has been offset by rate caps. I am curious as we see scenarios where loans are extended either because of execution or because of unattractive takeout financing, how you think about those rate caps, does that -- will you continue to have the same level of coverage if the portfolio fully extends?

Yeah. It’s a great question. And I think rate caps are one of the really important tools in our toolkit that allow us to have conversations with borrowers and sort of right-size our credit exposure on these loans. It really starts with the borrowers’ equity value in terms of what they have to protect, and to your point in a higher interest rate environment, clearly that eats into some of the equity value. But most of our borrowers still have a lot of equity value to protect, even if it’s less than what it was in a zero percent interest rate environment. So that’s a really positive backdrop. And then we have the cap conversations our portfolio is still 95% covered by rate caps or interest guarantees. We had a lot of loans come on those conversations in the last year, so that gives you an indication of our ability to preserve that structural protection. And we take a thoughtful approach, we will -- we have rate cap requirements, we will require that if we think that’s the right thing. We may also trade it for an interest guarantee, more cash in an interest reserve or whatever we think is the best alignment for us and for our borrowers. We have 25 people on our asset management team that are working through all of these decisions and discussions with our borrowers every day and really always just looking for a way to put our loan and the asset on the most stable path going forward. So I think it’s been a great sort of dialog with our borrowers. We have been able to preserve a lot of this protection, be able to -- been able to pick up more sort of credit enhancement in the form of guarantees and interest reserves potentially along the way and we will continue that approach.

Got it. It’s a very helpful answer. Thank you very much.

Sure.

And the next question is coming from Arren Cyganovich with Citi. Please go ahead.

Hey. Thanks. I was wondering, if you could just talk a little bit about the office market and how much of this is driven just by rates and required cap rates versus the actual fundamentals. Obviously, folks are going to the toughest is less and using less office space. I am just kind of thinking about what could turn this around, it is only REITs or do you really have to see a dramatic change in the fundamentals of folks in the offices themselves?

It’s a great question and it’s really a combination. I think that there are assets that are outperforming and doing fine even in the context of higher rates, whether that’s in the multifamily or industrial sectors or new build office, where we continue to see good leasing at strong rents. There are assets that have real secular issues, assets that just targeted a component of the market like government tenancy. As I mentioned, that just really is not a growing or it’s a significantly shrinking part of the market going forward. Commodity, obsolete physical quality office has been something that’s been challenged for years long before COVID and so there is a continuation of the trend. And then there are assets in the middle that cash flows perhaps were not growing or not as substantial as they once were. But they work okay, in a low interest rate environment and less so in the environment that we have today. So I think interest rates become a decision point for assets. Some assets that we are experiencing some challenges, but not really sort of permanently issues, and so as rates fall, you may see some of those assets crossover. But there’s certainly a number of assets in the market and a few in our portfolio that were just built and targeted at a part of the market that has had lasting change and I don’t think rates are -- there’s certainly a contributing factor, but I am not sure that lower rates are really going to change for some of those assets. But again that’s a really small part of our portfolio.

Okay. Thank you.

And our final question is coming from Jade Rahmani with KBW. Please go ahead.

Thank you very much. Just wondering if you could walk through liquidity post the convert repayment, what are the primary sources of liquidity, is it just undrawn available borrowing capacity and do you expect to issue any form of capital to potentially replace that convert, whether it would be a preferred securitization or something else?

Sure. I will start with the second part of your question. So we think of the term loan that we issued earlier this quarter as effectively the replacement for the convert. We thought that was a good time to issue that in the market, so that was a bit of a pre-refinancing. So we would not expect at this point that we are going to handle the convert maturity other than paying it in cash. As far as the sources of liquidity, we always keep some cash on hand, but the majority of the liquidity is under our credit facilities and those are revolving credit facilities where we can as of right borrow that money in 24 hours. That is not some sort of contingent availability that the banks need to approve or need to approve assets. So it’s really as good as cash. We just don’t keep the cash drawn to manage the interest expense.

No plans to issue a CLO in the near-term. I think, Katie, you did talk about some of the improvement in spreads that we have seen in that market.

Yeah. I mean, we are certainly tracking the CLO market and it’s nice to see some additional liquidity in that market. If we issued a CLO, it would really be a factor of our sort of opportunistic management of our balance sheet. As we talked about in the past, all of our asset financing is designed to be term match those CLOs, we really do if we see it as an opportunistic refi that improves our pricing, our structure, some way that we think is better than the in-place credit facilities that we have. And certainly, if we see that opportunity in the market, we will take it. But I think the market is not quite there yet, but certainly the momentum is moving well and we will be tracking that.

Thanks so much.

There are no further questions in the queue. So let me hand it back to Tim Hayes for closing remarks.

Thank you, Operator, and to everyone joining us today. Look forward to catching up shortly.