Blackstone Mortgage Trust Q2 Earnings Call Highlights

Key Points

• Q2 results covered the dividend but included significant pressure: BXMT reported a $0.48-per-share GAAP loss, while distributable earnings before realized losses were $0.48 per share versus a $0.47 dividend. Book value fell 4% to $19.31 per share, largely due to higher CECL reserves and real-estate depreciation.
• BXMT is rotating toward residential, industrial and net lease investments while reducing legacy and office exposure. The company collected $1.2 billion in repayments, invested $1.4 billion, and expects office and pre-2023 legacy exposure to decline by at least 40% by year-end.
• Credit risks remain concentrated in office loans: The watchlist declined to $2 billion, but roughly $1 billion consists primarily of stressed office assets. BXMT recorded three new impairments, including a $345 million Chicago office loan, and cautioned that third-quarter earnings could be affected by impairments and repayment timing.

Blackstone Mortgage Trust NYSE: BXMT reported a second-quarter GAAP net loss of $0.48 per share, while distributable earnings were $0.31 per share. Distributable earnings before realized gains and losses totaled $0.48 per share, covering the company’s $0.47 quarterly dividend.

Management said the quarter reflected continued portfolio turnover, with the company collecting $1.2 billion of repayments, nearly all from loans originated before 2023, and deploying $1.4 billion into new investments. Chief Executive Officer Tim Johnson said the new investments were concentrated in residential, industrial and net lease sectors, which have represented about 80% of portfolio deployment over the past year.

Portfolio rotation and new investment strategies

Johnson said Blackstone Mortgage Trust is working to reallocate capital toward sectors with stronger fundamentals and attractive relative value. The company entered the single-family home builder finance market during the quarter through a newly established joint venture, citing a pullback by banks and a fragmented competitive environment.

The initial home builder finance portfolio included approximately $130 million of loans at the company’s share, consisting of 36 loans across 10 states with an average loan commitment of about $12 million, President Austin Peña said. Johnson described the addressable market as roughly $200 billion and said the strategy could generate mid- to high-teens levered yields.

BXMT also continued expanding its net lease strategy, acquiring more than $135 million of properties at its share during the quarter. Its net lease portfolio reached $661 million, or about 3% of the overall portfolio, Peña said. The company had closed or was closing on more than $150 million of additional net lease acquisitions in July.

“Our new investments are laying the groundwork for a more diversified, granular BXMT,” Johnson said, noting that the company’s average investment size has declined to approximately $20 million from more than $130 million several years ago.

Legacy assets and office exposure remain a focus

Management emphasized efforts to reduce exposure to legacy loans and office properties. BXMT’s office allocation has declined to 21% of the portfolio from 36%, supported by approximately $13 billion of repayments over the recovery period outlined by management.

The company recently began sales processes for more than $1 billion of loans, mostly office loans, and expects to launch a sale process for a 686-key Hyatt hotel in San Francisco. Johnson said the proposed loan sales were optional and that BXMT could sell some, all or none of the portfolio depending on pricing.

“It’s really about rotating our portfolio into the sectors where we see the best fundamentals, the best risk-adjusted return, and the best relative value,” Johnson said in response to an analyst question about the office loan sale process.

BXMT said it expects that repayments and proactive asset management could reduce both office exposure and pre-2023 legacy loan exposure by 40% or more by year-end.

The company’s watchlist declined 23% sequentially to $2 billion from $2.5 billion. However, Johnson said a subset of approximately $1 billion of watchlist loans, primarily office properties with lower in-place cash flow, has faced greater pressure from elevated interest rates. These loans represent roughly 5% of total investments and are risk-rated four, according to Peña.

During the quarter, BXMT recorded three new impairments: two traditional office loans and one mixed-use loan with a substantial office component. Its largest impairment involved a $345 million Chicago office loan originated in 2018. The borrower defaulted in June, though Peña said the company subsequently substantially agreed to restructuring terms under which the borrower intends to contribute significant new capital, receive additional term and accept a reduction in BXMT’s loan balance.

Financial results, reserves and liquidity

Chief Financial Officer Marcin Urbaszek said distributable earnings included $29 million of realized losses, primarily related to the resolution of an impaired Dallas multifamily loan after BXMT foreclosed on the collateral. The company now holds that property as owned real estate.

Book value ended the second quarter at $19.31 per share, down 4% from the first quarter. Urbaszek attributed the decrease primarily to an $0.80-per-share increase in CECL reserves and $0.12 per share of depreciation and amortization associated with owned real estate.

• Total CECL reserves were $2.43 per share at quarter-end.
• General reserves were $1.13 per share, while asset-specific reserves were $1.30 per share.
• The reserve increase was largely tied to the Chicago office loan impairment.
• Liquidity stood at $1.2 billion at quarter-end.
• Debt-to-equity rose to 3.9x from 3.7x in the first quarter, primarily due to repayment timing and higher CECL reserves.

BXMT issued $450 million of senior secured notes in May, largely pre-funding a corporate debt maturity due in the first quarter of 2027. Urbaszek said that following repayment of those 2027 notes, the company expects to have nearly five years of weighted-average remaining term on its corporate debt and no maturities until 2029.

Non-mark-to-market borrowings represented about 88% of total debt at quarter-end, and Urbaszek said the company had no capital-mark-to-market provisions throughout its capital structure.

Outlook for earnings and dividend

Management cautioned that third-quarter distributable earnings could be affected by the quarter’s new impairments and by the timing of large repayments collected in July, including another $1.4 billion of similar-vintage repayments. That amount included a €450 million paydown on BXMT’s Dublin mixed-use loan, previously its largest position.

Johnson said the company would assess any effects from asset sales, portfolio turnover, interest rates and the investment environment when discussing the dividend with its board. He said BXMT’s dividend policy is focused on the “long-term earnings power of the business,” rather than short-term fluctuations alone.

About Blackstone Mortgage Trust (NYSE:BXMT)

Blackstone Mortgage Trust, Inc NYSE: BXMT is a publicly traded real estate finance company that originates, acquires and manages commercial mortgage loans and other CRE debt investments. As an externally managed real estate investment trust (REIT), it seeks to generate attractive risk-adjusted returns through the deployment of senior floating-rate and fixed-rate loans backed by income-producing properties.

The firm's core business activities span the origination of senior mortgage loans, the acquisition of loan portfolios and other real estate debt instruments, and the active management of those investments.

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