Blackstone Mortgage Trust, Inc. (NEW) 2026 Q3 Earnings Call

Please go ahead. Good morning, and welcome everyone to Blackstone Mortgage Trust third quarter 2026 earnings conference call.

I am joined today by Tim Johnson, Chief Executive Officer, Austin Peña, President, and Marcin Urbaszek, Chief Financial Officer. 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 would 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 10-Q.

This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the third quarter, we reported a GAAP net loss of $1.95 per share, while distributable earnings were $0.38 per share and distributable earnings prior to realized gains and losses were $0.42 per share. A few weeks ago, we paid a dividend of $0.47 per share with respect to the third quarter. Additionally, our board of directors declared a dividend of $0.30 per share with respect to the fourth quarter. The dividend is payable on January 15th, 2027 to stockholders of record as of December 31st, 2026. With that, I will now turn the call over to Tim.

Thanks, Tim. Interest rates continue to be the headline in our world. The 10-year Treasury is up 80 basis points since the beginning of the year, briefly reaching a 25-year high earlier this month. Market is clearly focused on the potential impacts to our sector, but importantly, we believe the setup is quite different today versus the last time rates rose significantly. Capital markets are functioning well, with CMBS issuance on track for a post GFC record this year. Spreads are effectively unchanged from where we started the year and approximately 40% lower than their peak in 2023. As it relates to real estate values, elevated rates are a headwind, but strong fundamentals supported by continued demand and the collapse in new supply are a tailwind.

This is evidenced by REIT same store NOI growth reaching a three-year high and reflected in performance with the REIT sector achieving a total return of approximately 12% year-to-date and 50% from the 2023 lows when the 10-year last touched 5%. These are all encouraging signs for continued liquidity in both real estate debt and equity markets. Where we see rates having more of an impact is on certain investments made prior to 2023. Last quarter, we outlined a path to accelerate portfolio turnover and reduce our exposure to these legacy pre-2023 investments. Since then, we have made significant progress, proactively selling select loans more exposed to higher rates, harvesting repayments, and reducing our watch lists.

While this has had a significant impact on our third quarter CECL reserves, we believe the impact of the recent rise in rates on our legacy loan portfolio is largely reflected in our third quarter book value. To provide more detail on our progress this quarter, I will start with loan sales. Since last quarter, we have sold nearly $1 billion of loans at a weighted average price of $0.93 on the dollar, capitalizing on strong market liquidity even as interest rates moved higher. This included six legacy office loans totaling nearly $500 million and two legacy multifamily loans totaling approximately $200 million. Importantly, most of these loans were on our watchlist, driving a near 60% reduction in our watchlist quarter-over-quarter to its lowest level since 2019. We are very pleased with this outcome, proactively reducing higher risk rated and office loans in our portfolio.

Including $250 million of these sales that closed in the quarter, we received a total of $2.3 billion of repayments, our highest level since the fourth quarter 2021. Nearly 90% of these repayments consisted of legacy loans. This momentum has continued with the repayment of a $300 million legacy office loan that priced in the CMBS market earlier this week. Real time evidence of liquidity for high quality assets in the current rate environment. Reflecting the loan sales and repayment activity so far through October, we are well on our way to meet or potentially exceed the 40% year-end reduction in both office and legacy loans that we referenced on our last earnings call. Turning to book value. The largest driver of the decline was the impairment of approximately $800 million of loans in the quarter, mostly legacy office and one hotel loan.

We identified these loans on our last earnings call as part of $1 billion on our watchlist, where we observed slower business plan progress and increasing pressure from higher rates. All of these loans were pre-2023 originations, and in many cases, sponsors had injected meaningful equity. But as we anticipated could be the case, those borrowers are now unwilling to commit additional capital to further support their assets. As a result, we took significant reserves against these loans. It is important to point out that we now have only one $57 million watchlist loan in the office sector that has not been previously impaired and reserved for. We believe that the secular challenges in office that have caused the majority of BXMT's impairments are substantially reflected in our book value. Turning to earnings. While we reported $0.42 of Distributable Earnings prior to realized gains and losses in the third quarter, we expect to see pressure on go forward earnings as we reduce the size of our portfolio to account for the book value impact of these new impairments and as we work through resolving legacy investments.

As has always been a priority for BXMT, we are committed to generating an attractive, sustainable dividend. The capital allocation decisions we make today directly influence book value and long-term earnings power, both key components of total stockholder return. With all of this in mind, our board has declared a $0.30 per share dividend for the fourth quarter.

Based on what we see today, we expect to be able to cover this dividend next quarter and in full year 2027, even considering the near term earnings pressure from impaired loans and our lower yielding owned real estate assets. Importantly, we believe this dividend can be sustained through a range of credit and rate environments. A key component of this decision is the ability to preserve capital that can be allocated towards attractive new investments and accretive debt or share repurchases. With a stable, well-structured balance sheet and a reset dividend, we believe BXMT has ample flexibility to dynamically allocate capital and deliver strong risk-adjusted returns for our shareholders. To that end, we bought back $36 million of stock in the third quarter and have $110 million of remaining capacity under our current authorization.

We continue to view buybacks as an attractive allocation of capital, especially given the progress we've made in repositioning our portfolio. First, we carry our owned real estate and impaired loans at nearly 30% below our prior loan basis, reflecting an approximate 55% decline in asset value. Second, our watchlist now stands at its lowest level since before COVID. Third, the remainder of the portfolio is well-performing. As Austin Peña will walk through in more detail, this includes legacy office, which is shrinking rapidly through repayments. Despite all of this, the market is pricing in significant downside from here, with BXMT shares trading at an additional $1 billion discount to our book value. We believe this offers an attractive entry point while delivering an 11% current yield to investors. I'll now pass it to Austin Peña to unpack our portfolio and investment strategy in greater detail.

Thanks, Tim. I'll start by providing some additional detail on our portfolio before touching on Q3 investment activity. At the end of the quarter, we had a $17 billion portfolio. About 50% of our portfolio is post-2023 loan originations rated one through three and recent investments in net lease bank loan portfolios and homebuilder finance. This is up from less than a third at the beginning of the year, demonstrating the significant progress we've made turning over our portfolio and diversifying into new, more granular strategies. About 14% of our portfolio comprises our impaired loans and owned real estate, which on average reflect carrying values nearly 30% below our prior loan basis, implying collateral value declines of approximately 55%. We continue to work diligently to resolve and exit these investments.

Another 5% of our portfolio consists of our watchlist, which declined 56% from last quarter and is now at the lowest level since COVID. Importantly, over half of the balance consists of loans that were previously impaired and reserved for with meaningful new equity commitments from sponsors. Finally, about one-third of our portfolio, or approximately $5.7 billion, consists of legacy pre-2023 loans with a risk rating of 3 or better. These loans, mostly office, multifamily, and hospitality, are more seasoned and were originated in a different market environment. However, we continue to see good liquidity for these assets, with nearly $4 billion of repayments collected in this segment so far this year, and with many more currently in the market to repay.