Q3 2023 Blackstone Mortgage Trust Inc Earnings Call

Good day and welcome to the Blackstone mortgage trusts third quarter 2023, Investor call. Today's call is being recorded at this time all participants are in a listen only mode. If you require operator assistance at any time. Please press star Zero. If you would like to ask a question. Please signal by pressing star one on your telephone keypad.

Pad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. At this time I would like to turn the conference over to Tim Hayes.

This president shareholder relations. Please go ahead.

Good morning, and welcome everyone to Blackstone mortgage trusts third quarter 2023 conference call I'm joined today by Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, Alison opinion, executive Vice President of investments.

This morning, we filed our 10-Q and issued a press release and 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 the company's control.

Operator: Good day, and welcome to the Blackstone Mortgage Trust 3rd quarter 2023 investor call. Today's call is being recorded. At this time, all participants are in a listening mode.

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.

Operator: If you require operator assistance at any time, please press star zero. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

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.

Tim Hayes: At this time, I would like to turn the conference over to Tim Hayes, Vice President, shareholder relations. Please go ahead.

This audiocast is copyrighted material of Blackstone mortgage trust I may not be duplicated without our consent.

For the third quarter, we reported GAAP net income of <unk> 17 per share while distributable earnings were 78 cents per share a few weeks ago, we paid a dividend of <unk> 62 per share with respect to the third quarter.

Tim Hayes: Good morning, and welcome everyone to Blackstone Mortgage Trust 3rd quarter 2023 conference call. I am joined today by Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, Dawson Pena, Executive Vice President of Investments. This morning, we filed our 10Q and issued a press release to the presentation of our results, which are available on our website and have been filed with the SEC.

Please let me know if you have any questions. Following today's call with that I'll now turn things over to Katy.

Thanks, Tim.

Since our last earnings call geopolitical risk is market and interest rates have continued their march higher. The tenure is four 9% up 100 basis points in the last three months and so far is at five 3%.

Tim Hayes: 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 factor section of our most recent 10K. We do not undertake any duty to update forward-looking statements.

We believe that higher rates are having the fed's desired impact with inflation decelerating economic growth slowing.

So we take the fat at their word and expect rates to persist at this level and are managing the business accordingly.

Tim Hayes: We will also refer to certain non-get measures on this call. And for reconfiliations, you should refer to the press release and our 10Q.

Rates impact our lending business into critical and correlated with.

First as a floating rate lender, we continue to recognize the pronounced benefit in our income from higher base rates.

Tim Hayes: This audio cast is copyrighted material of Blackstone Mortgage Trust may not be duplicate. It may not be updated without our consent.

And yet another quarter of strong distributable earnings.

Tim Hayes: For the 3rd quarter, we reported gap net income of $0.17 per share, while the tribunal earnings were $0.78 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the 3rd quarter. Please let me know if you have any questions following today's call.

At the same time, the sustained pressure at high rates and the attendant capital markets Illiquidity is weighing on the overall credit environment.

Even though the SMT remains well positioned for a higher for longer period with our distributable earnings exceeding our dividend, we are able to bolster our book value and significantly offset increasing reserves.

Katie Keenan: With that, I will turn things over to Katie. Thanks, Tim.

Katie Keenan: Since our last earnings call, geopolitical risk is more acute, and interest rates have continued their March higher. The 10 year is 4.9 per cent, at 100 basis points in the last three months, and so far is at 5.3 per cent. We believe that higher rates are having the Fed's desired impact, with inflation decelerating and economic growth slowing. But we take the Fed at their word and expect rates to persist at these levels and are managing the business accordingly.

The steps we've taken on both sides of our balance sheet, including proactive asset management, a conservative liquidity posture at a patient approach to new investments.

US on strong footing to navigate this environment.

This positioning is evident in our third quarter results with D. E F. <unk> 78 per share covering our dividend by 126%.

Katie Keenan: Rates impact our lending business in two critical and correlated ways. First, as a floating rate lender, we continue to recognize the pronounced benefit in our income from higher-based rates, yielding yet another quarter of strong, distributable earnings. At the same time, the sustained pressure of high rates and the attendant capital markets illiquidity is weighing on the overall credit environment. Even so, the XMT remains well positioned for a higher for longer period. With our distributable earnings exceeding our dividend, we are able to bolster our book value and significantly offset increasing reserves.

Liquidity is still at record levels and a continued reduction in our leverage.

On the credit side, our portfolio remains resilient, 95% performing notwithstanding some negative credit migration and a continued healthy pace of repayments.

And over the first three quarters of the year, we contributed over $80 million of distributable distributable earnings in excess of our dividend to book value cushioning much of the impact of incremental reserves.

Delving deeper on credit our challenged assets remain a small part of the overall portfolio with just 5% on cost recovery.

Our watch list represents an additional 13% of the portfolio loans, which are a focus of our asset management efforts, but remain current and performing.

Katie Keenan: The steps we've taken on both sides of our balance sheet, including proactive asset management, a conservative liquidity posture, and a patient approach to new investments, leave us on strong footing to navigate this environment. This positioning is evident in our third quarter results, with DE of 78 cents per share covering our dividend by 126%. Liquidity is still at record levels and a continued reduction in our leverage. On the credit side, our portfolio remains resilient, 95% performing, notwithstanding some negative credit migration, and a continued healthy pace of repayments.

We collected $1 billion of repayments this quarter.

Demonstrating liquidity and investor demand for the high quality collateral backing our loans.

We recognized partial paydowns on several large office.

And we strategically sold a subordinate interest in the U K office loan, reducing our basis by 18% generating $50 million of proceeds and retaining a lower ltvs senior loans still earning a double digit rois.

A separate U K office loan repaid post quarter end selling to an institutional fund at 50% above our basis.

Katie Keenan: And over the first three-quarters of the year, we contributed over $80 million of distributable earnings and access of our dividend to book value, cushioning much of the impact of incremental reserves. Delving deeper on credit, our challenged assets remain a small part of the overall portfolio with just 5% on cost recovery. Our watchlist represents an additional 13% of the portfolio, loans which are a focus of our asset management efforts, but remain current and performing.

While the office headwinds are well established high quality assets continue to outperform.

In addition to physical quality amenities and location tenants are increasingly focused on the capitalization of office assets, when making leasing decisions a clear advantage for our collateral.

Notably we saw several significant leases signed in our portfolio this quarter, including flagship deals in Chicago West L. A Miami and New York.

Katie Keenan: We collected $1 billion to free payments this quarter, demonstrating liquidity and investor demand for the high-quality collateral backing our loan. We recognized partial paydowns on several large office loans, and we strategically sold a subordinate interest in the UK office loan, reducing our basis by 18%, generating $50 million to proceed, and retaining a lower LTV senior loan still earning a double digit ROI. A separate UK office loan repaid post-quarter end, selling to an institutional fund at 50% above our basis.

With the slow but steady March of RTL tenants are transacting and we expect the demand that exists in the market will continue to concentrate in the past.

Our portfolio is far more weighted towards collateral built are substantially renovated since 2015 than the market.

And is therefore, well positioned to capture an outsized share of demand today and in the future with very little New office development on the horizon.

But despite these bright spots office overall remains challenging.

Downgraded and recorded impairments on three of our previously watch listed lots this quarter office assets in the Bay area and Chicago.

Katie Keenan: While the office headwinds are well established, high-quality assets continue to outperform. In addition to physical quality, amenities, and location, tenants are increasingly focused on the capitalization of office assets when making leasing decisions, a clear advantage for our collateral. Notably, we saw several significant leases signed in our portfolio this quarter, including flagship deals in Chicago, West LA, Miami, and New York. With the slow but steady march of RTO, tenants are transacting, and we expect the demands that exist in the market will continue to concentrate in the best asset.

Katie Keenan: Our portfolio is far more weighted toward collateral built or substantially renovated since 2015 than the market, and is therefore well positioned to capture an outside share of demand today and in the future, with very little new office development on the horizon.

While these loans were current on interest through the quarter. We are taking a forward looking approach as we anticipate potential deterioration ahead of maturity dates are other decision points.

We continue to run a robust quarterly process around our risk ratings and reserve levels.

We've increased our office reserves by more than 10 acts in the past year with marks on our five rated loans, implying an average decline in asset value of over 50%.

And collectively we have now either impaired or watch list at nearly 40% of our U S office as we continue to transparently identify risk within our portfolio.

But away from our watch listed assets are 1% to three risk weighted office portfolio is generally stable.

Nearly 60% is backed by new or substantially renovated assets, where we are seeing stronger leasing momentum like the spiral in hudson yards or $5 45 wind in Miami and another 16% benefits from substantial recent equity investments driven by our active asset management approach.

Katie Keenan: But despite these bright spots, office overall remains challenging. We downgraded and recorded impairments on three of our previously watch-listed loans this quarter, office assets in the Bay Area in Chicago. While these loans were current on interest through the quarter, we are taking a forward-looking approach as we anticipate potential deterioration ahead of maturity dates or other decision points. We continue to run a robust quarterly process around our risk ratings and reserve levels.

On the asset management side, we continue to leverage the resources of the Blackstone real estate platform to pursue the best outcomes for our shareholders across the portfolio.

Last quarter, we highlighted the substantial progress we've made on this front securing additional capital and improving our credit position.

Katie Keenan: We've increased our office reserve by more than 10 acts in the past year, with marks on our five rated loans implying an average decline in asset value of over 50%. And collectively, we have now either impaired or watch-listed nearly 40% of our US office loans, as we continue to transparently identify risk within our portfolio.

Over the past year, we have secured a total of $1 5 billion of additional equity commitment subordinates are alone.

Of which over 750 million relates to three and four rated office loan.

As we continue to pursue proactive modifications to place deals on more stable footing in the current environment.

These modifications typically exchange substantial additional borrower capital investment for time and in some cases rate relief.

Katie Keenan: But away from our watch-listed assets, our one to three risk-rated office portfolio is generally stable. Nearly 60% is backed by new or substantially renovated assets, where we are seeing stronger leasing momentum, like the spiral and Hudson yards or 545 win in Miami. And another 16% benefit from substantial recent equity investments driven by our active asset management approach.

Prioritizing credit protection over March and will return as irrational trade in the current environment for our borrowers and for us, especially given our substantial dividend coverage.

In more challenging situations, we are focused on ensuring we have maximum optionality to pursue recovery of outcome.

Katie Keenan: On the asset management side, we continue to leverage the resources of the Blackstone Real Estate platform to pursue the best outcomes for our shareholders across the portfolio. Class Quarter, we highlighted the substantial progress we've made on this front, securing additional capital and improving our credit position. Over the past year, we have secured a total of $1.5 billion of additional equity commitments to coordinate our loan. Of which over 750 million relates to three and four rated office loans, as we continue to pursue proactive modifications to place deals on more stable footing in the current environment.

With our robust liquidity and long duration balance sheet, we are never a forced seller.

And as the largest owner of real estate in the World, we have a deep well of expertise to take ownership and drive value when appropriate.

And at the same time, we will actively pursue sales of challenged assets when the opportunity cost of holding exceeds the return potential.

We expect to execute on at least one such sale next quarter on our small multifamily loan where we are appropriately reserved.

And multifamily more generally our second largest sector fundamentals continue to support loan performance with all other multi loans current on interest.

Katie Keenan: These modifications typically exchange substantial additional borrower capital investment for time, and in some cases rate relief. Prioritizing credit protection over marginal return is a rational trade in the current environment for our borrowers and for us, especially given our substantial dividend coverage.

In the near term a pocket of new supply is temporary rent growth.

Looking past this year the supply demand dynamics are favorable.

<unk> family housing starts are down 42% year over year and home mortgage rates are at a 23 year high significantly impacting affordability for potential homebuyers and supporting rental demand.

Katie Keenan: In more challenging situations, we have focused on ensuring we have maximum optionality to pursue recovery outcome. With our robust liquidity and long duration balance sheet, we are never a forced seller. And as the largest owner of real estate in the world, we have a deep well of expertise to take ownership and drive value when appropriate. And at the same time, we will actively pursue sales of challenged assets when the opportunity cost of holding exceeds the return potential.

And further our loans are typically set up with value add business plan, allowing for rent and NOI growth beyond market trends.

For example, our largest multifamily asset a newly constructed trophy building in Brooklyn is nearing completion of its lease up at rents well above our initial underwriting resulting in a projected that yield nearly 100 basis points higher than our base case.

This quarter, we upgraded six multiline seeing strong cash flow growth through successful execution of such value add strategies.

Katie Keenan: We expect to execute on at least one such sale next quarter on a small multi-family loan where we are appropriately reserved. In multi-family, more generally, our second largest sector, fundamentals continue to support loan performance with all other multi-lones current on interest. In the near term, a pocket of new supply is tempering rent growth. But looking past this year, the supply demand dynamics are favorable. Multi-family housing starts are down 42% year-over-year, and home mortgage rates are at a 23-year high, significantly impacting affordability for potential home buyers and supporting rental demands.

The financing market for multifamily also remains liquid, albeit impacted by rates pressuring the crs and loan side of things.

With a shrinking universe of targeted asset classes the sector remains squarely in the strike zone we.

We see this in our multifamily repayments so far this year $550 million through bank and agency Refis as well as sales well above our basis.

We expect 2020 for them may bring further pressure across the sector as many 2021 origination space maturity.

Katie Keenan: And further, our loans are typically set up with value-ad business plans, allowing for rent and NOI growth beyond market trends. For example, our largest multi-family asset, a newly constructed trophy building in Brooklyn, is nearing completion of its lease-up at rents well above our initial underwriting, resulting in a projected debt yield nearly 100 basis points higher than our base case. This quarter, we upgraded six multi-lones seeing strong cash flow growth through successful execution of such value-ad strategies.

But the combination of robust long term fundamentals and continued institutional liquidity incentivize the sponsors who have the wherewithal to branch near term NOI pressures and protect the substantial equity in their deals.

As such we believe our multifamily portfolio, 68% origination LTV on average remains well positioned to perform.

In closing there is no question that we are in a challenging period for the real estate market.

Rising rates continue to weigh on credit performance, but as a floating rate lender our earnings and dividend coverage also benefit.

Katie Keenan: The financing market for multi-family also remains liquid, albeit impacted by rates pressuring DSCRs and loan sizing. With a shrinking universe of targeted asset classes, the sector remains squarely in the strike zone. We see this in our multi-family repayments so far this year, 550 million through bank and agency refives as well as sales well above our basis.

In this environment current income is a critical component of Investor returns since the beginning of the year, we have paid out $1 86 per share in dividends, while our book value has declined just 36 assets.

Our dividend, which we've paid for 33 consecutive quarters and covered 130% for the past four currently produces a 12, 3% annualized yield on our share price.

Katie Keenan: We expect 2024 may bring further pressure across the sector as many 2021 origination space maturity. But the combination of robust long-term fundamentals and continued institutional liquidity incentivizes sponsors who have to wear with all to bridge near-term NOI pressures and protect the substantial equity in their deals. As such, we believe our multi-family portfolio, 68% origination LTV on average, remains well positioned to perform.

We've intentionally constructed our business for resilience and performance over the long term and our approach has supported distributable earnings stability since the onset of the rate cycle.

We continue to maintain a high bar for new investments, but we expect sustained rate pressure will spur the need for capital solutions for both borrowers and banks as we move into next year.

With a well structured balance sheet and $1 8 billion of liquidity, we are well positioned to capitalize on this opportunity unfolds with that I'll turn it over to Tony Thank.

Katie Keenan: In closing, there is no question that we are in a challenging period for the real estate market. Rising rates continue to weigh on credit performance, but as a floating rate lender, our earnings and dividend coverage also benefit. In this environment, current income is a critical component of investor returns. Since the beginning of the year, we have paid out $1.86 per share in dividends, while our book value is declined just 36 steps. Our dividend, which we've paid for 33 consecutive quarters and covered 130% for the past four currently produces a 12.3% annualized yield on our share price.

Thank you Katie and good morning, everyone in.

In the third quarter, <unk> reported distributable earnings or <unk> 78 per share our fourth consecutive quarter of exceptionally strong earnings.

And a rising rates has continued to benefit from floating rate business fall.

Our <unk> earnings included a onetime <unk> gain on extinguishment of debt.

Reflecting our repurchase of $33 million of our senior secured notes at 85% of face.

Helped to offset the impact from <unk> loan modifications loans placed on cost recovery accounting.

Katie Keenan: We've intentionally constructed our business for resilience and performance over the long term. And our approach has supported distributable earnings stability since the onset of the rate cycle. We continue to maintain a high bar for new investments, but we expect sustained rate pressure will spur the need for capital solutions for both borrowers and banks as we move into next year.

Portfolio contraction.

This quarter, we again posted net portfolio contraction. If you move to this additional three loans to cost recovery status as of 930.

We collected we expect will impact our go forward quarterly earnings by $3.05 per share.

Our debt repurchase this quarter allowed us to opportunistically deploy capital at an attractive yield while also taking an additional step as part of our broader strategy to focus on the strength of our balance sheet and maintain a stable dynamic posture as this credit cycle at all.

Katie Keenan: With a well structured balance sheet and $1.8 billion of liquidity, we are well positioned to capitalize of this opportunity unfold.

Tony Marone: With that, I'll turn it over to Tony. Thank you, Katie.

Tony Marone: Good morning, everyone. In the third quarter, the XMT reported distributable earnings, or DE, 78 cents per share, our fourth consecutive quarter of exceptionally strong earnings as the tailwind of rising rates have continued to benefit our floating rate business model. Our three Q earnings included a one-time two-cent gain on extinguishment of debt, reflecting our repurchase of $33 million of our senior secured notes at 85% of faith. It helped offset the impact from two Q loan modifications, loans placed on cost recovery accountings, and net portfolio contractions.

To that end, we reported our second consecutive quarterly reduction in our debt to equity ratio down.

Down to three six times as of 930 from three eight times at the start of the year.

At the same time, we've maintained a record liquidity of $1 8 billion.

Up from $1 $6 billion at the start of the year. Despite a net repayment of $1 $1 billion of debt so far in 2023.

As we've highlighted on prior calls our balance sheet continues to benefit from our stable capital structure with no corporate debt maturities until 2026, no capital markets margin call provisions across our term matched credit facilities and fully non mark to market provisions on the majority of our liability.

Tony Marone: This quarter, we again posted net portfolio contraction and moved into additional three loans to cost recovery status as of 930. We collectively expect will impact our go-forward quarterly earnings by three to five cents per share. Our debt repurchase this quarter allowed us to opportunistically deploy capital at an attractive yield, while also taking an additional step as part of our broader strategy to focus on the strength of our balance sheet and maintain a stable, yet dynamic posture as the credit cycle of all.

Our loan portfolio decreased to $22 $1 billion out of the 930 with $1 billion of repayments outpacing $440 million of loan funding.

These incremental investments represent fundings under existing loans on our credit facility lenders continue to advance their share of these ordinary course loan fundings indicative of the strength of our banking relationships and the quality of our overall portfolio.

Tony Marone: To that end, we reported our second consecutive quarterly reduction in our debt equity ratio, which is down to 3.6 times as of 930, from 3.8 times at the start of the year. At the same time, we maintained our record liquidity of $1.8 billion, up from $1.6 billion at the start of the year, despite a net repayment of $1.1 billion of debt so far in 2023. As we have highlighted on prior calls, our balance sheet continues to benefit from our stable capital structure, with no corporate deficiencies until 2026, no capital markets margin-called provisions across our term-master credit facilities, and fully non-marked market provisions on the maturity of our liability.

Our 185 loans are diversified across geographies and property types and only 5% of our total portfolio is characterized as nonperforming, which indicates a five risk rated loan and asset specific future reserve.

Our total asset specific future reserve increased $108 million to $323 million a quarter and a.

The reserve equivalent to 23% of the related loans cost basis, and implying a decline of over 50% and the underlying real estate collateral value.

These incremental asset specific reserves were offset by a $12 million decline in our general seasonal reserve for a net reserve increased by $97 million during the quarter.

Tony Marone: Our loan portfolio decreased to $22.1 billion as of 930, with $1 billion of repayments outpacing $440 million of loan funding. These incremental investments represent fundings under existing loans, and our credit facility lenders continue to advance their share of these ordinary course loan fundings, indicative of the strength of our banking relationships and the quality of our overall portfolio. Our 185 loans are diversified across geographies and property types, and only 5% of our total portfolio is characterized as non-performing, which indicates a five-risk-graded loan within asset-specific fee-ser-reserve.

These reserves do not impact until they are realized but do impact GAAP net income, which declined 42 cents this quarter to <unk> 17 per share as a result.

In addition, our aggregate seasonal reserve of $477 million does impact our book value. However, our ability to retain earnings in excess of our dividend has limited our book value declined to about 1% since January one of this year. Despite a 39% increase in our total CS reserve over the past three quarters.

Looking at our risk rating as noted we downgraded three office loans to five risk rating this quarter.

Tony Marone: Our total asset-specific fee-ser-reserve increased $108 million to $323 million of a quarter-end. To reserve equivalent to 23% of the related loans costs, and applying a decline of over 50% in the underlying real estate collateral value. These incremental assets specific reserves were all set by a $12 million decline in our general CSR reserve for a net reserve increase of $97 million during the quarter. These reserves do not impact DE until they are realized but do impact gap net income which declined 42 cents this quarter to 17 cents per share as a result.

All of these loans are on cost recovery status as of 930, which means that any cash interest received is applied as a reduction to our loan basis, rather than recognized as income.

Year to date, we have recorded $41 million of such cost recovery proceeds representing about <unk> 19 per share of unrecognized net income.

As I have highlighted in prior calls just income will eventually be recognized that these funds recover or will otherwise reduce future realized losses should credit continued to deteriorate.

Outside of our impaired loans, we only had two downgrades and reported seven upgrades as the majority of our portfolio continues to perform well and generate compelling returns with comparatively lower levels of risk.

Tony Marone: In addition, our aggregate CSR reserve of $477 million does impact our book value. However, our ability to retain earnings in excess of our dividends has limited our book value decline to about 1% since January 1 of this year, despite a 39% increase in our total CSR reserve over the past three quarters. Looking at our risk rating, as noted, we downgraded three office loans to a five risk rating this quarter. All of these loans are on cost recovery status as of 930, which means that any cash interest received is applied as a reduction to our loan basis, rather than recognize as income.

Overall, our portfolio average risk rating remained at $2 nine same level, we have maintained for the past four quarters.

In closing we remain steadfast in our focus on maintaining a strong balance sheet finding opportunities to reduce risk in our portfolio and managing our more challenged credits to maximize long term shareholder value.

Our 62% dividend is well covered by our distributable earnings and provides a highly attractive reliable income stream for our stockholders generating a 12% yield on yesterday's close.

Tony Marone: Here today, we have reported $41 million of such cost recovery proceeds, representing about 19 cents per share of unrecognized net income. As I have highlighted in prior calls, this income will eventually be recognized as these loans recover or will otherwise reduce future realized losses should credit continue to deteriorate. Outside of our impaired loans, we only had two downgrades and reported seven upgrades as the majority of our portfolio continues to perform well and generate telling returns with comparatively lower levels of risk. Overall, our portfolio average risk rating remains at 2.9, same level we have maintained for the past four quarters.

As a final note we view our recent addition to the S&P Smallcap 600, as an endorsement of the FMT as valuable long term investment for our stockholders.

Results incremental demand creates additional liquidity for our stock, which we believe will benefit our investors across market cycles.

Thank you for joining the call and I'll now ask the operator to open the call to questions.

Thank you as a reminder, please press star one to ask a question. We ask you limit yourself to one question and a follow up question. So we may take as many questions as possible.

First just Stephen laws with Raymond James.

Hi, good morning.

Tony Marone: In closing, we remain steadfast in our focus on maintaining a strong balance sheet, finding opportunities to reduce risk in our portfolio and managing our more challenged credits. To maximize long-term shareholder value, our 62 cent dividend is well covered by our distributable earnings and provides a highly attractive, reliable income stream for our stockholders, generating a 12 percent yield on yesterday's close. As a final note, we view our recent addition to the S&T Small Caps 600 as an endorsement of BXMT as a valuable long-term investment for our stockholders. The resulting incremental demand creates additional liquidity for our stock, which we believe will benefit our investors across market cycles.

Katy I guess to start.

Can you maybe talk a little bit about where you think you are kind of.

Evaluating the 1% to three as I know you talked about some performance metrics and your comments kind of what is the risk of kind of additional negative ratings migration kind of how do you feel about the lead time into some of the the loans.

That may be have original maturity dates later next year that youll start getting more color on in the coming quarters.

Yes, thanks, Stephen Thanks for joining us so it's a great question and I think that we go through our one to three isn't really the entire portfolio and a lot of depth every quarter. I think you can see the proactive approach we're taking both in terms of how we have treated the fours and fives, which really are in many.

Operator: Thank you for joining the call, and I will now ask the operator to open the call to question. Thank you. As a reminder, please press star one to ask a question. We ask you to limit yourself to one question and a follow-up question, so we may take as many questions as possible.

Cases are really in almost all cases downgrades in anticipation of challenge and then also the proactive modifications that we have taken on across our office portfolio and anywhere where we see that there may potentially be stress ahead. So when we look at our threes and fours and our office, we've really done proactive Mas on <unk>.

Stephen Laws: We'll go first to Stephen Laws with Raymond James. Hi, good morning.

Katie Keenan: You know, Katie, I guess to start, you know, can you maybe talk a little bit about where you think you are kind of, you know, evaluating the one to three is, I know you talked about some performance metrics in your comments, kind of what is the risk of kind of additional negative ratings migration, kind of how do you feel about the lead time into some of the loans, you know, that maybe have a rich from maturity dates later next year that you'll start getting more color on in the coming quarters. Yeah, thanks, Stephen.

Many of those loans over the last year and as a result, we have put those loans in much better position. So we're not waiting around to sort of deal with the 2020 for maturity.

And see what happens then we've been having conversations with our sponsors about those loans for many months and that is sort of the result of the $750 million of equity on our three and four rated office loans that we've brought in over the last year. So I think when we look at the overall credit environment, we have 200 loans across the portfolio.

Katie Keenan: Thanks for joining us. So it's a great question, and I think that we go through our one to three isn't really the entire portfolio in a lot of depth every quarter. I think you can see the proactive approach we're taking both in terms of how we have treated the fours and five, which really are, you know, in many cases are really in almost all cases downgrades in anticipation of challenge. And then also the proactive modifications that we have taken on, you know, across our office portfolio and anywhere where we see that there may potentially be stress ahead.

There is obviously going to be movements in both directions on the margin, but we are very in depth and how we look at these deals and we're running out multiple year projections in terms of looking at decision points in risk areas and so our risk ratings really reflect what we see over the future. In addition to what we are.

Seeing today.

Great. Thanks, Katy and then as a quick follow up can you talk about the repayment outlook.

Katie Keenan: So when we look at our threes and fours in our office, we've really done proactive mods on many of those loans over the last year. And as a result, we've put those loans in much better position. So we're not waiting around to sort of deal with the 2024 maturity, you know, and see what happens then. We've been having conversations with our sponsors about those loans for many months, and that is sort of the result is the $750 million of equity on our three and four rated office loans that we brought in over the last year.

And not doing any new origination similar to most peers.

Where do you think leverage trends or maybe trough how do you how do you see that and then appetite for more loan sales.

Not a lot in Q3, I don't think but maybe could you touch on that please thank you.

Yeah. So you know I think that we're really proud of the reduction in leverage that we've had that's really been a factor if the overall conservative approach we've taken with the business. We've had a very healthy pace of repayments. So far this year $1 billion in the quarter and I think that's really a result of the quality of the portfolio and the institutional liquidity.

Katie Keenan: So, you know, I think when we look at the overall credit environment, we have 200 loans across the portfolio. There's obviously going to be, you know, movement in both directions, you know, on the margin. But, you know, we are very in depth in how we look at these deals and we're running out, you know, multiple year projections in terms of looking at decision points and risk areas. And so our risk ratings really reflect what we see, you know, over the future in addition to what we're seeing today.

Stephen Laws: Great. Thanks, Katie.

He is the assets that underlie our loans and we've seen that continue even this quarter, obviously when rates ticked up.

I think the pace of repayments could possibly slow down as rates are higher but as I mentioned in the call script, we literally just had an office loan repay this week so.

The factor with these loans that they reached the end of their business plans are sponsors are ready to sell they're ready to refi and because our portfolio as a whole is low leverage and we're lending on high quality assets that have business plans that are generally working we do see that continued liquidity. So we expect repayments to continue and I think that as far as looking at and the.

Katie Keenan: And then as a quick follow-up, you know, can you talk about the repayment outlook, you know, not doing any new origination similar to most peers, you know, where do you think leverage trends or maybe tross, how do you, how do you see that and then, you know, appetite for more loan sales, not a lot in Q3, I don't think, but maybe could you touch on that, please. Thank you. Yeah. So, you know, I think that we're really proud of, you know, the reduction in leverage that we've had.

Leverage will sort of continue in the range. It is as a result of that looking at new investments. We are actively looking at new investments, we have plenty of liquidity our balance sheet is in great shape, and it's really a factor of overall transaction volume and making sure the investment opportunity. It's clear the high bar that we've set for ourselves for ourselves both from a return perspective.

Katie Keenan: That's really been a factor of the overall conservative approach we've taken with the business. We've had a very healthy pace of repayments so far this year, a billion dollars in the quarter. And I think that's really a result of the quality of the portfolio and the institutional liquidity of the assets that underlie our loans. And we've seen that continue. So, you know, even this quarter, obviously, when rates, you know, ticked up, you know, I think the pace of repayments could possibly slow down, you know, as rates are higher, but, you know, as I mentioned in the call script, we literally just had an office loan repay this week.

Katie Keenan: So, you know, the factor with these loans that they reach the end of their business plans, our sponsors are ready to sell, they're ready to refi and because our portfolio as a whole is low leverage and we're lending on high quality assets that have business plans that are generally working. We do see that continued liquidity. So, you know, we expect repayments to continue and I think that as far as looking at, you know, and the leverage will sort of continue in the range it is as a result of that.

And from a credit perspective, so with overall transaction volumes down 40% to 60% across the market. The addressable universe, it's smaller, but we're very actively out there with our bigger origination team looking for deals and I think that as the market continues to persist through this period and reaches more potential decision points coming.

Into next year, I think there will be more opportunities and we'll certainly be looking for them.

Great. Thanks for your comments this morning Katy.

Yeah.

We'll go next to Steve Delaney with JMP Securities.

Thanks, Good morning, everyone. So I know a lot of focus probably today on the.

Three new office downgrades I'd like to flip it over though and ask a question about the seven upgrades where.

Katie Keenan: Looking at new investments, you know, we are actively looking at new investments. We have plenty of liquidity, our balance sheet is in great shape. And it's really a factor of overall transaction volume and making sure the investment opportunities clear the high bar that we've set from ourselves, both from a return perspective and from a credit perspective. So, with overall transaction volumes down, you know, 40 to 60% across the market, the addressable universe is smaller, but we're very actively out there with our big origination team looking for deals.

Were they mostly.

Loans that were moved from our for two or three.

Are there any large loans in there and is there a common theme and those <unk> situations I know everyone's unique but what is a wow what is improving generally on those seven loans that is causing you to upgrade them. Thank you.

Yeah. Thanks, Steve Great question, So those loans really primarily fall into the category of multifamily and Theyre primarily two.

Katie Keenan: And I think that, you know, as the market continues to persist through this period and, you know, reaches more potential decision points coming into next year, I think there will be more opportunities and we'll certainly be looking for them.

Sorry, three risk rating to two risk grading loans and I would say generally our risk ratings have been pretty sticky over time, we have a lot of loans in the three category that continue to perform on their business plans, but with some situations, where we just see really continued outperformance strong debt yes.

Stephen Laws: Great. Thanks for your comments this morning, Katie.

Steve DeLaney: We'll go next to Steve Delaney with JMP Securities. Thanks. Good morning, everyone. So, I know a lot of focus probably today on the three new office downgrades.

Getting into the zone, where we feel very very good about the execution on the credit we move those types of loans to choose and in some cases, one if it's sort of another leg up from that so these are multifamily assets business plans completed strong rent growth strong debt yields.

Katie Keenan: I'd like to flip it over though and ask a question about the seven upgrades. Were they mostly loans that were moved from a four to a three? Are there any large loans in there? And is there a common theme in those seven situations? I know every loans unique, but what is allowing, what is improving generally on those seven loans that is causing you to upgrade them? Thank you. Yeah, thanks, Steve. Great question.

And really just working in terms of their business plans and benefiting from the leverage level that we have on them. There's also one select service hotel, which I think would it I didn't talk as much about hotels this quarter, but we have seen continued strength on the hotel side, especially in the sectors that we're focused on.

That like everything we will see some deceleration over time, but select service in good markets resorts in good markets those assets are performing as well and so one of our upgrades was.

Katie Keenan: So those loans really primarily fall into the category of multifamily and they're primarily two to, sorry, three risk rating to two risk rating loans. And I would say, you know, generally are risk ratings have been pretty sticky over time. We have a lot of loans in the three category that continue to perform on their business plans. But, you know, with some situations where we just be really continued out performance, strong debt, you know, getting into the zone where, you know, we feel very, very good about the execution on the credit.

It was a select service hotel as well.

Got it so on the multifamily really just strong leasing.

Solid year over year rent increases and basically just achieving.

At plan or even better than plan our expectation. So lead you to think that the basis, you're in the owner will.

Katie Keenan: We move those types of loans to two and in some cases, one, if it's sort of another leg up from that. So these are multifamily assets, business plans completed, strong rent growth, strong debt yield, and, you know, really just working in terms of their business plans and benefiting from the leverage level that we have on them. There's also one select service hotel, which I think would it, I didn't talk as much about hotels, this quarter, but we have seen, you know, continued strength on the hotel side, especially in the sectors that work focused on.

Probably comfortably be able to refinance is that the right way to think about that that loan is probably going to be off your books in a year or so.

Yeah. It's a good question I would say our tooth and ones are easily re financeable in this market I think the question for our borrowers and what we've seen over the course of the last year. It's really comes down to their business plans. So that they have reached the end of their business plan and our next capital markets activity is selling its likely that theyre just going to keep.

Katie Keenan: And, you know, I think that like everything will see some deceleration over time, but, you know, select service in good markets, resorts in good markets, those assets are performing as well. And so one of our upgrades was, you know, was a select service hotel. God, it's one of the multifamily really just strong leasing, solid year-over-year rent increases and basically just achieving at plan or even better than plan expectations. So lead you to think that at the basis you're in, the owner will probably comfortably be able to refinance.

Our loan in place for longer it's unusual for someone to go out and refi if they think theyre going to sell in a year or 18 months. The costs just don't really make sense. So we have a lot of borrowers that are sort of just waiting for a window in terms of sale and in the meantime, we have these very high quality stabilized assets sticking around in our portfolio because you know people people.

Aren't going to try if they are of good quality deal they've done a good job on theyre not going to sell into a more challenging market they'll just wait. These assets have do you think cash on cash the spreads on the loans in the portfolio generally are probably lower than where they can achieve elsewhere in the market, but the capital structures are set up the right way because they have created value and so I think.

Katie Keenan: Is that the right way to think about that? And that loan is probably going to be off your books in a year or so. Yeah, it's a good question. I would say our two's and ones are easily refinanceable in this market. I think the question for our borrowers and what we've seen over the course of the last year, it's really come down to their business plan. So if they've reached the end of their business plan and their next capital markets activity is selling, it's likely that they're just going to keep our loan in place for longer.

These loans will stick around for a longer and that's certainly what we've seen so far.

Thanks for the color Katy.

Okay.

We will go next to Sarah <unk> with BTG.

Hey, everyone. Thanks for taking the question sorry.

So I would just like to talk about office color generally.

Katie Keenan: It's unusual for someone to go out and refi if they think they're going to sell in a year or 18 months. The costs just don't really make sense. So we have a lot of borrowers that are sort of just waiting for a window in terms of sale. And in the meantime, we have these very high quality stabilized assets sticking around in our portfolio because people aren't going to try, if they have a good quality deal, they've done a good job on.

So from where we said post labor day 2023.

Do you think the weakness in office fundamentals in refinance ability are more entrenched in work from home policy or overall economic weakness at this point.

And if the latter worsens next year as more pre Covid office leases expire at the same time should we expect to see additional reserves taken on that asset class and at what point do you think we would start to see Rio come onto the books.

Katie Keenan: They're not going to sell into a more challenging market, they'll just wait. These assets have decent cash on cash, the spreads, the loans in the portfolio generally are probably lower than where they could achieve elsewhere in the market. But the capital structures are set up the right way because they've created value. So I think these loans will stick around for longer, and that's certainly what we've seen so far. Thanks for the call, Arcadia.

Or would we see more modifications like like we saw this quarter can you talk about that balance as we head further into next year.

Sure. That's a lot of questions I'll try and hit all of them and let me know if I missed anything I think as far as the broader outlook on office, it's pretty interesting because there are two sort of counterbalancing effects. There is certainly at the risk of cyclical downturn, although the economy has been remarkable.

Sarah Barkham: We'll go next to Sarah Barkham with BTIG. Hey everyone, thanks for taking the question. So I would just like to talk about office color generally.

Katie Keenan: So from where we sit, post Labor Day 2023, do you think the weakness in office fundamentals and responsibility are more entrenched in work from home policy or overall economic weakness at this point? And if the latter worsens next year as more pre-COVID offices expire at the same time, should we expect to see additional reserves taken on that asset class, and at what point do you think we would start to see REO come on to the books, or would we see more modifications like we saw this quarter?

We are resilient to date and if you look at the main users for the types of office buildings that we make loans on whether it's the fire tenants sort of creative marketing content creation, even the tech industry, which is obviously pulling back from office a lot right now, but the business itself actually in <unk>.

Earnings looks to be doing pretty well those industry has seemed to be pretty resilience in the face of the overall macro.

And we've seen job growth there as well, which historically has been an indicator a leading indicator of demand growth now of course, there's also the countervailing factor.

Katie Keenan: Can you talk about that balance as we head further into next year? Sure, that's a lot of questions I'll try and hit all of them, and let me know if I miss anything. I think as far as the broader outlook on office, it's pretty interesting because there are two sort of counter-balancing effects. There's certainly the risk of cyclical downturn, although the economy has been remarkably resilient to date, and if you look at the main users for the types of office buildings that we make loans on, whether it's the fire tenants, sort of creative marketing content creation, even the tech industry, which is obviously pulling back from office a lot right now, but the business itself actually, in recent earnings, looks to be doing pretty well, those industries seem to be pretty resilient in the face of the overall macro.

Return to office, which has marched along sort of slow and steady positively but of course, it's still below pre COVID-19 levels and overall sort of space rationalization I would say when we look at the statistics and you know there have been a number of third party market reports out there. This quarter you can see that tenants are making space decision returned to office.

Continues.

A lot of tenants out there that have instituted new return to office policies. This quarter, starting next year sort of every quarter. There is more of that but I think that there is certainly still a question as to where that ultimately settles out.

For our portfolio I think the big question is the concentration of demand in which office buildings and how does that overlay with what we have and 60% of our one to three rated office is sort of post 2015, vintage which is much higher than the market as a whole and one of the statistics I saw recently, which I thought was really interesting was that 90 per.

Katie Keenan: And we've seen job growth there as well, which historically has been a leading indicator of demand growth. Now, of course, there's also the counter-vailing factor of return to office, which has marched along sort of flow and study positively, but of course, it's still below pre-COVID levels and overall sort of space rationalization. I would say when we look at the statistics, and there have been a number of third-party market reports out there this quarter, you can see that tenants are making space decision, return to office continues.

Set of office vacancy is in like 30% of office buildings and so when you think about that relative to the concentration of where demand is going and there's lots of statistics like that in terms of net demand et cetera. We just have to make sure that our office buildings are well positioned in the market to capture a disproportionate share of demand because theres going to be the sort of broader.

Market dynamics in terms of demand and I think it's candidly very hard to predict where those level out I think.

As far as more reserves and mods and as we look forward to next year.

Katie Keenan: There's a lot of tenants out there that have instituted new return to office policies this quarter, starting next year, sort of every quarter, there's more of that, but I think that there's certainly still a question as to where that ultimately settles out. For our portfolio, you know, I think the big question is the concentration of demand in which office buildings and how does that overlay with what we have. And 60% of our one-to-three rated office is sort of post-2015 vintage, which is much higher than the market as a whole.

Every single one of our assets is a facts and circumstances like bottoms up deal decision. So when we approach each loan and each conversation with a borrower whether it's proactive a year ahead of time trying to get capital in the door, whether it's looking at making sure. The asset is appropriately capitalized to capture those leases in the market, which.

It's something we're very focused on.

Or whether it's thinking that we may be in a better position to maximize value for the asset and an Oreo situation that our borrower for various reasons, we're really looking at each one of those and just using all the tools, we have whether it's our expertise our capital the strength of our balance sheet to just make sure that we're maximizing value over time.

Katie Keenan: And one of the statistics I saw recently, which I thought was really interesting, was that 90% of office vacancy is in like 30% of office buildings. And so when you think about that relative to the concentration of where demand is going and there's lots of statistics like that in terms of net demand, et cetera, we just have to make sure that our office buildings are well positioned in the market to capture a disproportionate share of demand, because there's going to be these sort of broader, you know, market dynamics in terms of demand, and I think it's candidly very hard to predict where those level out.

Do I think that we could potentially have some assets come on to ARIA or some more of those conversations over time of course in this market. That's definitely are very likely to happen, but I think that we have the tools and we've really been ahead of the game in terms of reducing our basis in these deals and making sure that they are appropriately capitalized and also coming up.

Katie Keenan: I think as far as more reserves and mods, and as we look forward to next year, you know, every single one of our assets is a fact in circumstances like bottoms-up deal decision. So when we approach each loan in each conversation with a borrower, whether it's proactive, you know, a year ahead of time trying to get capital in the door, whether it's looking at making sure the asset is appropriately capitalized to capture those leases in the market, which is something we're very focused on, you know, or whether it's thinking that, you know, we may be in a better position to maximize value for the asset and inario situation than our borrower for various reasons.

With our contingency plans, our business plans and putting the right team in place to make sure that if we end up in those situations, we will be ready to hit the ground running and maximize our potential recovery.

Okay, great. Thanks for all the detail there and then just one more from me you mentioned during Q&A that you guys are actively looking at new investments given how strong liquidity is so I was just curious if you could give a bit more color on what's looking interesting right now whether credit or equity.

Katie Keenan: You know, we're really looking at each one of those and just using all the tools we have, whether it's our expertise, our capital, the strength of our balance sheet, to just make sure that we're maximizing value over time, time. So, you know, do I think that we could potentially have some assets come onto ARIA or some more of those conversations over time? Of course, in this market, you know, that's definitely are very likely to happen.

And I know, we're focused on <unk> right now, but maybe some perspective from the broader Blackstone platform, just maybe some detail on what looks interesting from a sector or geography perspective. Thanks.

Yeah absolutely.

It is a really interesting time to invest in as a whole at Blackstone. We are really focused on the credit opportunity. We think it is tremendously interesting time to be a credit investor you're inherently and investing at a discount to asset value that creates a defensive position and the returns available you can see it in our results and really across.

Katie Keenan: But I think that, you know, we have the tools and we've really been ahead of the game in terms of reducing our basis in these deals and making sure that they're appropriately capitalized. And also coming up with our contingency plans, our business plans, putting the right team in place to make sure that if we end up in those situations, we'll be ready to hit the ground running and maximize our potential recovery.

The board and credit, especially floating rate credit are just historically attractive.

Katie Keenan: Okay, great. Thanks for all the detail there. And then just one more from me. You mentioned during Q&A that you guys are actively looking at new investments, given how strong liquidity is. So, I was just curious if you could give a bit more color on what's looking interesting right now, whether credit or equity, you know, I know we're focused on BXMT right now, but maybe some perspective from the broader Blackstone platform.

In terms of the risk return you can achieve so we think credit is really interesting that certainly you know our posture of our business and across the firm and I think on the real estate side as far as sectors. We're excited about the demand growth in data centers has been phenomenal. That's an area. We've been very active in on the equity side as well as on the debt side student housing.

To be very strong certain lodging and leisure sectors, and obviously on the credit side and multifamily continues to be a good area the rate basis, and we will be focus there too.

Katie Keenan: Just maybe some detail on what looks interesting from a sector or a geography perspective. Thanks. Yeah, absolutely. You know, I think it is a really interesting time to invest. And as a whole, you know, at Blackstone, we are really focused on the credit opportunity. You know, we think it is a tremendously interesting time to be a credit investor. You're inherently investing in a discount to asset value that creates a defensive position.

And I should say industrial is obviously continues to be a good sector.

Right.

Great.

Yes.

We'll go next to Jade Rahmani with K B W.

Yeah.

Thank you very much.

I was wondering about asset management and loan resolutions are you seeing any sponsors take an interest in buying into some of your debt position in order to reduce their leverage and hence their basis I noticed you sold a $51 million junior loan interest and I was thinking.

Katie Keenan: And the returns available, you can see it in our results and really across the board and credit, especially floating rate credit are just historically attractive, you know, in terms of the risk return, you can achieve. So we think credit is really interesting. That certainly, you know, a posture of our business and across the firm. And I think on the real estate side as far as sectors were excited about, you know, the demand growth and data centers has been phenomenal.

That this could be a way to facilitate.

Modifications workouts loan resolutions.

Yeah.

Katie Keenan: That's an area we've been very active in on the equity side as well as on the debt side. Student housing continues to be very strong certain lodging and leisure sectors and obviously on the credit side, you know, multi-family continues to be a good area at the right basis and, you know, we'll be focused there too. And in our case, industrial is obviously continuous to be a good sector.

Yeah, Chad I think youre really on point and really a lot of the capital we brought in a lot of the models. We've done so far this year have been exactly that so sponsor to look at deals continue to believe in their business plans, but effectively want to pay off the bottom of their debt capital structure or effectively buy back.

Katie Keenan: Great.

The mezzanine portion of our loan so what we'll do is we'll they'll they'll effectively by the bottom 10 or 15% of the loan they buy it at a double digit.

Jade Rahmani: We'll go next to Jade Ramani with KBW. Thank you very much. I was wondering about asset management and loan resolutions. Are you seeing any sponsors take an interest in buying into some of your debt position in order to reduce their leverage and hence their basis. I noticed you sold a $51 million junior loan interest and I was thinking that this could be a way to facilitate modifications workouts loan resolutions. Yeah, Jade, I think you're you're really on point and and really a lot of the capital we brought in a lot of the mods we've done so far this year have been exactly that.

12, 13% IRR, whatever we think is appropriate for the for the deal there are effectively paying off the most expensive part of their debt capital structure, reducing the debt balance reducing the carry cost putting the asset on stronger footing in terms of deleveraging the asset going forward and enhancing their return.

Jade Rahmani: So sponsors who look at deals continue to believe in their business plans, but effectively want to pay off, you know, the bottom of their debt capital structure or effectively buy back, you know, the mezzanine portion of our loan. So what we'll do is we'll they'll they'll effectively buy the bottom 10 or 15% of the loan, you know, they buy it at, you know, a double digit, you know, 12, 13% IRA or whatever we think is appropriate for the for the deal.

And for US, we're reducing our basis, we have so much built in earnings in the portfolio because base rates are 500 basis points higher than when we set up these deals. So we're earning much more on these loans then we set them up to you than we expected so for us, making the trade off reducing our basis.

Reducing the overall gross coupon of the loan, but still earning more than what we expected to when we set the loan up that's a very rational trade and a lot of our borrowers are taking advantage of that.

Thank you I also wanted to ask on cash flow performance something I've been focused on and I know investors are two cash flow from operations declined quarter over quarter. However, it looks like there was a working capital headwind to the to the tune of around $21 million wondering.

Jade Rahmani: They're effectively paying off the most expensive part of their debt capital structure, reducing the debt balance, reducing the carry cost putting the asset on stronger footing in terms of, you know, we're delivering the asset going forward and enhancing their return potential. And for us, you know, we're reducing our basis, we have so much built in earnings in the portfolio because base rates are 500 basis points higher than when we set up these deals.

If there is any specific seasonal items to point out.

And your.

Your overall thoughts on cash flow performance.

Yeah.

Jade Rahmani: So we're earning much more on these loans than we set them up to than we expected. So for us making the trade of reducing our basis, reducing the overall, you know, gross coupon of the loan, but, you know, still earning more than what we expected to when we set the loan up.

Hey, James It's Tony I, Wouldnt say, there is anything, particularly notable in terms of cash flow from operations.

But I would flag as far as seasonality.

Yes.

As we've mentioned, we're getting paid generally speaking all of our loans and we have plenty of cash flow to cover our dividend not just from an earnings perspective, but importantly.

There is not a significant amount of pick interest or deferred interest that's elevating our net income relative to our cash flow. So I think what you're probably seeing is just some inherent lumpiness.

Tony Marone: That's a very rational trade and a lot of our borrowers are taking advantage of that. Thank you. I also wanted to ask on cash flow performance, something I've been focused on and I know investors are too. Cash flow from operations declined quarter over quarter. However, it looks like there was a working capital headwind to the to the tune of around 21 million, wondering if there is any specific seasonal items to point out and your overall thought on cash flow performance.

Cash flow of operations, that's ordinary course.

Any business, but no no issues, there or anything that I would flag I think we're very comfortable with the level of cash from operations.

Thank you.

Yeah.

We'll go next to Don <unk> with Wells Fargo.

Yes. Good morning. After three office loans that were downgraded can you provide a little context in terms of fundamentals at the property level and also.

Tony Marone: Hey, Jay, Tony, I wouldn't say that there's anything particularly notable in terms of cash flow from operations that I would flag as far as seasonality, you know, as we've mentioned, we're getting paid, generally speaking, all of our loans and we have plenty of cash flow to cover our dividends, not just from earnings perspective, but importantly, there's not a significant amount of taking interest or deferred interest that's elevating our net income relative to our cash flow.

What sort of brought things too.

<unk>.

Okay.

Reserving perspective.

The risks.

Yeah, absolutely so.

Obviously, each deal specific but I would say generally really the two factors are rates not surprisingly and then two of the three assets. The two larger ones are in the San Francisco Bay area and so we have one in San Jose one in Silicon Valley, both very nicely recent.

Tony Marone: So I think what you're probably seeing is just some inherent lumpiness in cash flow operations that's ordinary course in any any business, but no, no issues there or anything that I would flag, I think we're very comfortable with the level of cash flow operations for generating. Thank you.

We renovated very high quality assets, but as I think mentioned in the Q&A tab.

Tack, which is 40% of the market in San Francisco has just been really challenged in terms of office yes.

It's by far the biggest driver of negative net absorption across the country. If you look sort of more sector specific there is theres, a pretty big difference between <unk> and any other industry and San Francisco has just always been kind of a company town. So we see historically in San Francisco, it's sort of a boom and bust cycle when tech is working.

Don Fendetti: We'll go next to Don Fendetti with Wells Fargo. Yes, good morning.

Katie Keenan: Of the three office loans that were downgraded, can you provide a little context in terms of fundamentals at the property level and also, you know, what sort of brought things to head from a reserving perspective. Yeah, absolutely. So, you know, obviously each deal is specific, but I would say generally, really, the two factors are rates, not surprisingly, and then two of the three assets, the two larger ones are in the San Francisco Bay area.

It's extremely positive for the market and when tickets pulling back.

It's an overhang and so you have that now.

You also have some quality of life issue that I think there is a lot of focus on addressing but will take time because of the way the way that sort of political system works in San Francisco in the Bay area. So that's really what was driving most of the challenges with those assets.

Katie Keenan: And so, you know, we have one in San Jose, one in Silicon Valley, both, you know, very nicely recently renovated, you know, very high quality assets, but as I think mentioned the Q and A, you know, tech, which is 40% of the market in San Francisco has just been really challenged in terms of office use, you know, it's by far the biggest driver of negative net absorption across the country. If you look sort of more sector specific, there's there's a pretty big difference between tech and any other industry and San Francisco has just always been kind of a company town.

Do you feel good about the long term.

Performance at that market as I said, it's really been a very cyclical market and Tac as a whole we believe in and we believe in San Francisco, but it's going to take time and in the meantime, those are assets that have higher carry cost today because of where rates are so it is really the confluence of those two factors the third <unk> right about it it's just a very small <unk>.

Office deal in Chicago, where.

We've been pretty successful over time, reducing our basis, but it's sort of a small deal in a relatively old fund and it's hitting its maturity. So we'll evaluate the best option there.

Katie Keenan: So, you know, we see historically in San Francisco, it's sort of a boom and bust cycle when tech is working, it's extremely positive for the market. And when tech is pulling back, you know, it's, it's an overhang and so you have that now, and you also have some quality of life issues that I think there's a lot of focus on addressing, but we'll take time because of, you know, the way the way the sort of political system works in San Francisco and the Bay area.

Got it thank you.

We will take our next question from Rick Shane with J P. Morgan.

Thanks, everybody for taking my question.

Look the difference between distributable earnings dividend and GAAP earnings really highlights some of the timing differentials inherent in the business model.

Katie Keenan: So, you know, that's really what was driving, you know, most of the challenges with those assets, you know, we do feel good about the long term performance of that market. As I said, it's really been a very cyclical market and, you know, tech as a whole, we believe in and we believe in San Francisco. But it's going to take time and in the meantime, you know, those are assets that have higher carry costs today because of where rates are. So, it's really the confluence of those two banks.

In terms of recognition of credit expenses, both from a distributable taxable perspective versus the sort of implicit.

Our assumed credit expenses over time.

We can look back and basically the dividend.

Katie Keenan: The third vibrated load is just a very small office deal in Chicago where, you know, we've been pretty successful over time reducing our basis, but it's sort of a small deal and a relatively old fund and, you know, it's hitting its maturity, so we'll, you know, evaluate the best option there. Thank you.

On any sort of one year basis or two year basis split.

GAAP net income and distributable.

Question really becomes two fold one when you think about the reserves presumably.

You believe that Theyre conservative how conservative or how much cushion do you think you have in them, but more importantly, when do we expect to really see some of those realized losses come through is it a one year horizon is it a five year horizon. So we can start to reconcile that differential.

Rick Shane: We'll take our next question from Rick Shane with JP Morgan. Thanks everybody for taking my questions. Look, the difference between distributable earnings, dividend and gap earnings really highlights some of the timing differentials inherent in the business model in terms of recognition of credit expenses, both from a distributable and a taxable perspective versus the sort of implicit or assumed credit expenses over time. We can look back and basically the dividend on any sort of one-year basis or two-year basis splits, gap net income and distributable.

Thanks, Rick I think that.

It's hard to say because it really depends on the individual assets right. So we have a hotel deal for example that we took a reserve on.

In the Covid period that has continued to perform at its reserve level of recovery in performance that that's continued for a while we.

We have other assets as I mentioned, where we are looking for more of a near term sales situations. So the timing really could extend over quite a prolonged period of time, there may very well be assets, where we think the right answer is to take them over as Oreo and operate them for the foreseeable future. So I think it is.

Rick Shane: The question really becomes twofold. One, when you think about the reserves presumably, you believe that they're conservative. How conservative or how much cushion do you think you have in them? But more importantly, when do we expect to really see some of those realized losses come through? Is it a one-year horizon? Is it a five-year horizon? So we can start to reconcile that differential. Thanks, Rick. You know, I think that it's hard to say because it really depends on the individual assets, right?

Hard to peg sort of a definitive time period, and certainly we'll be fighting for value recovery and those types of situations I think the other very important dynamic is that every passing quarter. Our earnings of the majority of the portfolio. The 95% of the portfolio that is performing and that is earning a very strong amount of net income.

To what we expected and relative to the overall portfolio. We continue to see the benefit of that earnings on a quarterly basis. Both in terms of the dividends, we pay out to our shareholders and in terms of our ability to accrete the access into our book value. So I do think that this is all going to take time to play out we're going to want to implement the best.

Rick Shane: So we have a hotel deal, for example, that we took a reserve on, you know, in the COVID period that has continued to, you know, perform at its reserve level, recover and performance, that's continued for a while. We have other assets, as I mentioned, where we are looking for more of a near-term sale situation. So the timing really could extend over quite a prolonged period of time. You know, there may very well be assets where we think the right answer is to, you know, take them over as RIO and operate them for, you know, the foreseeable future.

Recovery strategy the capital markets are moving very slowly in all cases, and so all of this is going to take time to play out.

In the meantime, we're going to continue earning the very strong distributable earnings profile, we have from a portfolio that allows us to cushion a lot of the impact here.

The other thing that I would add got it.

Rick Shane: So I think it's hard to peg sort of a definitive time period and certainly we'll be fighting for value recovery, you know, in those types of situations. I think the other very important dynamic is that every passing quarter are earnings of the majority of the portfolio, the 95% of the portfolio that is performing and that is earning a very strong amount of net income relative to what we expected and relative to the overall portfolio.

I'm sorry.

Sorry, just to add one further thing as you are correlating the dividends and gap and ran at key was just discussing gets into the timing of how some of these reserves are recognized as it relates to the dividend that's driven by our requirements.

Yes, as it relates to taxable income, which is also influenced by the timing, but it's important to recognize that our dividend level is very stable in that at the moment, we're well out earning the dividend.

Rick Shane: You know, we continue to see the benefit of that earnings on a quarterly basis, both in terms of the dividends we pay out to our shareholders and in terms of our ability to accrete the access into our book value. So, you know, I do think that this is all going to take time to play out. We're going to want to implement the best recovery strategy, the capital markets are moving very slowly in all cases.

So there is no downward pressure for us to have to cut it were far far away from that but on the other hand, we do have some different tax attributes that is allowing us to retain those earnings and so we don't expect that to add to our dividend or make a special dividend. So I would view the dividend as very solid at 62.

Rick Shane: And so all of this is going to take time to play out. And in the meantime, we're going to continue earning the very strong distributable earnings profile we have from the portfolio that allows us to cushion a lot of the impact here. The other thing that I would add got a death death death. I'm sorry. So I just add one further thought as you were correlating, you know, D.E, dividends and gap and everything that Katie was just discussing gets into the timing of how some of these reserves are recognized.

Where it is for the near term and then youre going to see the variability and gap in des as those different timing elements that J P mentioned earlier players from those metrics, but the dividend you could think of is pretty solid.

I think I think that's totally fair.

I'm going to try to frame my follow up question and get to win.

Interestingly enough with all of the headwinds in terms of office, it's going to be multifamily, where you guys have.

Cited youre going to take your next potential realized loss.

Rick Shane: You know, as relates to the dividend, you know, that's driven by our requirements as we as relates to taxable income, which is also influenced by this timing, but it's important to recognize that our dividend level is very stable in that. At the moment, we're well out earning the dividend. So there's no downward pressure for us to have to cut it. We're far, far away. From that, but on the other hand, we do have some different tax attributes that is allowing us to retain those earnings, and so we don't expect to have to add to our dividend or make a special dividend.

Is that because.

Those are.

Easy or to exit in this environment because the market is more robust.

Thanks, Rick I think that there's potentially some element of that although as I mentioned, we've got an $800 million of multifamily repayments. So far this year. So we are seeing.

Katie Keenan: So I would view the dividend as very solid at 62 cents, where it is for the near term, and then you're going to see the variability in gap and D.E, as those different timing elements that Katie mentioned earlier play through those metrics, but the dividend you could think of as a pretty solid. I think that's totally fair. I'm going to try to frame my follow up question and get to win. Interestingly enough, with all of the headwinds in terms of office, it's going to be multi-family, where you guys have cited, you're going to take your next potential realized loss.

I mean, sorry $800 million of office repayments. So far this year. So we are seeing.

You know decent liquidity and in office and I think that really there. It's a question of spot pricing versus recovery. When we think about our you know with the.

Our long term plan for our office assets and of course liquidity is worse than in Opex.

This deal of the multifamily deal it's small it's it it's one of the very few rent stabilized exposed assets in our portfolio, it's gone through sort of a storied history and its just an asset that we have been.

Katie Keenan: Is that because those are easier to exit in this environment because the market is more robust? Thanks, Rick. I think that there's potentially some element of that, although as I mentioned, we've gotten $800 million of multi-family repayments so far this year. So we are seeing, sorry, $800 million of office repayments so far this year, so we are seeing decent liquidity in office, and I think that really there is a question of thought pricing versus recovery when we think about our long-term plan for our office assets, and of course liquidity is worse in office.

Looking to move on from for a long time.

So I think it's it's a little bit idiosyncratic and we're hopeful that we can execute on the transaction.

With a good buyer there.

Got it and then last question I Couldnt read my own handwriting.

Wanted to ask you, but when you if.

If you take Oreos would you take write offs immediately associated with them based upon revised appraise values.

I think under our definition it would depend.

The way we characterize distributable earnings is it's reduced by a realized loss. So that would typically be an actual contractual change in loan terms or at the point of a sale of a property. However, we do have the ability. If we think that that losses I think the language we have in our Qs nearly certain are all but certain to take it. So I'd say, it's more facts and circumstances.

Katie Keenan: This deal, the multi-family deal, it's small. It's one of the very few red stabilized exposed assets in our portfolio. It's gone through sort of a storied history, and it's just an asset that we have been looking to move on from for a long time. So I think it's a little bit idiosyncratic, and we're hopeful that we can execute on the transaction with a good buyer there. Got it. And then last question, I couldn't read my own handwriting so I could figure out that we wanted to ask you, but when you, if you take RIOs, would you take right off some immediately associated with them based upon revised appraised values?

And not something that I would say is pro rata based on appraisal at the time of a foreclosure.

Okay. Thank you guys.

We'll take our final question from Eric <unk> with Citi.

Thanks <unk>.

Well Erinn today, maybe if you could give an update on the risk created five months that are coming due for the next couple of quarters. It looks like you have.

Orange County in New York, New York Office long stealing thank you in Chicago.

Due early next year.

Katie Keenan: I think under our DE definition, it would depend the way we characterize distributive learnings is it's reduced by a realized loss, so that would typically be an actual contractual change in loan terms, or at the point of a sale of a property. However, we do have the ability, if we think that that loss, I think the language we have in our queue is nearly certain or all but certain to take in. I'd say it's more facts and circumstances, and not something that I would say is prerratic based on appraised what the time of foreclosure. Okay.

Do you expect to do additional maturity extension was along or should we just model and near term right out.

Yes.

As far as the five rated loans.

Tony Marone: Thank you guys.

These are the ones I mentioned, we're really focused on maximizing recovery I would say the maturity dates they really are what's driven the downgrade. The one you mentioned the Chicago loan. So what I was mentioning earlier that we have downgraded ahead of a conversation around that maturity date for some of the other ones. We're engaged in active discussion with our borrowers.

Aaron Saganovich: We'll take our final question from Aaron Saganovich with City.

In terms of modifications or creating the best plan for recovery. There I think the maturity dates are a factor, but not the primary factor. We're really just focused on how do we get to the best path for recovery for those assets overtime or sales, we think thats the right thing, but we'll really evaluate that.

Katie Keenan: Thanks, this is Kaili Wang for Arren today. Maybe if you could give an update on the risk-created five loans that are coming due for the next couple of quarters, looks like you have the Orange County and New York office loans due in through Q and the Chicago office loans due early next year, do you expect to do additional maturity extension with a loan or should we just model a new term right out?

Based on the ability to.

Create the most value and and with it and also thinking about opportunity costs over time.

Got it okay and it looks like you had one <unk> and one fatality low in Spain that are on a risk weighted for us well. So maybe if you could talk about where you are seeing with the domestic market places outside of the U S.

Katie Keenan: Yeah, so I think as far as the five rated loans, those are the ones I mentioned were really focused on maximizing recovery. I would say the maturity dates, they really are what's driven the downgrades, the one you mentioned the Chicago loan, is the one I was mentioning earlier that we've downgraded ahead of a conversation around that maturity date. For some of the other ones, we're engaged in active discussion with our borrowers in terms of modifications or creating the best plan for recovery there.

Yeah, you know I would say that what we're seeing generally in Europe is pretty stable and I mentioned that we've had some good liquidity on UK office loans or Europe office loans, even this quarter I would say, we see the macro there in terms of fundamentals for our real estate is pretty positive.

Katie Keenan: I think the maturity dates are a factor, but not the primary factor, we're really just focused on how do we get to the best path for recovery for those assets over time, or sales we think that's the right thing, but we'll really evaluate that just based on the ability to create the most value and also thinking about opportunity cost over time.

The Spanish hotel market has really recovered very strongly that that particular asset is doing quite well.

So I think that what we've observed over time and what we really liked about the market in Europe is leverage has always been lower so I would say by and large the leverage on our assets. There is just at a lower LTV to start.

The macro demand picture for the assets that we have land ton has been pretty stable notwithstanding some of the pressure it's more broadly in the market and we've obviously been quite selective there over time as we happened in the U S too, but very selective in terms of sponsorship quality of assets et cetera, So I would say that Europe.

Aaron Saganovich: Yeah, that's okay.

Katie Keenan: It looks like you have one mixed use and one hospitality loan in Spain that are on risk-rated for us. Well, so maybe if you could talk about what you are seeing was the domestic market versus outside of the US? Yeah, I would say that what we're seeing generally in Europe is pretty stable. I mentioned that we've had some good liquidity on UK office loans or Europe office loans, even this quarter. I would say we see the macro there in terms of fundamentals for our real estate is pretty positive.

Both from a capital markets perspective, and from a fundamentals perspective has performed.

Really quite well over the last year and we see those dynamics continuing.

Thank you.

That will conclude our question and answer session I'd like to turn the call back over to Tim Hayes for any additional or closing remarks.

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

Katie Keenan: The Spanish hotel market has really recovered very strongly that particular asset is doing quite well. So I think that what we've observed over time and what we really liked about the market in Europe is leverage has always been lower. So I would say by and large the leverage on our assets there is just a lower LTV to start. The macro demand picture for the assets that we've lent on has been pretty stable, notwithstanding some of the pressures more broadly in the market.

[music].

Katie Keenan: And we've obviously been quite selective there over time as we happen in the US too, but very selective in terms of sponsorship, quality of assets, et cetera. So I would say that Europe, both from a capital market perspective and from a fundamental perspective, has performed really quite well over the last year and we see the dynamics continuing.

Katie Keenan: Thank you.

Tim Hayes: That will conclude our question in the answer session. I'd like to turn the call back over to Kim Hayes for any additional closing remarks. Thank you operator and everyone joining today's call. Please reach out with any questions.