Q4 2023 Blackstone Mortgage Trust Inc Earnings Call

Timothy Hayes: The Bulletproof Executive 2013 At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead.

Good day, and welcome to the Blackstone mortgage trusts fourth quarter and full year 2023 investor call.

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Timothy Hayes: Good morning, and welcome, everyone, to Blackstone Mortgage Trust's fourth quarter and full year 2023 conference call. I am joined today by Jonathan Pollock, Blackstone's Global Head of Real Estate Credit, Tim Johnson, Global Head of BREADS and Chair of the Board of Directors, Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, and Austin Pena, Executive Vice President of Investment. I'd like to remind everyone that today's call may include forward-looking statements that are subject to risk, and actual results may differ materially.

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'd like to turn the conference over to Tim Hayes, Vice President shareholder Relations. Please go ahead.

Good morning, and welcome everyone to Blackstone mortgage trusts fourth quarter and full year 2023 conference call I'm joined today by Jonathan Pollack Blackstone's Global head of real estate credit, Tim Johnson Global head of bread and chair of the board of Directors, Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer.

Here and often Daniel <unk> executive Vice President of investments.

This morning, we filed our 10-K 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'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.

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.

Timothy Hayes: For discussion of some of the risks that could affect results, please see the risk factor section of our most recent 10, We do not undertake any duty to update forward-looking This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our permission. For the fourth quarter, we reported a gap net loss of $0.01 per share, while distributable earnings were $0.69 per share. A few weeks ago, we paid a dividend of 62 cents per share with respect to the fourth. Please let me know if you have any questions following today's call. With that, I'll now turn things over to you. Thanks, Tim.

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-K.

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

For the fourth quarter, we reported a GAAP net loss of one cents per share while distributable earnings were <unk> 69 per share.

Few weeks ago, we paid a dividend of 62 per share with respect to the fourth quarter. 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.

Katharine Keenan: The XMT weathered a challenging 2023 with results that underscore the resilience of our business. We reported record interest income and distributable earnings, generating $3.05 per share for the year and covering our dividend 123%. This dividend delivered $2.48 per share of current income to our shareholders, exceeding the $1.10 net reduction in our book value from Cecil Reserve increases and underpinning a positive total return in 2023. Additionally, we maintained near record levels of liquidity and reduced our leverage over the course of the year. Benchmark commercial real estate borrowing costs are down 150 basis points in the last four months, and issuance pipelines across corporate debt and CMBS markets have rebounded sharply. However, new construction starts are 30 to 60% below recent peak levels.

You had some T weathered a challenging 2023 with results that underscore the resilience of our business.

We reported a record interest income and distributable earnings generating $3 five per share for the year and covering our dividend 123%.

This dividend and delivered $2 48 per share of current income to our shareholders.

Hitting the $1 10 net reduction in our book value from CFO reserve increases and underpinning a positive total return in 2023.

And we maintained near record levels of liquidity and reduced our leverage over the course of the year.

Moving into 2024, while the path clearly will not be linear we see an improving backdrop with inflation receding rates moving lower and the economy showing stability.

It will take time for the tail of legacy credit issues to work through the system in our portfolio, but macro momentum has shifted.

Benchmark commercial real estate borrowing costs are down 150 basis points in the last four months is.

Issuance pipelines across corporate debt and see MBS markets have rebounded sharply.

New construction starts are 30% to 60% below recent peak levels.

Katharine Keenan: This will not alleviate fundamental issues in certain segments like older vintage office, but for most of the real estate market, these dynamics are driving renewed confidence among lenders, incumbent owners, and new buyers. At BXNT, we also enter 2024 with greater visibility. Our portfolio is 93% performing. Of $10 billion of loans that hit interim or final maturities in 2023, 89% repaid past their extension performance test are extended with substantial new equity commitments. And notably, this includes nearly $6 billion in office space.

It will not alleviate fundamental issues in certain segments like older vintage office, but for most of the real estate market dynamics are driving renewed confidence among lenders and content owners and new buyers.

At the excellent team, we also enter 2024 with greater visibility.

Folio is 93% performing.

$10 billion of loans that had interim or final maturities in 2023, 89% repaid Pasteur extension performance tops are extended with substantial new equity commitments.

Notably this includes nearly $6 billion of office.

Katharine Keenan: Those loans that didn't are already impaired, part of the nearly $600 million of reserves that are already incorporated in our book value. Our borrowers renewed or replaced 93% of the nearly $15 billion of rate caps that rolled in 2023, with new caps being guaranteed. Fourth-quarter outcomes were similar to the full year.

As long as that didn't are already impaired part of the nearly $600 million of reserves that are already incorporated in our book value.

Our borrowers renewed or replaced 93% of the nearly $15 billion of rate caps that rolled in 2023 with new caps are guaranteed.

Fourth quarter outcomes were similar to the full year $4 6 billion rolled 89% replaced at in the money strike prices of three 6% at renewal.

Katharine Keenan: $4.6 billion rolled, 89% replaced, at in-the-money strike prices of 3.6% at renewal. And when borrower business plans were impacted by higher interest costs or other headwinds, the vast majority chose to support their assets, committing over $1.6 billion of incremental equity subordinate to our loans. These are sophisticated, well-capitalized investors who carefully evaluate incremental investments. Their support is a powerful indicator.

And when borrower business plans were impacted by higher interest costs or other headwinds the vast majority of chose to support their assets committing over $1 6 billion of incremental equity is subordinate to where the.

These are sophisticated well capitalized investors to carefully evaluate incremental investment there.

Their support is a powerful indicator.

Katharine Keenan: On multifamily specifically, we see continued resilience. Our multi-loans were 99.4% performing at year-end, and we subsequently sold the single non-performer. We lent at 67% average LTV at origination, and our operating collateral has seen average NOI growth of 35% since then. And we have virtually no exposure to New York City or San Francisco rent-regulated multifamily.

On multifamily specifically, we see continued resilience our multi loans were 99, 4% performing at year end and we subsequently sold the single Nonperformer.

We learnt at 67% average LTV at origination and are operating collateral has seen average NOI growth of 35% since then.

And we have virtually no exposure to New York City, or San Francisco rent regulated multifamily.

Perhaps most importantly across the portfolio our loans continue to repay.

Katharine Keenan: Perhaps most importantly, across the portfolio, our loans continue to repay. We collected $3.8 billion of repayments in 2023, including over $600 million in 4Q. This included $1 billion of office loans, three in the fourth quarter alone. How does this work?

We collected $3 $8 billion of repayments in 2023, including over $600 million in <unk>.

This included $1 billion of office wells three in the fourth quarter alone.

How does this work a lot has to do with the types of loans we make.

Katharine Keenan: A lot has to do with the types of loans we make. BXMT finances value-add business plans where high-quality sponsors invest capital to drive cash flow growth. Our underwriting is based on current and potential real estate value, and we lend at a meaningful discount to those levels. For transitional assets, real estate value cannot be measured by current cash flow alone.

<unk> finance as value add business plans, where high quality sponsors invest capital to drive cash flow growth.

Our underwriting is based on current and potential real estate value and we landed a meaningful discount to those levels.

For transitional assets real estate value cannot be measured by current cash flow alone.

Katharine Keenan: Forty percent of the loans that repaid this quarter had in-place debt service coverage ratios under one time, as takeout investors credited hard asset value and the potential for cash flow growth over time. We have substantial structure in our loans—guarantees, performance tests, rebalancing rates, and sweep triggers—that give us the path to enhancing our credit position. We can trade additional equity for rate or time when we deem it accretive. We have the full toolkit of execution strategies and the benefit of deep experience and extensive real-time data.

40% of the loans that repaid this quarter had in place debt service coverage ratios under one times as takeout investors credit at hard asset value and the potential for cash flow growth over time.

Our outcomes also have to do with our asset management approach.

Have substantial structure in our loans.

Guaranty's performance tests rebalancing rights and sweep triggers that give us the path to enhancing our credit position.

We can trade additional equity for rate or time, when we deem it accretive we have the full toolkit of execution strategies and the benefit of deep experience and extensive real time data.

Katharine Keenan: And we channel all of this toward improving our credit position over time, putting our portfolio in a better position to perform. This included a London office loan originated in 2019 to vacate, renovate, and deliver a full building to WeWork. We heavily structured the deal up front, given the tenant profile, and used our structure over time to negotiate a 40% reduction in our loan commitment.

And we channel all of that is toward improving our credit position over time, putting our portfolio in a better position to perform.

We saw this strategy at work and <unk> on two vacant office building, where we secured incremental paydowns or recourse over our loan term.

The path to full repayments this quarter.

This included a London office loan originated in 2019 to vacate renovated and deliver a full building to rework we heavily structure of the deal upfront given the tenant profile and used our structure over time to negotiate a 40% reduction in our loan commitments.

Katharine Keenan: The asset sold in October empty to an institutional buyer, resulting in a full repayment at our lower base. In other cases, we manage our loans to add collateral value over time. It is a clear positive for a senior lender to support accretive office leasing, and we generally fund leasing in concert with our borrowers. As a lender, we get 100% of the benefit of the incremental rent while funding a portion of the cost.

The asset sold in October empty to an institutional buyer, resulting in a full repayment at our lower basis.

In other cases, we manage our loans to add collateral value overtime.

It is a clear positive for our senior lender to support accretive office leasing and we generally fund leasing in concert with our borrowers as a lender we get 100% of the benefit of incremental rent while funding a portion of the cost.

Katharine Keenan: We recently did this on a Chicago office loan, where our borrower signed one of the city's largest leases of the year, a testament to the asset's strong positioning in the market. XMT expects to fund 70% of TILC costs going forward, capital that goes in only when leases are signed. We gave our borrower additional term at a partial spread reduction in exchange for guarantees, an increased floor, and $21 million of additional equity. While this deal remains on our watch list, this modification enhances the value of our collateral, secures additional equity support, and places this loan on stronger footing. In total, we have completed modifications on 50% of our watchlisted offices, stabilizing performance on new flow. We expect to take a similar tack on impaired assets, where we see the potential for better recovery over time through capital investment. Our overall approach to impaired assets is guided by a singular focus on maximizing shareholder return.

We recently did this out of Chicago office.

Our borrowers signed one of the city's largest leases of the year, a testament to the asset strong positioning in the market.

Yeah. So do you expect to fund 70% of TLC costs going forward capital that goes in only when leases are signed.

We gave our borrower additional term at a partial spread reduction and exchange for guarantees and increased floor and $21 million additional equity commitment.

While there still remains on our watch list that's modification enhances the value of our collateral secures additional equity support in place at the Sloan on stronger footing.

In total we have completed modifications on 50% of our watch list at office stabilizing performance on these bonds.

We expect to take a similar tack on impaired assets, where we see the potential for better recovery over time through capital investment.

Our overall approach to impaired assets is guided by a singular focus on maximizing shareholder returns we.

Katharine Keenan: We will exit assets when that's the best path, but with our robust liquidity and long-duration balance sheet, we are not a forced seller. Instead, we carefully evaluate strategies on an asset-by-asset basis, informed by Blackstone's deep experience as one of the largest real estate investors in the world. With this approach, we are making progress on our five-rated assets. Post-year-end, we sold one loan, placed two others under hard contract, and completed a loan restructure, all generally in line with our reserves. We also expect to take one small office REO in the coming months, where we believe we can leverage our deep real estate operational expertise and reset the basis to add value over time. This deliberate and strategic approach to asset management is supported by the strong balance sheet positioning we have established over the last several years.

We will exit assets when that's the best path, but with our robust liquidity and long duration balance sheet, we are not a forced seller.

Instead, we carefully evaluate strategy is on an asset by asset basis informed by Blackstone's deep experience as one of the largest real estate investors in the world.

With this approach we are making progress on our five rated assets post year end, we sold one loan placed two others under hard contract and completed alone restructure all generally in line with our reserves.

We also expect to take one small office Oreo in the coming months, where we believe we can leverage our deep real estate operational expertise and reset basis to add value over time.

This deliberate and strategic approach to asset management is supported by the strong balance sheet positioning we have established over the last several years.

We ended 2023 with $1 $7 billion of liquidity, while reducing our leverage over the course of the year.

Katharine Keenan: We ended 2023 with $1.7 billion of liquidity while reducing our leverage over the course of the year. Our financing complex, with an average cost of $195 on our loan-level financing and no corporate maturities until 2026, is a meaningful asset for our business, which enables us to pursue value-maximizing resolutions while preserving distributable earnings and dividend coverage. Our relationship with our lenders remains highly constructive. Loan-on-loan facility lending has performed very well for banks through this cycle.

Our financing complex with an average cost of 195 over on our loan level financing and no corporate maturities until 2026 is a meaningful asset for our business, which enables us to pursue value maximizing resolution, while preserving distributable earnings and dividend coverage.

Our relationship with our lenders remains highly constructive load on loan facility lending has performed very well for banks through this cycle and.

Katharine Keenan: And with capital rules tightening, it provides them with significantly better relative value than direct real estate lending. This evolution of the lending market is a distinct advantage for BXMT. As one of the top counterparties in the industry, we regularly hear from banks that wish to expand their relationships with us. And the rebound of the securitization market should provide further tailwinds for financing capacity. In late 2022 and into 2023, we fortified BXMT with the staying power to navigate a highly volatile period. We raised and preserved capital, extended our corporate maturities, and proactively managed our portfolio to reduce credit risk where we could. Now, in 2024, we see the backdrop improving.

And with capital rules tightening it provides them significantly better relative value than direct real estate lending.

This evolution of the lending market is a distinct advantage for <unk>.

That's one of the top counterparties in the industry, we regularly hear from banks that wish to expand their relationships with us.

And the rebound of the securitization market should provide further tailwind for financing capacity.

To close.

In late 2022 and into 2023, we fortified the X M to you with the staying power to navigate a highly volatile period.

We raised and preserved capital extended our corporate maturities and proactively manage our portfolio to reduce credit risk where we cut.

Now in 2024, we see the backdrop improving we.

Katharine Keenan: We will continue to tackle residual credit challenges in the portfolio with some potential reserves along the way, but market conditions are aligning for a more active 2024, both on legacy asset resolutions and new investors. While we expect to maintain a highly disciplined approach to deployment, we are starting to see new transactions that stand up to the opportunity cost of preserving our liquidity. Our four key distributable earnings of $0.69, which are off the record levels earlier in 2023 but still comfortably above our dividend, are encumbered both by loans on cost recovery and excess liquidity, earnings power we can recapture over time. And while rate cuts affect interest income for a floating rate lender, they also provide a more constructive environment to deploy capital and resolve challenged credits. Our stock valuation, in contrast, prices in a far more punitive outlook.

We will continue to tackle residual credit challenges in the portfolio with some potential reserves along the way.

Conditions are aligning for a more active 2024, both on legacy asset resolutions and new investments.

While we expect to maintain a highly disciplined approach to deployment, we are starting to see new transactions that stand up to the opportunity cost of preserving our liquidity.

Our <unk> distributable earnings of <unk> 69.

Which are off the record levels earlier in 'twenty, three but still comfortably above our dividend are encumbered, both by loans on cost recovery and excess liquidity earnings power, we can recapture overtime.

And while rate cuts affect interest income for a floating rate lender. They also provide a more constructive environment to deploy capital and resolve challenged credits.

Our stock valuation in contrast prices in a far more punitive outlook.

Katharine Keenan: Trading at $0.72 of book value implies $1.2 billion of incremental losses beyond our reserves, over 43% across all of our watchlisted assets. Meanwhile, our dividend delivers a 13.5% current income yield, a cash return that is highly attractive relative to the current lower rates and spreads. Finally, I want to end with a word about Mike Nash, whose long-planned retirement from Blackstone came at the end of 2023. Mike founded the Blackstone Real Estate Debt Strategies business, launched VXMT in 2013, and was the heart of our platform for over 15 years. In concert with his retirement, Mike has stepped down as chair of the BXMT Board of Directors, but BXMT is privileged to have him continuing as a director. Tim Johnson, the global head of Blackstone Real Estate Debt Strategies, will succeed Mike as chair.

Trading at 72 tenths of book value implies $1 2 billion of incremental losses beyond our reserves over 43% across all of our watch list it assets.

Meanwhile, our dividend delivers a 13, 5% current income yield cash return that is highly attractive relative to now lower rates and spreads.

Finally, I want to end with a word about Mike Nash, whose long planned retirement from Blackstone came at the end of 2023.

Founded the Blackstone real estate debt strategies business launched <unk> in 2013 and was the heart of our platform for over 15 years.

In concert with his retirement major step down as chair of <unk> Board of directors, but <unk> is privileged to have them continuing as a director.

Tim Johnson, the global head of Blackstone real estate debt strategies will succeed Mike as chair Tim.

Tim has been an integral part of the <unk> business since it's in since its inception, working closely with Mike and the entire <unk> team and leads the overall brad's business today.

Katharine Keenan: Tim has been an integral part of the BXMT business since its inception, working closely with Mike and the entire BXMT team, and leads the overall Brad's business today. We sincerely wish Mike all the best and welcome Tim as BXNT's new chairperson. Thank you for your time, and I will now turn it over to Tony. Thank you, Katie. Good morning, everyone.

We sincerely wish Mike all the best and welcome Tim SPX empties new chair.

Thank you for your time and I will now turn it over to Tony.

Thank you Keith.

Good morning, everyone.

Starting with our results <unk> reported distributable earnings of 69 per share for the fourth quarter and $3 <unk> per share for full year 2023, our highest annual earnings level since we launched <unk> in 2013.

We incurred a GAAP net loss of <unk> 10 per share for the fourth quarter, which reflects the sequential increase in our seasonal reserves primarily related to three new loans, we impaired them placed on cost recovery accounting in the fourth quarter.

Anthony F. Marone: Starting with our results, CXMT reported distributable earnings of $0.69 per share for the fourth quarter and $3.05 per share for full year 2020, our highest annual earnings level since we launched BX. We incurred a gap net loss of one cent per share for the fourth quarter, primarily related to three new loans we impaired and placed on cost recovery accounting. Our 4Q earnings, while still above our $0.62 dividend, have come down from the levels we reported earlier this year. Reflecting the cumulative impact of loans we have placed on cost recovery status and $1.7 billion of net portfolio contraction. Our cost recovery accounting election will continue to negatively impact earnings until these loans are resolved through sales or other transactions.

Our <unk> earnings while still above our 62 cent dividend have come down from the levels. We reported earlier this year, reflecting the cumulative impact of loans placed on cost recovery status and $1 7 billion of net portfolio contraction.

Our cost recovery accounting election, we will continue to negatively impact earnings until these loans are resolved through sales or other transactions.

The fourth quarter, we incurred interest expense related to these loans of eight cents per share net of incentive fees.

Which represents a potential immediate uplift to our recurring earnings power upon resolution of these loans and repayment of you attended financing.

Redeployment of our capital invested in these loans can also generate an additional two to four per share of quarterly earnings.

You mean returns in line with our typical investment.

Reflecting further upside as we move through the.

Credit cycle.

Looking at <unk>, we expect to resolve four loans currently on cost recovery, which will partially offset the impact of the three new loans placed on cost recovery.

Anthony F. Marone: In the fourth quarter, we incurred interest expense related to these loans of $0.08 per share, net of incentive; redeployment of our capital invested in these loans could also generate an additional two to four cents per share per quarter, assuming returns in line with our typical investment. Looking at 1Q, we expect to resolve four loans currently on cost recovery, which will partially offset the impact of the three new loans based on cost recovery at year end. In general, we expect such realized losses to align with our CESA reserves with minimal impact on GAAP earnings or book value, which validates the accuracy of our reserve estimates. Taking into account the assets we have under contract to sell on a small office loan that we will likely take REO. We expect to recognize between $70 million and $80 million of realized losses, likely in the first half of this year.

Earnings will also be impacted periodically as impaired loans are resolved and we realized losses through distributable earnings.

PPO or foreclosure of an asset.

In general, we expect such realized losses to align with our seasonal reserves with minimal impact on GAAP earnings or book value.

Which validates the accuracy of our restaurants.

Taking into account the assets, we have under contract to sell a small office loan that we will likely take RVO.

We expect to recognize between 70 and $80 million of realized losses slightly in the first half of the year.

Importantly, the majority of these come in concert with the resolutions that allow us to unlock earnings from the assets currently on cost recovery.

When we think about <unk> 62 dividend, which we've paid consistently for 34 consecutive quarters, we primarily focus on our distributable earnings for any such realized losses.

We consider a variety of factors as we assess our ability to generate earnings overtime.

<unk> changes in interest rates, a range of credit outcomes and the environment for new originations.

As in the past, we will make decisions regarding our dividend with this long term perspective in mind, rather than reacting to any short term changes in earnings that we believe are temporal in nature.

Anthony F. Marone: Importantly, the majority of these come in concert with resolutions that allow us to unlock earnings from the assets currently on call. When we think about our $0.62 dividend, which we have paid consistently for 34 consecutive quarters, we primarily focus on our distributable earnings for any such realized loss.

Lastly on earnings.

$504 million or <unk> 99, 7% of the interest income we reported in Q4 was paid current.

Pik income representing only 0.3%.

This quarter, we enhanced our disclosures by adding a discreet lines were audited statement of cash flows in our 10-K. So stockholders can clearly identify the pik versus cash components of our income.

We continue to manage our balance sheet conservatively repaying over $1 4 billion of our assets corporate level financing in 2023.

Anthony F. Marone: We will consider a variety of factors as we assess our ability to generate earnings over time, including changes in interest rates, a range of credit, and the Environment for New Origins. As in the past, we will make decisions regarding our dividend with this long-term perspective in mind, rather than reacting to any short-term changes in earnings that we believe are temporary and Class B honoree. This quarter, we enhanced our disclosures by adding a discrete line to our audited statement of cash flows in our 10-K, so stockholders can clearly identify the PICK vs. CASH components of our investments. We continue to manage our balance sheet conservatively, repaying over $1.4 billion of our assets in corporate level financing in 2020 and reducing our leverage to 3.7 times from 3.8 times at the start. Importantly, we achieve this result while increasing our liquidity to $1.7 billion at year end and remaining comfortably in compliance with all financial commitments. Abundant liquidity, stable term-matched financing for our assets, and no corporate debt maturities for the next two years. BXNT is well-equipped to meet our future funding obligations.

Using our leverage to three seven times from three eight times at the start of the year.

Importantly, we achieved this result, while increasing our liquidity to $1 $7 billion at year end and remaining comfortably in compliance with all financial covenants.

With ample liquidity stable term matched financings for our assets and no corporate debt maturities for the next two years <unk> is well equipped to meet our future funding obligations.

We currently have $1 $2 billion of net future fundings under existing loans in our portfolio.

Which are generally subject to conditional asset performance and distributed over a weighted average term of two six years.

Our public portfolio was supported by $16 billion of term matched asset level financing, where we have maintained a low cost of capital despite more challenging market fundamentals.

And as noted on previous calls zero capital markets Mark to market exposure drive our entire capital structure.

Key component of our portfolio financings Clo's, we provide stable funding source for a portion of our U S loan originations.

Over time these viral pools naturally concentrated down in today are over 60% U S office, two five times, our exposure outside of used vehicles.

Looking at our portfolio overall.

Overall credit performance remained strong with 93% of our loans performing at year end and our weighted average risk rating of three point out up modestly from $2 nine last quarter at the beginning of the year.

Anthony F. Marone: We currently have $1.2 billion of net future funding under existing loans in our portfolio, which are generally subject to conditional asset performance and distributed over a weighted average term. The portfolio is supported by $16 billion of term-matched asset-level finance, where we have maintained a low cost of capital despite more challenging market fundamentals. And as noted on previous calls, we have zero capital markets marked to market exposure throughout our entire capital. A key component of our portfolio financing is our CLOs, which provide stable funding sources for a portion of our U.S. loan book. Over time, these firewall pools naturally concentrated down, and today are over 60% U.S. office, two-and-a-half times our exposure outside of Looking at our portfolio, overall credit performance remains strong, with 93% of We also had 11 loan downgrades this quarter, including 5 U.S. office loans moving to a 4 rating and the 3 new 5 rated loans that we impaired and placed on cost recovery at year end.

We upgraded for lounge, including a $361 million Spanish hotel loan that had been on the watch list since COVID-19.

It has since recovered leading to upgrade to a risk rating of three this quarter.

We also had 11 loan downgrades this quarter, including five U S office loans moving to a for reading and the three new five rated loans that we inherited and placed on cost recovery at year end.

These loans were all previously watch listed.

San Francisco Hotel, and one of your office and retail assets.

As it stands today, 7% of our portfolio is worth greatest five impaired by 22% on average by 26% for office loans, specifically, reflecting sober assumptions around collateral value.

The implied valuation declines of more than 50% car origination.

Another 27% of the portfolio risk rated one or two reflecting their continued strong performance.

The bulk of our portfolio, 55% overall as risk rated three loans that continue to demonstrate business plan progression and are performing in line with expectations.

Over 60% of these loans are in multifamily hospitality and industrial sectors, demonstrating consistent fundamental performance.

And of the 30% in office.

And half is in Europe, where market dynamics are strong.

The last segment of our portfolio, 12% of the total.

$2 7 billion dollar watch list.

Over the past 12 months, we have modified 40% of our watch list loans, bringing in $335 million additional equity commitments from borrowers and putting them on more stable footing.

Another 22% have exhibited steady performance despite being on the watch list for seven years several years.

The remainder about $1 billion of loans, where we most directly focus our asset management efforts today.

Reflecting the credit migration in the portfolio continued pressure from higher rates, we increased our seasonal reserves by $150 million in the fourth quarter and $250 million throughout 2000 $23 million to $592 million at yearend.

Anthony F. Marone: These loans were all previously watch-listed and include two San Francisco hotels and one New York office and retail house. As it stands today, 7% of our portfolio is risk rated 5 and impaired by 22% on average, and by 26% for office loans, which imply valuation declines of more than 50% from original. Another 27% of the portfolio is risk rated one or two, reflecting their continued strong performance. Loans that continue to demonstrate business plan progression and are performing in line with expectations. Over 60% of these loans are in the multifamily, hospitality, and industrial sectors, demonstrating consistent fundamental performance. And of the 30% in office, more than half are in Europe, where market dynamics are strong.

On the other hand, we retained nearly $100 million of excess earnings throughout the year. So our book value declined by only 3% notwithstanding the substantial increase in our reserves.

In closing <unk> business model continues to deliver resilient results during a period of greater uncertainty in pressure for commercial real estate investors.

Our balance sheet held firm our earnings remained strong and while the pressures of the rate environment weighed on credit performance. The overall impact to book value and dividend coverage was manageable.

Well structured balance sheet and near record liquidity, we entered 2024 on strong footing to maximize value for our stockholders.

Thank you for joining the call I will now ask the operator to open the call to questions.

Okay.

Thank you as a reminder, please press star one to ask a question. We ask you limit yourself to one question and one follow up to allow as many questions as possible will.

Anthony F. Marone: The last segment of our portfolio, 12% of the total, is our $2.7 billion watch list. In the past 12 months, we have modified 40% of our watch list loans, bringing in $335 million of additional equity commitments from borrowers, putting them on a more stable footing. Another 22% has exhibited steady performance despite being on the watch list for seven years; several, Reflecting the credit migration in the portfolio and continued pressure from higher rates, we increased our CESA reserves by $150 million in the fourth quarter and $250 million throughout 2023. $592 million at your end.

We'll go first to Steve Delaney with JMP.

Good morning, everyone. Thanks for taking the question.

Appreciate the update on credit could I, just confirm that currently as far as real estate and that there is no <unk> on the books as of year end 'twenty three is that correct.

That's correct.

Okay and Tony in your comments you.

You were talking about you gave us some information about realized losses 70 to 80 million.

From an analyst standpoint are projecting.

Would you suggest we just split that in half as far as in terms of our D E distributable earnings would.

Would it make sense to you if we just split it in half over the first and second quarter of the year.

Anthony F. Marone: On the other hand, we retain nearly $100 million of excess earnings throughout the year, so our book value declined by only 3%, notwithstanding the substantial increase in our... closing. DXMT's business model continues to deliver resilient results during a period of greater uncertainty and pressure for commercial real estate investors. Our balance sheet held firm, our earnings remained strong, and while the pressures of the rate environment weighed on credit performance, the overall impact of book value and dividend coverage was manageable due to a well-structured balance sheet and near record liquidity. We enter 2024 on a strong footing to maximize value for our stock. Thank you for joining the call. I will now ask the operator to open the call to questions. Thank you. As a reminder, please press star 1 to ask a question. We ask you to limit yourself to one question and one follow-up to allow as many questions as possible. We'll go first to Steve DeLaney with JMC. Good morning, everyone.

I think that's a reasonable assumption, it's hard to predict when youre talking about a handful of discrete events more choline in the first quarter work late in the second quarter.

I think if you wanted to split the baby that's probably reasonable.

Okay. Thank you for the comments.

We'll go next to Sarah <unk> with BTG.

Hey, everyone. Thanks for taking the question.

So we obviously saw a significant dividend reset last week from one of your peers and I was just hoping you could talk about your go forward expectations for interest income in.

In the context of both your income covenants and your dividend coverage.

You've obviously highlighted that sponsors are coming to the table. They are buying new rate caps. The multifamily portfolio is performing quite well.

But we're still seeing some pressure on net interest margin and it looks like the performing portfolio came down from 95% to 93%.

Also we're going to see some arriola potentially here so with all that said I'm just I'm just hoping for some more detail on your expectations for go forward earnings should we be modeling further contraction and pressure from mpls or how should we think about that.

Sure. So I think just the levels that we covered our dividend by 123% over the year at 111% in the fourth quarter and as we went into in some detail. We think our fourth quarter earnings are encumbered by about 10% to 15 from non accruals and excess liquidity because those will both be gradual but they provide a tailwind over time.

Steve DeLaney: Thanks for taking the question. Appreciate the update on credit. Could I just confirm that currently, as far as real estate owned, there is no REO on the books as of year end 23? Is that correct?

I think as far as Oreo that loan is already on non accrual. So there's no incremental impact from taking that loan from cost recovery of impairment to Oreo and I think that as we look at the overall portfolio. The 95 going to 93, I think Tony laid out sort of where we're focused as far as the watch list and the overall impact is pretty manageable.

Anthony F. Marone: That's correct. Okay, and Tony, in your comments, you were talking about, you gave us some information about realized losses of 70 to 80 million. Just from an analyst standpoint of projecting, would you suggest we just split that in half as far as DE distributable earnings is concerned? Would it make sense to you if we just split it in half over the first and second quarter of the year? I think that's a reasonable assumption. It's hard to predict when you're talking about a handful of discrete events. More could land in the first quarter; more could land in the second quarter. So I think if you want to just split the baby, that's probably... Okay, thank you for the comment. I'm I'm I'm. We'll go next to Sarah Barcombe with BTIG. Hey, everyone.

The other big picture.

Picture factor is obviously rates.

We're all watching what will happen with rates, but while lower rates could impact income. They also alleviate credit pressure and potentially accelerate some of these impaired asset resolutions. So they provide a bit of a natural hedge. So we look at the dividend on a long term basis, we're thinking about our current income levels, where we see the potential for resolutions and <unk>.

Incremental investments and obviously sort of how we got there along the way and I think that that's the big picture view of how we're looking at it.

Okay. Thank you.

Okay.

Sarah Barcombe: Thanks for taking the question. You know, we obviously saw a significant dividend reset last week from one of your peers. I was just hoping you could talk about your go forward expectations for interest income in the context of both your income covenants and your dividend coverage. You've obviously highlighted that sponsors are coming to the table. They're buying new rate caps, and the multi-family portfolio is performing quite well. But we're still seeing some pressure on net interest margin, and it looks like the performing portfolio came down from 95% to 93%. We also, you know, we're going to see some REO potentially here. So, with all that said, I'm just hoping for some more detail on your expectations for going forward earnings. Should we be modeling further contraction and pressure from NPLs, or how should we think about that?

As far as covenants, we're in compliance with our covenants.

And thats not something that we're worried about the near term.

Okay great.

And then just as a follow up.

In the presentation, you gave some great disclosure on sponsor decision, making in the context of the.

So for Cafe purchased in 2023, it looks like those are around a three 7% strike today.

Could you give us an idea of the total cost of the sulfur cap like what did those look like in Q4, how are those shaping out for upcoming maturities I'm just trying to get a handle on the capital need for your sponsors in the near term here as those rate tax com Gail.

Yeah, I mean, I think when you look ahead. So the caps as we provided in the disclosure they werent a real issue in 2023 when rates were going up and now rates are obviously moving in the other direction and the costs were placed caps are cheaper.

I think that when we think about it from the sponsor perspective. The caps are not really a deciding factor there are marginal costs relative to the substantial equity sponsors having their deals and it's effectively just prepaying interest over for a year. So we the overall cost of the caps of the factor of where a sponsor buys.

Katharine Keenan: Sure, so just to level set, you know, we covered our dividend by 123% over the year and 111% in the fourth quarter. And as we went into in some detail, you know, we think our fourth quarter earnings are encumbered by about 10 to 15 cents from non-accruals and excess liquidity. So those will both be gradual, but they provide a tailwind over time.

The strike price on the tops relative to where the base rate is at that time, and so with base rates coming down into the fours the weighted average cap rate or sort of a strike at the caps and the portfolio. Today is three 3%. So youre thinking about it 100 basis point sort of magnitude of differential based on sort of weighted average so for on the curve and where the <unk>.

Katharine Keenan: I think as far as REO, you know, that loan is already on non-accruals. So there's no incremental impact from taking that loan from cost recovery or impairment to REO. And I think that if we look at the overall portfolio, you know, the 95 going to 93, I think Tony laid out, you know, sort of where we're focused as far as the watch list, the overall impact is pretty manageable.

<unk> are today for the call.

<unk> really isn't that meaningful I think to the sponsors and as we saw in 2023.

The vast majority of them renewed and it wasn't a real decision plant.

Okay.

Thank you we'll go next to Doug Harter with UBS.

Thanks.

How are you thinking about 2004.

Curious and I guess, how would you expect.

The outcomes for 24 to look relative to kind.

Katharine Keenan: The other big picture factor is obviously rates. And I think we're all, you know, watching what will happen with rates, but while lower rates could impact income, they also alleviate credit pressure and potentially accelerate some of these impaired asset resolutions. So they provide a bit of a natural hedge.

Kind of how they looked in 'twenty three.

Yeah. So you know we look ahead at the portfolio and I think that you know looking at the 24 maturity as you can see we put some loans on the watch list. That's really a factor of looking ahead at what we expect but overall, we have pretty good visibility on the 24 maturity. If obviously addressed a lot of the watch list loans. So.

Katharine Keenan: So, you know, we look at the dividend on a long-term basis. We're thinking about our current income, levels where we see the potential for resolutions and incremental investments, and obviously, how we get there along the way. And I think that, you know, that's the big picture view of how we're looking at it. Our covenants, you know; we are in compliance with our covenants. And that's not something that we're worried about.

Far this year, 50% of the watch list.

<unk> modified with substantial new equity.

A couple more that we've moved and that we're watching we're working on but when we look at the overall scope of the final maturity is in 2024.

We think we've identified where the more challenging conversations should be in the vast majority of those we have visibility on and.

Katharine Keenan: Okay, great. And then just as a follow-up, you gave some great disclosure on sponsored decision making in the context of the amount of SOFR caps they purchased in 2023. Looks like those are around a 3.7% strike today. Could you give us an idea of the total cost of those SOFR caps? Like, what did those look like in Q4?

You can see it in our risk ratings, one to three risk ratings, 81% of the overall portfolio.

I think in terms of the performance and our expectations of how those maturities will play out that's reflected in the risk rating.

Great and then.

Tony did you say how much that.

That will be kind of prepaid or how much capital is freed up with the resolution of those four loans.

Katharine Keenan: How are they shaking out for upcoming maturities? I'm just trying to get a handle on, you know, the capital needs of your sponsors in the near term as those rate caps come due. Yeah, I mean, when you look ahead, so, you know, the caps as we provided in the disclosure, they weren't a real issue in 2023 when rates were going up. And now rates are obviously moving in the other direction, and the cost to replace caps is cheaper. You know, I think that when we think about it from the sponsor perspective, the caps are not really a deciding factor.

I did not give a specific data point.

But I would focus on is the earnings impact I mean, there will be some liquidity that will pick up from from those repayments.

Able to repay some debt but.

What I would focus on is the earnings impact of unlocking the trapped earnings that we're going to have in those deals.

And I guess does that earnings come from.

Money back to work or is it immediate results.

The result.

It's immediate once you resolve and repay the debt.

Youll pickup.

Our center too from.

Repaying the debt and then.

If we redeploy that then you'd have further upside from there, but just just the repayment of the debt.

Katharine Keenan: They're a marginal cost relative to the substantial equity sponsors have in their deals, and it's effectively just prepaying interest over, you know, for a year. So, you know, we, you know, the overall cost of the caps is a factor of where a sponsor buys the strike price on the caps relative to where the base rate is at that time. And so with base rates coming down, you know, into the fours, the weighted average cap rate, or sort of strike of the caps in the portfolio today is 3.3%. So you're thinking about a 100 basis point sort of magnitude of the differential based on a sort of weighted average so far on the curve and where the caps are today. The cost really isn't that meaningful, I think, to these sponsors. And, you know, as we saw in 2023, the vast majority of them renewed, and it wasn't a real decision point. Thank you. We'll go next to Doug Herter with UBS.

I appreciate it thank you Tom.

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

Can you talk a little bit about the Q1 resolution. So I think you had mentioned there were four loans resolved how are those resolved for those property sales repayments.

Yeah, absolutely so.

I mentioned, we have one loan that we already sold we carried that off at Unlevered that with our upper west side rent stabilized multifamily asset, which we sold earlier this quarter. We have two others that are under hard contract for sale one of those it will be a full sale of the other will take back some seller financing at a much more rational level with new equity coming in.

And then the fourth is a restructure with one of our borrowers where we're bringing new equity at a reset base.

At a rational level, we're at the low end well be performing at an <unk> level and covering.

So it's really a whole variety and I think it's a great example of the fact that we bring a customized approach to each one of these impaired loans.

We have assets, where we see a good appropriate valuation level in the market and where we're prepared to exit at those levels. Sometimes that's a full sales I'm sorry at times, if we like the asset with new equity coming in we can stay in at a lower leverage level either at <unk> or is.

Douglas Harter: Thanks. How are you thinking about 24 maturities? And, you know, I guess, how would you expect the outcomes for 24 to look relative to kind of how they looked in 23? And then, Tony, did you say how much debt will be repaid or how much capital will be freed up with the resolution of those four loans? Um, I did not give a specific data point. You know, what I would focus on is the earnings impact. I mean, there will be some liquidity that will pick up from those repayments, being able to repay some debt, but, What I would focus on is the earnings impact of unlocking the trapped earnings that we're going to have. And I guess does that earnings come from putting that money back to work, or is it an immediate one? soul.

Financing on it.

And then sometimes will take a longer term approach I think one of the biggest competitive advantages of running this business at Blackstone as we can look at all of these deals and think about what is the best way to maximize returns over time do we want to sell the assets today do we want to invest capital implement our business plan, bringing to bear all of our operational expertise and we're really taking that approach on a deal by deal.

So as I'm thinking about the best results, but I think that having the option of all three of those are even more broad options.

Anthony F. Marone: .. It's immediate once you resolve and repay the debt, so you'll pick up a cent or two from repaying the debt, and then, if we redeploy that, then you'd have further upside. I appreciate it. Thank you. We'll go next to Don Fandetti with Wells Fargo. Can you talk a little bit about the Q1 resolutions? I think you had mentioned there were four loans resolved.

It is a real advantage and I think the fact that we're resolving four of our impaired loans generally just out of our reserves is a real positive in terms of looking at moving forward in the portfolio and freeing up earnings on those deals.

Got it.

What's the sort of tone <unk> and office in general I mean, obviously still under significant pressure I mean are there any are you seeing any signs of capital coming in.

And answering your availability or is it still.

Donald Fandetti: Were those property sales repayments? Yeah, absolutely. As I mentioned, we have one loan that we have already sold. We carried that asset unlevered.

Continues to be very difficult.

Yeah, you know I think it's interesting I mean, obviously the bifurcation is really continuing.

Got the older vintage more challenge assets certain markets like San Francisco, where we continue to see real challenge, but I think that you know as we've seen over the last year in terms of fundamental performance and also we're now seeing it in the capital markets. The high quality Trophy assets are they're really continuing to show performance both on <unk>.

Katharine Keenan: That was our Upper West Side Rent Stabilized Multifamily Asset, which we sold earlier this quarter. We have two others that are under hard contract for sale, and one of those will be a full sale.

Katharine Keenan: The other will take back some seller financing at a much more rational level with new equity coming in. And then the fourth is a restructure with one of our borrowers where we're bringing in new equity on a reset basis at a rational anode level where the loan will be performing at an anode level and covering. So it's really a whole variety.

Saying occupancy as well as on the capital markets and just by way of data point Trophy MBS capital structures. Today are 50 to 75 basis points tighter on spreads and they werent three or four months ago, and obviously see it in the office REIT stocks and Theres been a lot of news about capital formation coming into the space. So I think that it's pretty clear that there is a segment of the office market that is going.

Katharine Keenan: And I think it's a great example of the fact that we bring a customized approach to each one of these impaired loans. We have assets where we see a good, appropriate valuation level in the market and where we're prepared to exit at those levels, sometimes that's a full sale.

To work going forward and pricing is starting to reflect that.

We've talked about in the past you know the vast majority of our office portfolio is newer build we have a lot of new construction assets newbuild assets in Hudson yards et cetera, and so.

Katharine Keenan: Sometimes, if we like the asset with new equity coming in, we can stay in at a lower leverage level either as an anode or as financing on it. And then sometimes we'll take a longer-term approach. I think one of the biggest competitive advantages of running this business at Blackstone is that we can look at all of these deals and think about what is the best way to maximize returns over time. Do we want to sell the assets today? Do we want to invest capital, implement a business plan, and bring to bear all of our operational expertise? And we're really taking that approach on a deal by deal basis and thinking about the best results. But I think that having the option of all three of those or even more broad options is a real advantage. And I think the fact that we're resolving four of our impaired loans generally just at our reserves is a real positive in terms of looking at moving forward in the portfolio and freeing up earnings on those deals. Got it. What's the what's the sort of tone Katie and the office in general?

I think that the capital markets are coming around to the value and the invest ability of those assets.

That the market is just getting a little bit more rational.

Thanks.

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

Hi, good morning.

First question I'd like to follow up on the on the cap rate can you provide a little additional color on the weighted average duration of that.

The caps I know you said, 97% of performing loans have a cap kind of when do we think about the exploration of those.

Oh.

Yeah. So you know the comps the way the cops are structured are generally coterminous with the initial term of the loan and then the extension tests. So we're going to expect to see that the comps will continue to roll in similar magnitude to the $15 billion of tops that we saw roll this year and I think as I mentioned I think.

Katharine Keenan: I mean, obviously still under significant pressure. I mean, are there any signs of capital coming in through financing availability? Or is it still? This is going to be very difficult. Yeah, you know, I think it's interesting. I mean, obviously, the bifurcation is really continuing. You've got, you know, the older vintage, more challenged assets, you know, certain markets like San Francisco, where we continue to see real challenges. But I think that, you know, as we've seen over the last year, in terms of fundamental performance, and also we're now seeing it in the capital markets, the high quality trophy assets are really continuing to show performance, both in terms of leasing occupancy, as well as in the capital markets.

We expect to continue to see a similar result, so the vast majority obviously of the caps that rolled this year were replaced.

We look forward in and don't see any real change that other than the fact that rates are coming down and so the overall cost differential.

Is going to be less the average cops are as I mentioned three 3% in <unk>.

Terms of the exploration and Thats for the 2024.

Roles, and so look at that relative to where so far is.

Other base rates it feels quite manageable.

Great appreciate the color there and as a follow up you talked about new origination starting to sort of passed the test I guess to use some liquidity. How do you think about the right time to do that is it is it looking at leverage is that based on these resolutions in the first half is it more of an adjusted leverage adding back just the general or maybe the toe.

Katharine Keenan: You know, just by way of a data point, trophy CMBS capital structures today are 50 to 75 basis points tighter on spreads than they were three or four months ago. You can obviously see it in the office rental stocks, and there's been a lot of news about capital formation coming into this space. So I think that there is a segment of the office market that is going to work going forward, and pricing is starting to reflect that. You know, as we've talked about in the past, the vast majority of our office portfolio is newer construction, we have a lot of new construction assets, you know, new construction assets in Hudson Yards, etc. And so I think that, you know, the capital markets are coming around to the value and the investability of those assets. And I think that, you know, the market's just becoming a little bit more rational. We'll go next to Stephen Laws with Raymond James. Hi, good morning.

Reserve, how do you think about the right amount of liquidity the right size of the balance sheet with respect to doing some new originations as we move through the year.

Yeah, well I think a big part of it comes down to the investment opportunity and I think right now is a really compelling time to be a lender you have a competitive environment that is much more favorable banks pulling back you also have fundamentals, which we see on the ground improving and yet as is obvious from the last week, you have real volatility and sort of real pause.

That's where we think we can make interesting risk adjusted returns. So we feel that now is a really compelling moment to be a lender in our space and of course. We're also looking at the balance sheet liquidity leverage we have plenty of liquidity, we have plenty of capacity.

Capacity in terms of our facilities. We also have various ways. We can finance. These deals how we can participate and so I think that where we are today, we're not going to go out and do a ton of new loans, obviously, and we're going to be monitoring repayments are going to be monitoring liquidity monitoring managing our overall portfolio, but I think that you know putting a couple of chips on the table right now.

Stephen Laws: First question, I'd like to follow up on the cap. Can you provide a little additional color on the weighted average duration of the caps? I know you said 97% of performing loans have a cap, but when do we think about the expiration of those? Yeah, so the caps, the way the caps are structured are generally coterminous with, you know, the initial term of the loan and then the extension. So, you know, we're going to expect to see that the caps will continue to roll in a similar magnitude to the 15 billion dollars of caps that we saw roll this year. And I think, as I mentioned, I think we expect to continue to see a similar result. So, you know, the vast majority, obviously, of the caps that rolled this year were replaced.

Now in that in this environment at the lender is the right thing in terms of.

Setting up our portfolio on the go forward to access interesting opportunities.

Great I appreciate the comments this morning Jami.

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

This is Jason snapshot on for Jade.

So im curious what youre hearing from your multifamily and life science borrowers if properties were underwritten to much lower cap rates and lease up is slower and NOI is taking longer to stabilize how do they typically manage through the next 18 months.

Sure. So I think that's a great question and as we mentioned in the remarks, our multifamily portfolio today is 99, 4% performing and post quarter on selling the asset that we sold about 100% performing.

Katharine Keenan: You know, we look forward and don't see any real change other than the fact that rates are coming down. And so the overall cost differential, you know, is going to be less. The average caps are, as I mentioned, three point three percent in terms of, you know, the cap expiration. And that's for the twenty twenty four rolls. And so, you know, look at that relative to where SOFR is and other base rates. It feels quite manageable.

We've seen NOI growth of 35% since we originated these loans and we started at 67% LTV. So.

We do see some pressure, especially obviously, it's been broadly discussed in the sunbelt from new supply and that's really resulting in rents kind of flattening out there's been a lot of growth in these markets a lot of NOI growth in our assets and then obviously business plans. These are all value add assets to start so they had incremental business plans to renovate increase rather.

Katharine Keenan: Yeah, well, I think a big part of it comes down to the investment opportunity. And I think right now is a really compelling time to be a lender. You have a competitive environment that is much more favorable, banks pulling back. And you also have fundamentals, which we see on the ground, improving.

As you know in addition to the growth in the market generally.

So in terms of how the borrowers are addressing I mean, I think you can see it in the rate cap rules. We had a couple of billion dollars of multi rate-cap roles that have already happened in 'twenty three.

Katharine Keenan: And yet, as has been obvious from the last week, you have real volatility and sort of real pockets where we think we can make interesting risk-adjusted returns. So, you know, we feel that now is a really compelling moment to be a lender in our space. And, of course, we're also looking at balance sheet liquidity leverage. We have plenty of liquidity. We have plenty of capacity in terms of our facilities.

You can see it in the performance of the portfolio and I think that really a lot of it comes down to the leverage point and the types of borrowers that were lending to these are well capitalized borrowers they see the supply demand fundamentals using up in 25, new starts or construction deliveries in 25 are much lower than 24, and this is really sort of a temporary mode.

Katharine Keenan: We also have various ways we can finance these deals, how we can participate. And so, you know, I think that where we are today, we're not going to go out and make a ton of new loans, obviously. We're going to be monitoring repayments. We're going to be monitoring liquidity, monitoring, and managing our overall portfolio. But I think that putting a couple of chips on the table right now in this environment as a lender is the right thing in terms of, you know, setting up our portfolio in the future to access interesting opportunities. I appreciate your comments this morning, Kenny. We'll go next to Jade Rahmani with KBW. This is Jason Sapshon on for Jade.

And time in a very liquid asset class, where there continues to be a lot of capital a lot of debt availability from agencies and insurance companies and others and it's really going through a temporary pocket that I think by and large our sort of long.

Patient and well capitalized borrowers are going to be able to see it our way through it and we haven't seen any indication otherwise in the performance of the portfolio.

Great. Thank you.

And then with respect to life science borrowers.

Has have you seen lease up taking slower than expected or has there been have the business plans generally but the following expectations.

Jade Rahmani: So I'm curious what you're hearing from your multifamily and life science borrowers. If properties were underwritten to much lower cap rates, lease up is slower, and NOI is taking longer to stabilize, how do they typically manage for the next 18 months? Great, thank you. And then, with respect to life signs, borrowers, have you seen lease upticking slower than expected? Or have the business plans generally been meeting expectations? Yeah, so we have very little life science in the portfolio. You know, the largest asset is a brand new build asset, you know, in Berkeley, California, right on the water. It's a super high quality trophy asset at a low leverage point. That's in the process of being under construction.

Yes, so we have very little life science in the portfolio.

The largest asset is a brand new builds asset in Berkeley in California, right on the water. So it's super high quality Trophy asset at a low leverage point, that's in the process under construction and so it's really a little too early to tell I would say by and large we really only have a couple of assets and they're all low leverage new construction.

Great. Thank you very much.

We'll go next to Rick Shane with J P. Morgan.

Thanks, everybody for taking my questions.

I'd love to talk a little bit about the interplay between GAAP and distributable earnings and dividend policy.

You've spoken.

We really about over earning the dividend this year.

On a distributable earnings basis.

If we take for example, and I'm going to make a couple of assumptions here. We look at your reserve. We say that you are 25% over reserve versus what youre going to realize for losses. It seems like a reasonable assumption.

Katharine Keenan: So it's really a little too early to tell. I would say, by and large, you know, we really only have a couple of assets, and they're all low leverage, new construction. Great, thank you very much. Thanks, everybody, for taking my question. Katie, I'd love to talk a little bit about the interplay between GAAP earnings, Distributable Earnings, and Dividend Policy. You've spoken clearly about over-earning the dividend this year on a distributable earnings basis. If we take, for example, and I'm going to make a couple of assumptions here.

But it takes three years for the reserves that you're going to use to run through the distributable earnings.

That represents about $150 million per year drag.

To distributable earnings.

Probably $85.90.

How would you think about the dividend if it materializes along that path, which seems reasonable.

In terms of continuing the dividend at the current level, if youre not likely to earn it on a distributable basis.

Great question.

So.

I'd say the <unk>.

Jump to the dividend policy question.

You spoke about all of it in the prepared remarks.

Richard B. Shane: We look at your reserve. We say that you are 25% over-reserved versus what you're going to realize in losses. It seems like a reasonable assumption, and think that it takes three years for the reserves that you're going to use to run through the distributable earnings. That represents about $150 million a year drag on distributable earnings. It's probably $0.8590. How will you think about the dividend if it materializes along that path, which seems reasonable in terms of continuing the dividend at the current level if you're not likely to earn it on a distributable basis? Great question!

What we focus on when were setting our dividend, which is what we focus on for several years now is what do we think is the right dividend level relative to the long term sort of run rate earnings power.

You've seen many quarters, where we out earned the dividend for example, and we didn't increase our dividend because we felt like that was a piece that might come down.

We had some quarters, although not many going back to 2015, where we under earn the dividend, but we again felt like that was temporal and so didn't cut the dividend. So what we really focus on is what do we think is the earnings power of our dividend and so we would anchor to our earnings for this quarter, which were not impacted by losses in the <unk>.

Katharine Keenan: So I'd say, To jump to the dividend policy question, which we spoke about a little bit in the prepared remarks, what we focus on when we're setting our dividend, which is what we have focused on for several years now, is what we think is the right dividend level relative to the long-term run rate earnings power of. We've seen many quarters where we well out-earned the dividend, for example, and we didn't increase our dividend because We had some quarters, although not many, going back to 2015, where we under-earned the dividend, but we, again, felt like that was temporary and so didn't cut the dividend. So what we really focus on is what we think is the earnings power of our dividend. I got it. And that's helpful. And, you know, look, there's this inherent disconnect here.

That will move out over time, which we've highlighted on the call. So you had impact rates impact from other loans going non accrual you would have the benefit of previous non accrual loans coming back online.

Originations when they happen et cetera. So we look out over time at how do we think those factors will come together to impact the earnings power of the company.

And if that aligns with the 62 cent dividend then we feel good about our dividend when that doesn't align with the 60 views that dividend then of course, we're going to reconsider our dividend level, but that's more of where we're focused and less.

Trying to make a judgment and your the numbers you threw out a refined estimate if one wanted to make one but we're less focused on where do we think the episodic losses are going to head over a period of time and or where do we think the overall earnings power of the company is overtime.

Got it and that's <unk>.

Helpful.

Look there is this inherent disconnect. Your GAAP makes you assume losses distributable makes you realized losses and.

Katharine Keenan: Gap makes you assume losses; distributable makes you realize losses. And, you know, it is imperfect in the context of that dividend policy. Ultimately, you can't be a lender and not consider the costs of credit.

It is in perfect in the context of that dividend policy.

Ultimately you can't be a lender and not consider the cost of credit when we look at distributable income for this year. It was about $3 just over $3 and the dividend was $2 48.

Katharine Keenan: When we look at distributable income for this year, it was about $3, just over $3. And the dividend was $2.48. Is a reasonable way to look at this that you see the long-term credit costs and the dividend policy that you just described is about $0.50 per year? And that, because again, we can't ignore credit, but we also can't, we realize that there's a tax implication in terms of distributable as well. So I think when you're saying credit costs, you're not talking about the cost of our debt; you're talking about credit losses when you say credit costs. Yeah, yeah.

Is a reasonable way to look at this that you see the long term credit costs and the dividend policy that you. Just described is about 50 per year and that.

Because again.

We can't ignore credit, but we also can't we realize that there is a tax implication.

In terms of distributable as well.

So I just I think when youre, saying credit costs, just make sure you're not talking about the cost of our debt youre talking about credit losses, when you say credit cost.

Yes exactly.

Anthony F. Marone: So I think, Firstly, as a REIT, maybe this is where you're going, as a REIT, we have to anchor to the taxable income impact, which says that we have to distribute our taxable income, or 90% of it, tax-free, if you want. So, we satisfy that. So, we don't have any issues as far as satisfying the tax requirements. However, as we're realizing losses, to your point, that does impact your tax accounting. So, if you do realize a loss on a loan because you get a DPO or you foreclose and sell for less than your base, That is a tax deduction. So all of those flow through. The timing may not be the exact same, but all of those realized losses will flow through overtime, gap, NDE, and tax. Again, the timing may be different.

Yes, yes, so I think.

So firstly as a REIT, maybe just where youre going.

The anchor to the taxable income impact, which says that we have to distribute our taxable income or 90% of it.

Tax if you want.

So we satisfy that so we don't have any any issues as far as satisfying the tax requirements.

We are realizing losses to your point those do.

That does impact your tax accounting. So if you do realize a loss on alone because you get a GPO or you foreclose and sell for less than year basis that is a tax deduction. So all of those flow through the <unk>.

Timing may not be the exact same but all of those realized losses will flow through over time gap <unk> and tax again timing may be different.

Anthony F. Marone: So I wouldn't interpolate that we think that there's some sort of an imputed $0.50 credit loss based on how we out-earn our dividend this year. What impacted our ability to out-earn our dividend this year isn't because there's some tax losses existing below the surface that we think would perpetuate on a year-by-year basis. It's because in some prior periods... We had other tax attributes, for example, NOLs from our legacy capital trust business, or some periods where we had over-distributions on a tax basis, again, going back many years.

So I wouldnt interpret that we think that there's some sort of an imputed 50 crore.

Credit loss based on how we out earned our dividend this year, what impacted our ability to out earn our dividend this year isn't because theres some tax losses existing below the surface.

That we think would perpetuate on a year by year basis, it's because in some prior periods we.

We had other tax attributes for example, Nols from our legacy capital Trust business or some periods, where we had over distributions on a tax basis again going back many years those carry forward to this year and allowed us to earn a level well above our dividend while satisfying the tax rules because.

Katharine Keenan: Those carried forward to this year and allowed us to earn a level well above our dividend while satisfying the tax rules. Because we had this cushion coming in, it's not that there's some sort of imputed $0.50 tax loss that was allowing us to meet our dividend requirement that you should think of as a go-forward $0.50 loss rate that I would. I think, Rick, big picture, what matters in terms of how we look at the dividend is what our earnings power is after we get through the impairments and the losses. So we're going to have some quarters where we have, you know, gap earnings impacted by reserves, as we did this quarter. We're going to have some quarters where DE is impacted by realized losses. But what really matters is, on the other side of that, our investable equity, and the earnings power of that relative to our overall business. And that's how we think about the dividend.

Because we have this cushion coming in it's not that there is some sort of imputed 50 tax loss that.

Was allowing us to meet our dividend requirement that you should think of as I go forward.

Loss rate that I would I think Greg Big picture, what matters in terms of how we look at the dividend is what our earnings power is after we got through the impairments and the losses. So we're going to have some quarters, where we have you know.

GAAP earnings impacted by reserves as we did this quarter, we're going to have some quarters, where we're gonna have day impacted by realized losses, but what really matters is on the other hand on the other side of that are investable equity the earnings power of that relative to our overall business and Thats, how we think about the dividend.

Very good okay. Thank you guys really appreciate it.

We'll take our final question from Aaron Zyuganov Itch with Citi.

Aaron are you there.

Your line. Please check your mute function your line is open.

Arren Cyganovich: Okay, thank you guys. Really appreciate it. We'll take our final question from Arren Cyganovich with Citi. Aaron, are you there?

Sorry can you hear me now.

Please go ahead.

Yep.

Sorry about that.

The Los Angeles office that was downgraded to four from five.

Arren Cyganovich: Caller, please check your mute function. Your line is open. Sorry, can you hear me now?

<unk>.

There is a much smaller I guess net book value on that versus the principle is that something where you sold a piece of that or maybe you just talk a little bit about that loan.

Katharine Keenan: Go ahead. Yep. Sure, that's a really high-quality asset in West LA. It signed a couple of big, high-rent leases well above our underwriting, but it's taking longer to lease, I think in part because of the strikes and what happened over the last year in the content industry. We have a loan there that we originated as a whole loan and then sold the senior loan, so that's the difference in terms of book value that you're seeing.

Sure, that's a really high quality asset.

In West L. A it signed a couple of Big High route Liza is well above our underwriting, but taking longer to lease I think in part because of the strikes and what happens.

Over the last year.

In the content industry.

We have a loan there that we originated as a whole loan and then sold the senior loan. So that's the difference in terms of book value that you're seeing.

Katharine Keenan: We're in a very constructive conversation on that deal in terms of the modification, but we downgraded it because we're in that conversation. Okay, got it. And then you have a couple of risk-rated five loans that matured in January. Are those some of the loans that you're going to be realizing losses on in the first half, or were those modified?

And we're having we're in a very constructive conversation on that deal in terms of the modification, but we downgraded it because we're in that conversation.

Okay got it and then you have a couple of risk grade five loans.

Matured in January.

Or are those some of the loans that youre going to be realizing losses on the first half or were those modified.

Yeah, I mean, I wouldn't read much into the maturity dates of the impaired loans I mean, those ones. Obviously are already impaired. We don't recognize income they are really in the category of we're just working them out for the best recovery over time.

Katharine Keenan: Got it. Okay. Thank you. At this time, I would like to turn the call back over to Mr. Tim Hayes for any additional or closing remarks. Thanks, Katie, and to everyone for joining today's call. Please feel free to reach out with any questions. The Bulletproof Executive 2013, The Ultimate Parody Site!

Thank you, maybe one or two of them might have coterminous maturities, but we're really we're in workout on the impaired loans and I am the maturity dates themselves are not particularly meaningful I'm not particularly impactful in terms of our disposition. We're just going to do the disposition on the timeline that we think maximizes recovery.

Got it okay. Thank you.

At this time I would like to turn the call back over to Mr. Tim Hayes for any additional or closing remarks.

Thanks, Gary and to everyone for joining today's call. Please feel free to reach out with any questions.

Yeah.

Yeah.

Okay.

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