Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Blackstone Mortgage Trust Inc (BXMT, Financial) reported a GAAP net loss of $0.38 per share, but distributable earnings were $0.49 per share, indicating strong operational performance despite challenges.
- The company declared a third-quarter dividend of $0.47 per share and authorized a $150 million common stock repurchase, reflecting confidence in long-term value creation.
- BXMT has a 90% performing portfolio at the end of the quarter, showing resilience and effective management.
- The company collected $1.7 billion in repayments through various lender profiles, indicating strong liquidity and repayment momentum.
- BXMT's partnership with M&T Realty Capital is expected to provide long-term income potential with minimal incremental cost, enhancing the business model.
Negative Points
- BXMT reported a GAAP net loss of $0.38 per share, highlighting ongoing financial challenges.
- Credit issues remain concentrated in the US office sector, with significant reserves representing 29% of impaired office assets.
- The company downgraded 12 loans, including three impairments, reflecting ongoing credit quality concerns.
- Near-term earnings are expected to be encumbered by assets on non-accrual, impacting overall financial performance.
- BXMT's debt-to-equity ratio increased slightly to 3.9 times, indicating higher leverage and potential financial risk.
Q & A Highlights
Q: 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? Thank you very much.
A: 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 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.
Q: 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 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?
A: 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.
Q: 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 what gives you confidence earnings stay there? Are we going below the new dividend level, what were the considerations that you guys use to decide that $0.47 is the right place to be?
A: 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 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.
Q: 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?
A: 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 US office. That's where we're seeing the challenges. I think when we look at our US office at this point, we have 55% of our US 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 US 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 US 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 US 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.
Q: 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 play into that? If we see more credit migration, do you slow that down? How are you thinking about the pace of deployment?
A: 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.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
