Good day and welcome to the Blackstone Mortgage Trust Second Quarter 2024 Investor Call. Today's call is being recorded. At this time, all participants are in a listen-mode only. [Operator Instructions] At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead.

Good morning and welcome everyone to Blackstone Mortgage Trust's second quarter 2024 earnings conference call. I'm joined today by Tim Johnson, Chair of the Board of Directors; Katie Keenan, Chief Executive Officer; Tony Marone, Chief Financial Officer; and Austin Pena, Executive Vice President of Investments. This morning, we filed our 10-Q and issued a press release with 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 subject to risks, uncertainties and other factors 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 this 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 a GAAP net loss of $0.38 per share, while distributable earnings and distributable earnings prior to charge-offs were $0.49 $0.56 per share respectively. A few weeks ago, we paid a dividend of $0.62 per share with respect to the second quarter. Additionally, our Board of Directors declared a dividend of $0.47 per share with respect to the third quarter and authorized a $150 million common stock repurchase. The dividend is payable on October 15, 2024 to stockholders of record on September 30, 2024. Please let me know if you have any other questions following today's call. With that, I'll now turn things over to Katie.

Thanks, Tim. Since the onset of this credit cycle, we have strategically positioned BXMT to navigate a volatile period, driven by the steep rise in interest rates and a secular shift in office demand. Entering 2024, we saw the pillars of the recovery taking shape with the stabilization of rates and buying of capital markets. Greater transaction flow has created greater liquidity and greater transparency on reset values, accelerating repayments, resolutions and in some cases reserves, all of which we saw this quarter. Portfolio resolutions, of course, impact earnings, but are a necessary transition point to move through the cycle and free up capital for reinvestment and rebuilding of earnings power. This remains our primary focus as we position BXMT to maximize stockholder value over the long-term. This quarter, we made significant progress. With a 90% performing portfolio at quarter end and the continued healing of the capital markets, much of our portfolio is well-positioned for refinancing. Through the first half of the year, we've collected $1.7 billion of repayments through a variety of takeout lender profiles. We see increased acquisition and financing activity broadly across the market. While office liquidity remains challenged, it is reemerging with over $700 million of office repayments year to date. And repayment momentum is accelerating. We've collected more repayments so far in July over $700 million than we did for the entire second quarter, and we are tracking over $1 billion of incremental repayments across nearly 20 individual loans. We see ongoing commitment from borrowers, supporting their assets where they continue to have equity value even at today's reset valuation. To that end, in the last several months, we have closed on three major in London and West LA, bringing in significant borrower equity commitments, totaling over $100 million subordinate to our basis. We…

Thank you, Katie, and good morning, everyone. In the second quarter, BXMT reported a GAAP net loss of $0.35 per share and distributable earnings of $0.49 per share. We also reported distributable earnings prior to charge-offs of $0.56 per share, which excludes realized losses related to non-performing loan resolution. Our earnings continue to be encumbered by the interest expense from our financings of non-performing loans, $0.20 per share this quarter with no related interest income recognized. Many of these loans are, in fact, generating current income. This quarter, we collected $0.11 per share of cash interest related to loans on cost recovery, which was instead applied against our loan basis. And over time, we expect to generate incremental earnings as non-performing loans are resolved and this capital is redeployed at our target returns. In the near-term, however, our earnings will face the headwind of incremental loans placed on cost recovery. These generated nearly $0.07 per share of revenue in 2Q as well as portfolio contraction following the elevated repayments Katie mentioned earlier. We continue to make progress on non-performing loan resolutions, which will ultimately grow our earnings to more stabilized levels over time. Katie mentioned, we resolved an $84 million Brooklyn office loan during the quarter at an exit price above our carrying value. Across our collective NPL resolutions to date, we have realized values at a modest premium to our basis, validating the accuracy of our CECL reserve process. And subsequent to quarter end, we took title to the collateral assets backing two small crossed San Antonio multifamily loans. We have not booked CECL reserves on these loans, as we expect that with proper management, the asset value can be maximized and sold at or above our loan basis. Looking out to the back half of the year, we…

[Operator Instructions] We'll take our first question from Steven Delaney with JMP.

Katie the portfolio now about $21 billion has come off about 16% from the recent high in late 2022. Given what seems to be a slightly more balanced view towards obvious runoff, but some new lending -- green shoot lending opportunities. Can you give us some sense of, on a net basis, how much additional shrinkage we might see? I realized just a rough range, but are we nearing the bottom of the size of the portfolio?

I think it really comes down to relative value in terms of our capital allocation. So if you think about buying into our capital structure at a discount, that, obviously, has one impact, new originations would have a different impact. And we're really going to be allocating our capital where we see the best potential for risk-adjusted returns. So I think that's really the primary driver. The result will be where the portfolio ultimately settles out. I think we're getting, as I mentioned on the call script very significantly elevated repayments, which is obviously a very positive sign about the refinanceability and credit quality of the portfolio. And so I think you could see sort of a local decline in the size of the portfolio as we get those repayments and position that capital for reinvestment. So I think that there is a possibility that we'll see that trend continue a bit over time. But as you picked up on and as we mentioned, we're really focused on redeploying that capital in an accretive way, and certainly, new loans are going to be part of that.

And a quick follow-up from me. On your recent M&T Realty acquisition, some of us on the call are familiar with that to Arbor and Walker & Dunlop. It's an excellent business model. Can you comment on whether, at some point, BXMT might acquire the entire business? I don't know if you have an option to do that. Or is it -- do you think it will just stay as sort of a JV for the next five years or whatever? But do you have any optionality there to acquire that and build it out to make it a much larger business?

No. I mean this is really a partnership with M&T Realty Capital. They have a fantastic business, a great team, a lot of business away from this. We've looked at this business for a long time and we agree that it's a very interesting and complementary business for our transitional lending platform and evaluate it different ways. And we really think that this partnership is the best way at this time for BXMT to participate in the market. And as we mentioned, gives us the optionality to provide agency execution via our partnership with M&T, think creatively about those loans and benefit economically in an appropriate way without any initial or overtime incremental expense. So we like this model. We think the M&T platform is phenomenal and the partnership, we think is really the most accretive way to pursue this business.

We'll go next to Stephen Laws with Raymond James.

Katie I wanted to talk about the first, the new dividend level. I think, as Tony mentioned, about $0.07 per share in Q2 of interest income from new non-accrual loans and then some runoff in the portfolio, especially given the dry repayments. I mean it seems like those two things would point to earnings next quarter around the current dividend levels. So kind of what gives you confidence earnings stay there? Are we going below the new dividend level, kind of what were the considerations that you guys use to decide that $0.47 is the right place to be?

Yes. So I think as we talked about in the past, we're always very focused on the sustainable long-term earnings level of the business. And we're obviously moving through a relatively volatile period in terms of the market and sort of ins and outs within the portfolio. And as a result, as we mentioned, we think that individual quarters might vary from the dividend level. But this level really is based on what we think is sustainable over time. And also very importantly, focused on continuing to balance near-term current income for our shareholders with the ability to allocate capital to new investments that we think will ultimately enhance and drive better long-term earnings over time.

And then as a follow-up, I want to touch on the reserve level. We've seen kind of four pretty big increases in a row, especially in the last few quarters, kind of what gives you comfort in the current level. When I look at four and five rated loans, even adjusting for repayments, the absolute amounts up 25% in the first half of the year, backing into general is 1:3 is about 100 basis points or 1%. The total of 4s and 5s is about 15%. So we see a really big reserve increase when something moves out of the three buckets. Can you talk about your expectations in the back half of the year for additional negative loan rating migration? And what your expectations are for the reserve build going forward?

Sure. So I think that we've really tried to be ahead of what we see in the credit markets, obviously, moving a lot of loans to our watch list to transparently identify what we're seeing in that part of the market. And I think importantly, this is really concentrated in U.S. office. That's where we're seeing the challenges. I think when we look at our U.S. office at this point, we have 55% of our U.S. office loans watchlisted or impaired. We have significant reserves against our impaired assets and against that portfolio of loans. And the rest of that is about $2.4 billion. Of that, 60% is risk rated one and two. Those are new construction loans, primarily very low LTV. As I mentioned on the call, a number of them are looking at refi. We feel very good about the 1s and 2s. And the other 40% is risk rated three U.S. office, which is about $1 billion. That's also about 50% new construction and 50% Sunbelt, where we see -- it is like pretty well leased and good cash flow. So I think the best way to think about it is we've tried to proactively move things into the watch list and into impairment. We mentioned on past calls, a lot of the impaired loans and obviously, all of the watch list loans are performing paying current interest. We're really trying to get ahead of this. And there's really a diminishing amount sort of left in that three bucket in terms of our U.S. office exposure, which is where we're really seeing the credit pressures. Away from that, obviously, we're really seeing the market turn for the rest of the asset classes. Values are recovering much more liquidity than repayments are a very direct crystallization of that. And so we think away from U.S. office, the credit quality of the portfolio is doing well and improving given the tailwinds that we see in the capital markets and in valuations with rates coming down and with liquidity returning.

We'll go next to Doug Harter with UBS.

As you think about the ability to redeploy, how should we think about the level of liquidity that you're going to hold? How much does future credit migration sort of play into that? If we see more credit migration, do you slow that down? Just how are you thinking about the pace of deployment?

Sure. I think as Tony mentioned, we have maintained near-record levels of liquidity really over the last year or more than a year as we've positioned the business to be really well fortified in the face of volatility. Now we feel like we have more visibility on what's going on in the capital markets, obviously, more repayments. Future fundings have come way down. And so, maintaining that very significantly elevated level of liquidity feels like not the best use of the liquidity. We were sort of trading optionality against investment opportunities. Obviously, also over the last 12 months, 18 months, there really weren't a lot of investment opportunities. Transaction volumes were down 40%, 50%, 70%, depending on what you looked at. We kept the pipeline very active. And obviously, we're active across our business. We really didn't see a ton of very interesting opportunities. Now both of those dynamics have shifted. And so maintaining the optionality of the liquidity was really meant to position us to be able to capture the opportunity that we're seeing now in terms of a better pipeline and a bunch of different investment opportunities that we see across the capital structure and across the market. So I think that we wouldn't necessarily expect liquidity to stay at these sort of record levels because we think the liquidity is better served by investing, we'll have to see how that tracks quarter-to-quarter. Again, it's, obviously, there's lumpiness with repayments, redeployment, et cetera. But we think we have a very comfortable sort of excess level of liquidity today. And obviously, we look forward and look at all the potential scenarios around credit migration and others, as you mentioned. And even with that, we think that it's the right time to be reinvesting some of that liquidity.

We'll go next to Jade Rahmani with KBW.

Securitization markets are pretty wide open and there's been a healthy amount of issuance. Coming out of distressed cycles, there typically is access to securitization as a way to bifurcate risk and, therefore, accretively unlock capital. Do you see that market providing any potential opportunity for such a strategy?

Yes. I think it's a great point. I mean we are a very active player all around the securitization markets as an issuer, as a buyer is, obviously, looking at what's going on across various geographies and CMBS, CLO, et cetera. So I think that the resurgence of the various securitized markets has a lot of positive impacts on our business. Obviously, the most direct one is repayments. A lot of the loans were getting repaid are getting refinanced in the CMBS market. That is where a lot of capital is coming in, including for office. Beyond that, I think in terms of CLO issuance or other ways we can directly continue to improve our balance sheet. We've obviously been an innovator and done a lot of that over time. And I think it's something that we'll continue to monitor very closely in terms of strategically using all of the financing options we have to put our balance sheet in the best position. So I do think it's a really relevant trend for our business in a lot of ways and something that we spend a lot of time thinking about how to maximize the impact of.

In terms of new investment, do you see doing anything differently for BXMT coming out of this? For example, could you take smaller pieces of large transactions and really hone in on the risk tranche you want to take, which would allow the company to be very targeted with its use of capital. Also, are you seeing a pickup in loan portfolio sales from banks and other legacy asset holders?

So on your first question, I think that what we're always very focused on is our North Star is the credit profile of the assets we're investing in. So leverage institutional quality borrowers. That will not change. But I think in terms of looking at how to access that tranche of risk return, we have a very diversified business here. We have really great people across the spectrum. I'm looking at various parts of the capital markets. And I think we're going to be very strategic about accessing that risk-return tranche lending. However, we think best benefits the balance sheet and the company. So I do think that, that's something that we're obviously thinking about. We've talked about preferred equity behind multi in the past. We talked about other aspects of the business. And I think that innovating on the origination side and also on the capital markets side, just really how you get to the ultimate equity investment in these deals that's something that we constantly look at to try and optimize for where the business is at a given moment in time. In terms of bank sales and loan portfolios, that's something that is episodic obviously. We've obviously been a very big participant in that market across our business. We think it's something that Blackstone, our real estate debt platform as a whole has a real competitive advantage in because we're able to have a lot of these touch points, underwrite portfolios quickly, have a very specific view on credit. Obviously, we have the scale of capital to invest in them. And so I think it's a really attractive investment opportunity. In terms of volume, I think it's really going to be episodic and there's a lot of sort of individual things that drive whether those deals come to market. But I think that to the extent we see them, that's obviously something that we'll be looking at investing in.

We're going to Don Fandetti with Wells Fargo.

I guess, Katie can you talk a bit on how you think the markets -- the CRE finance markets are going to -- and equity markets will respond to Fed cut. Is that going to potentially drive some more liquidity, make it easier for refinancing, I guess maybe not so much for office. But can you talk a bit whether or not you think that's kind of priced in? Or do you think that's a material event?

So I think that the timing and pace of rate cuts is clearly a very material -- will have a very material impact on the financing markets and sort of capital markets liquidity. I think that, obviously, the expectation and really looking at the macro indicator of inflation that is already driving the five year, the 10 year and those rates are pretty impactful in terms of refinancing, in terms of capital markets more so than sort of 30 days over. So we're already starting to see that. But I think that as it really comes to fruition over time, of course, it's going to have an impact. And I would say, by the way, including on office. I think that when we observed over the turn of the year, really the start of 2024 with a narrowing range of outcomes about rates. It was pretty clear that we were sort of at peak rates and that next direction was sort of flat to down. And the result of that was a resurgence in capital markets activity in the CMBS market and in the transaction market. And we're seeing sort of a continuation and acceleration of that. Rates coming down more is just, I think, more tailwind to that dynamic. And I think the thing that's also really important is spreads continue to be attractive and wider on a relative level, but the cost of capital is really most materially impacted by base rates. And so that's all to say that as the base rates sort of move and if they do come down in the back half of the year or in faster trajectory than perhaps we were expecting a while ago, I think that's going to have a very positive impact. I do think we're already seeing that, but I don't think it's all priced in.

[Operator Instructions] We'll go next to Tom Catherwood with BTIG.

Katie, you had mentioned $700 million of office repayments year-to-date. Outside of the Brooklyn loan sale that you detailed, what was the makeup of the remaining resolutions and how much office is included in the $1 billion of incremental repayments that you're currently tracking?

So the office repayments to date have been a mix. We've had definitely activity in the CMBS market. We've obviously had some sales. We've also had some balance sheet repayments. We had an office construction loan that leased up and our sponsor just kind of took us out. So it's a pretty good mix. I mean, obviously, we've talked about how banks have pulled back from real estate lending generally, and they're certainly similarly pulled back from office. But I think when we look across CMBS, debt funds, some of those parts of the market, we are seeing some liquidity. And even to some degree from smaller relationship banks. A lot of the liquidity for the small office today is coming from long-term owners, high net worth and that's sort of a different part of the capital markets. We're also seeing office liquidity in Europe where we have debt funds and even some banks are coming back into the market there. So office liquidity in general is certainly less prevalent than across other parts of the market. And the liquidity we're seeing is obviously either in the highest quality assets, 1s and 2s, as we mentioned or situations where people are coming in at what they perceive as a big discount in the case of the impaired assets that we're selling. But I think it is -- it's more than just one source. I don't have the number and the $1 billion exactly of office, but there's a couple of larger ones in there that we're tracking for refi. Obviously, the capital markets have been volatile over the last year. And so we'll be watching closely to see how those come to bear. But the trend in repayments is very clear. And obviously, seeing our $700 million in repayments just thus far in July is a very specific indicator of what we're seeing in the portfolio.

Appreciate those details, Katie. And then maybe as a follow-up, Tony, you had previously noted expectations for $70 million to $80 million of realized losses in the first half of the year, and you performed within that range. With the $500 million-ish of challenged loans that are earmarked for near-term resolution, what are your expectations for realized losses through the balance of the year?

I don't have a specific number that I would guide you towards at this time. I'd say when we provided that metric previously, we had a pretty clear line of sight to specific resolutions for those assets. Whereas this $500 million, there's a little more variability, I would say, most importantly is if you look at our history of resolutions being slightly above our marks. You could assume that the realized losses that we take would be in line with our CECL reserves.

We'll take our next question from Rick Shane with JPMorgan.

I don't think this is going to be a surprise given it's been a topic we've discussed a lot, but can you delve in a little bit more to the $150 million repurchase authorization. The dividend reduction equates to about $100 million a year. Stock is now trading at a 20%-plus discount to book. How aggressively should we expect to see you repurchase shares given where stock is trading? Is this sort of a reallocation from dividend to repurchase and you'll do it systemically -- or systematically, I should say? Or how should we think about it?

Yes. I think it's -- I wouldn't say it's one for one in any way. I think it's really two separate things that are somewhat related in that. Our dividend decision is really about balancing continued current income with capital allocation. And the incremental capital, obviously, that we are going to be able to invest, we're going to direct that to where we see the best relative value. We want to have all the tools in the toolkit in terms of being able to access wherever we see the best relative value and obviously, buying into what we are largely performing loan portfolio, which is producing strong current income even at the adjusted dividend level, where we have visibility, where we're seeing a resurgence of repayment and credit performance at a big discount is one of the tools we want to have in the toolkit in terms of investments. But we're going to balance that against debt buyback, which we've been active in, and obviously, new investments. So I think it's going to be a very dynamic decision. I think it's really going to come down to what we see as the best balance for long-term earnings power of the company and our balance sheet composition. And again, it's really about making sure that we have max optionality to make the best investment decisions.

Now understanding that deploying $100 million of capital into your lending investment business generates a levered return and repurchasing shares doesn't necessarily -- I guess, in some ways, it does. But what types of hurdle rates would you need to see on loans to make them compelling in the context of where the stock is trading versus book?

Yes. I mean I think that it -- it's hard to give a specific number because, again, it really comes down to relative value and what is the profile of the loans we're looking at relative to the return and then the profile of the new lending opportunity, the values. And as I mentioned, I do think we are in a very attractive lending environment. Values have come down significantly, but generally now on the upswing. We're coming in at better attachment points, lending standards are better. Spreads remain wide. We have a very strong competitive positioning. And obviously, absolute return is a lot higher than it has been historically. So with all of that, the new loans we're looking at are probably in that sort of mid-teens return level on sort of a levered basis, which is where our business has performed through cycles on sort of a net interest margin basis. So that's kind of a benchmark we would start from. And then we would really be looking at a lot of different considerations around how to balance that against buying into our capital structure from a return and relative value perspective.

We'll take our final question from Eric Dray with Bank of America.

Just wanted to stick with office real quick. Do you guys think that if we get 50 basis points of Fed cuts in the back half year, even if it's 100 basis points of cuts in the next 12 months? Does that really change things for office loans? And kind of what do you guys think it will take to see that sector stabilize and improve?

Yes. I don't -- obviously, lower rates are helpful on the margin. But I think that what we're seeing in office really a secular reset that is not really rate related. And obviously, again, rates obviously have an impact, but I don't think that 100 bps lower rates are going to significantly change what's generally going on in the office market. I think that the things to watch are really where rents settle out, where cap rates settle out and liquidity coming back in, in the form of new capital. And I think that where we've gone from a year ago to today in terms of office, it's really about increasing transparency, value settling out and people feeling a level of conviction to come back in and invest in office at reset values. And there's sort of a third derivative impact of rates on that, I think, because I think more certainty about where rates are going, just creates a stronger level of conviction about investing in real estate as a general matter. But I think that the challenges impacting office are really about demand and kind of a reset in demand and a reconfiguration of where that demand is going. And I think what we've seen in markets is that where the demand is going, is to high-quality office in the right locations. And the assets that aren't that are, obviously, having a very material shift in sort of their viability in the market. And so for those office assets, the more challenged older office assets, the ones that were in sort of second-tier compression locations, if that's not a rate story, that's sort of a fundamental story. And so I think that the impact of rates on that sort of segment of the office market is probably not the main driver.

That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Mr. Hayes for any additional or closing remarks.

Thank you, Katie, and to everyone joining today's call. Please reach out with any questions.