Q1 2024 Blackstone Mortgage Trust Inc Earnings Call
Okay.
Speaker Change: Good day and welcome to the Blackstone mortgage trusts first quarter 2024 investor call today.
Operator: Good day, and welcome to the Blackstone Mortgage Trust first quarter 2024 investor call. This conference 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. If you are using a speakerphone, 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.
Speaker Change: This conference 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, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our.
Speaker Change: At this time I'd like to turn the conference over to Tim Hayes, Vice President shareholder Relations. Please go ahead.
Timothy Paul Hayes: Good morning, and welcome everyone to Blackstone mortgage trusts first quarter 2024 earnings conference call.
Timothy Paul Hayes: Good morning and welcome everyone to Blackstone Mortgage Trust's first quarter 2024 earnings conference call. I'm joined today by Tim Johnson, Chair of the Board of Directors; Katie Keenan, Chief Executive Officer; Tony Marone, Chief Financial Officer; and Austin Pena, Executive Vice President of Investment.
Timothy Paul Hayes: I'm joined today by Tim Johnson, Chairman of Board of Directors Haney, Kim Chief Executive Officer, Tony Marone, Chief Financial Officer, and all companion Executive Vice President of investments.
Timothy Paul Hayes: This morning we filed our 10Q 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 that are subject to risks, uncertainties, and other factors outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the risk factors section of our most recent 10K.
Timothy Paul Hayes: This morning, we filed our 10-Q and issued a press release or presentation of ourselves, which are available on our website and filed with the SEC.
Timothy Paul 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.
Timothy Paul Hayes: Actual results may differ materially.
Timothy Paul Hayes: A discussion of some of the risks that could affect results. Please see the risk factors section of our most recent 10-K would.
Timothy Paul Hayes: We do not undertake any duty to update or look at, We will also refer to certain non-GAAP measures on this call, and for reconciliations, you should refer to the press release and 10, This audio cast is copyrighted material. Blackstone Mortgage Trust may not be duplicated without our consent.
Timothy Paul Hayes: We do not undertake any duty to update forward looking statements.
Timothy Paul Hayes: We will also refer to certain non-GAAP measures on this call and for reconciliations you should refer to the press release and 10-Q.
Timothy Paul Hayes: This audiocast is copyrighted material of Blackstone mortgage trust may not be duplicated without our consent.
Timothy Paul Hayes: For the first quarter, we reported a GAAP net loss 71 cents per share all distributable earnings and distributable earnings prior to charge offs were $33 65 per share respectively.
Katharine A. Keenan: For the first quarter, we reported a gap net loss of $0.71 per share. All distributable earnings and distributable earnings prior to charge-offs were $0.33 and $0.65 per share, respectively. A few weeks ago, we paid a dividend of $0.62 per share with respect to... Please let me know if you have any questions following today's call. With that, I'll now turn things over to
[noise] ago, we paid a dividend of 62 cents per share with respect to the first quarter.
Timothy Paul Hayes: Let me know if you have any questions. Following today's call with that I'll now turn things over to Katy.
Katharine A. Keenan: A quarter into the year, we continue to see a positive direction of travel for real estate. Liquidity has returned to the market with CMBS issuance multiples above the year-ago level. New supply is down dramatically, with starts 50-90% below peak across asset classes. While expectations for the pace of rate cuts have been tempered, overall cost of capital is lower, with spreads compressing across public and private lending markets. We believe values in commercial real estate are bottoming, creating an attractive entry point for new investment.
Katy: Thanks, Tim.
Katy: A quarter into the year, we continue to see a positive direction of travel for our real estate liquidity has returned to the market with see MBS issuance multiples above year ago levels.
Katy: New supply is down dramatically when it starts 50% to 90% below peak across asset classes.
Katy: Well expectations for the pace of rate cuts have been tempered overall cost of capital is lower with spreads compressing across public and private lending markets.
Katy: We believe values in commercial real estate are bottoming, creating an attractive entry point for new investments.
Katy: With this backdrop, we continue to see strong performance on the vast majority of our portfolio, providing ballast for the subset of more challenged loans.
Katharine A. Keenan: With this backdrop, we continue to see strong performance on the vast majority of our portfolio, providing ballast for the subset of more challenged loans. Our portfolio remains 92% performing. We produced $0.65 of distributable earnings prior to charge-offs, covering our $0.62 dividend.
Katy: Our portfolio remains 92% performing we produced 65 cents of distributable earnings prior to charge offs, covering our 62 cent dividend.
Katharine A. Keenan: We collected over $1 billion of repayments this quarter, including the refinancing of one of our largest office loans through a CMBS transaction with deep investor demand. And we maintained near record liquidity levels, ending the quarter at $1.7 billion. We continue to address the ongoing credit cycle and reset in office values, with an impact on both our earnings and reserve bills. And, of course, higher-for-longer rates, while good for income as a floating-rate lender, put additional pressure on borrowers.
Katy: We collected over $1 billion of repayments this quarter, including the refinancing of one of our largest office loans through the MBR transaction with deep investor demand.
Katy: And we maintained near record liquidity levels, ending the quarter at $1 7 billion.
We continue to address the ongoing credit cycle and reset in office values with impact in both our earnings and reserve Bill.
Katy: And of course higher for longer rates well good for income as the floating rate lender put additional pressure on borrowers.
Katharine A. Keenan: But more liquidity creates more transparency, prompting borrowers to more definitively pick a path for their assets, selling or refinancing where they see equity value, and moving on where they don't. In both cases, this process is the necessary transition point to get to a healthier and more normalized market. The recovery will take time, with additional reserves and losses along the way, as we've seen this quarter, but BSMT is well prepared to navigate this period.
Katy: But more liquidity it creates more transparency, prompting borrowers to more definitively pick a path for their assets selling or refinancing where they see equity value moving on where they don't.
Katy: In both cases, prompting capital structure resets at more appropriate levels.
Katy: This process is the necessary transition point to get to a healthier and more normalized market.
Katy: The recovery will take time with additional reserves and losses, along the way as we've seen this quarter.
But be SMT is well prepared to navigate this period.
Katharine A. Keenan: We fortified our balance sheet with plenty of liquidity and a $1.8 billion reduction in our financing over the last year. We revved up our asset management, collecting $1.5 billion of incremental equity from our borrowers over the last 12 months, which enhances our credit. And we brought together our experts from across the Blackstone real estate platform, bringing to bear the insights and experience of the largest owner of commercial real estate globally. We are actively seeking to accelerate portfolio turnover to move through the credit cycle and return to our core lending. Some of these conversations materialize as credit-enhancing modifications, and others as workouts where we maintain a highly disciplined approach, no free options, quickly taking control from sponsors if they are unwilling to demonstrate commitment.
Katy: We fortified our balance sheet with plenty of liquidity and a $1 8 billion reduction in our financings over the last year.
Katy: We wrapped up our asset management collecting $1 5 billion of incremental equity from our borrowers over the last 12 months, which enhances our credit position.
Katy: And we marshaled, our experts from across the Blackstone real estate platform, bringing to bear the insights and experience of the largest owner of commercial real estate globally.
Katy: We are actively seeking to accelerate portfolio turnover to move through the credit cycle and returned to our core lending business.
Katy: Some of these conversations materialized as credit enhancing modification others. This workouts, where we maintain a highly disciplined approach no free options quickly taking control from sponsors if they are unwilling to demonstrate commitment.
Katy: We resolved four of the 13 impairments, we started the quarter with through sales restructuring some foreclosures and we expect continued progress next quarter.
Katharine A. Keenan: We resolved four of the 13 impairments we started the quarter with through sales, restructuring, and foreclosures, and we expect continued progress next quarter. We strongly believe our proactive approach will result in the best long-term outcome for our investors. And with Blackstone and its employees, a top three shareholder of the company, we are firmly aligned. Most importantly, our core performing portfolio continues to show stability and generate strong income. Of the $1.8 billion of performing loans that faced interim or final maturities this quarter, 95% repaid, passed their extension test, or were extended with new equity or enhanced economics. We closed or agreed on nine credit-positive loan modifications. We negotiated paydowns on five loans, representing 11% of the respective loan balance on average.
Katy: We strongly believe our proactive approach will result in the best long term outcome for our investors.
And with Blackstone and its employees a top three shareholder of the company we are firmly aligned.
Katy: Most importantly, our core performing portfolio continues to show stability and generate strong income.
Katy: Of the $1 8 billion of performing loans that faced interim or final maturities. This quarter, 95% repaid pasture extension tests are were extended with new equity or enhanced economics.
Katy: We closed or agreed nine credit positive loan modification, we negotiated paydowns on five loans, representing 11% of the respective loan balance on average and in total our borrowers contributed over $300 million of incremental equity across our portfolio. Just this quarter real time indications of sponsor commitment and confidence in us.
Katharine A. Keenan: And in total, our borrowers contributed over $300 million of incremental equity across our portfolio just this quarter, real-time indications of sponsor commitment and confidence in asset value. Included in these modifications was one of our largest multifamily loans, a newly renovated New York City asset with a minority office component, which WeWork surrendered following its recent bankruptcy. This disruption presented the opportunity for our sophisticated, well-capitalized sponsor to replace the office with 75 new apartments.
Katy: That values.
Katy: Included in these modifications was one of our largest multifamily loans and newly renovated New York City asset with a minority office component, which we worked surrendered following the recent bankruptcy.
Katy: This disruption presented the opportunity for our sophisticated well capitalized sponsors to replace the office was 75 new apartments enhancing.
Katharine A. Keenan: Enhancing the value and ultimate liquidity of the collateral. We granted time to pursue the secretive business plan in exchange for significantly increased equity, both to pay down our loan and capitalize the value add cap. In addition to the positive result for this collateral, the modification leaves us with virtually no ongoing WeWork exposure in our portfolio. Across Blackstone, we are highly constructive on multifamily, given this long-term structural shortage of housing. Within BXMT, our multifamily portfolio ended the quarter at 100% performance.
Katy: Enhancing the value and ultimate liquidity of the collateral.
Katy: We granted time to pursue this accretive business plan in exchange for significant increased equity both to pay down our loan and capitalize the value add capex.
Katy: In addition to the positive result for this collateral the modification leaves us with virtually no ongoing we work exposure in our portfolio.
Speaker Change: Across Blackstone, we are highly constructive on multifamily given the long term structural shortage of housing.
Speaker Change: Within <unk>, our multifamily portfolio ended the quarter at 100% performing.
Katharine A. Keenan: Our loans benefit from a weighted average LTV of 67% at origination and NOIs of 35% across the portfolio since. Across $1.5 billion of multi-loans with first quarter rate cap expirations, 100% of our borrowers renewed caps or replaced them with guarantees, a clear demonstration of commitment. Our largest multifamily concentrations are in New York City and Dallas, markets which are performing well.
Speaker Change: Our loans benefit from a weighted average LTV of 67% at origination and NOI was up 35% across the portfolio. Since then.
Speaker Change: Across $1 $5 billion of multi loans with first quarter rate cap exploration, 100% of our borrowers renewed caps or replace them with guarantee is a clear demonstration of commitment.
Speaker Change: Our largest multifamily concentrations are in New York City, and Dallas markets, which are performing well.
Katharine A. Keenan: We upgraded five loans in Q1 that have reached stabilization and are likely to repay in the coming quarter. Given temporary supply pressures in certain SunBelt markets compounded by higher rates, we also watchedlist four loans, but these together are just 1% of the portfolio. And with these capital markets' liquidity and fundamentally stable long-term demand for multifamily from users and owners alike, we believe our portfolio is largely insulated from these headwinds and that any credit impacts will be marginal and contained.
Speaker Change: We upgraded five loans in Q1 that have reached stabilization and are likely to repay in the coming quarters.
Speaker Change: Given temporary supply pressures in certain sunbelt markets compounded by higher rates. We also watch listed for loans, but these together are just 1% of the portfolio.
Speaker Change: And with deep capital markets liquidity, and fundamentally stable long term demand for multifamily from users and owners alike. We believe our portfolio is largely insulated from these headwinds and that any credit impacts will be marginal and contained.
Speaker Change: In closing, while the timing of the cycle will remain dynamic we believe 2024 will bring additional clarity to the market in our portfolio and we are highly focused on placing ourselves in the best position to capture the historically attractive investment opportunity that inevitably follows a period of distress.
Katharine A. Keenan: In closing, while the timing of the cycle will remain dynamic, we believe 2024 will bring additional clarity to the market and our portfolio, and we are highly focused on placing ourselves in the best position to capture the historically attractive investment opportunity that inevitably follows a period of distress. We are not waiting for the all-clear sign. Exceptional lending opportunities are available today, and given our strong liquidity position, we will selectively take advantage of them.
Speaker Change: We are not waiting for the all clear sign exceptional lending opportunities are available today and given our strong liquidity position, we will selectively take advantage, we capitalized on one such opportunity post quarter and committing to a $69 million senior loan on a resort hotel at 39% LTV and a <unk>.
Katharine A. Keenan: We capitalized on one such opportunity post-quarter end, committing to a $69 million senior loan on a resort hotel at 39% LTV and a 16% debt yield, which sets up for a double-digit unlevered return. This loan is the result of the core principles that have always underpinned our lending, real estate knowledge, analytical expertise, intellectual creativity, and deep relationships across the market. These strengths have driven our investors to entrust the Blackstone Real Estate Debt Strategies Platform with $85 billion of their capital, and they will continue to drive our performance through and following this cycle. And with that, I will now turn the call over to Tony. Thank you, Katie.
Speaker Change: 16% debt yields which sets up to a double digit unlevered return.
Speaker Change: This loan is the result of the core principles that have always underpinned our lending business.
Speaker Change: Real estate knowledge analytical expertise intellectual creativity and deep relationships across the market.
Speaker Change: These strengths have driven our investors to entrust the Blackstone real estate debt strategies platform with $85 billion of their capital and they will continue to drive our performance through and following this cycle.
Speaker Change: And with that I will now turn the call over to Tony.
Anthony Francis Marone: Thank you Katie and good morning, everyone.
Anthony Francis Marone: Thank you, Katie, and good morning, everyone. In the first quarter, BXMT reported a gap net loss of $0.71 per share and distributable earnings of $0.33 per share, excluding realized losses. Distributable earnings were $0.65 per share, supporting our dividend of $0.62 per share. We added this loss-adjusted metric to our disclosures this quarter, labeled as distributable earnings prior to charge-off, as we believe it is more reflective of the ongoing earnings power of the business and therefore helpful for investors to consider when assessing our cash flows and dividend coverage.
Anthony Francis Marone: In the first quarter <unk> reported a GAAP net loss of <unk> 71 per share and distributable earnings of <unk> 33 per share.
Anthony Francis Marone: Excluding realized losses distributable earnings were <unk> 65 per share supporting our dividend of <unk> 62 cents per share.
Anthony Francis Marone: We added this loss adjusted metric toward disclosures this quarter labeled as distributable earnings prior to charge offs.
Anthony Francis Marone: As we believe it is more reflective of ongoing earnings power of the business and therefore helpful for investors to consider when assessing our cash flows and dividend coverage.
Anthony Francis Marone: We recognized $61 million of realized losses in the first quarter as we made significant progress on the asset management initiatives.
Anthony Francis Marone: We recognize $61 million of realized losses in the first quarter as we make significant progress on asset management issues, resolving several impaired loans and crystallizing the existing CESA reserve, which impacted DE but not GAAP earnings or our book value. We acquired legal title to our first REO asset, a newly renovated office campus located in a desirable submarket of Silicon Valley. This asset is currently vacant, but is well positioned to capture leasing demand over time without the need for material CapEx investment.
Anthony Francis Marone: Following several impaired loans and crystallizing existing seasonal reserves, which.
Anthony Francis Marone: Which impacted the non-GAAP earnings or book value.
Anthony Francis Marone: We acquired legal titles were first Oreo assets.
Newly renovated office campus located in a desirable submarket of Silicon Valley.
This asset is currently vacant but is well positioned to capture leasing demand over time without the need for material Capex investment.
Anthony Francis Marone: We are leveraging the broader resources over the Blackstone platform to manage the property with the goal of maximizing recovery value beyond what we believe is achievable in the current market with liquidity for the office sector is still in it.
Anthony Francis Marone: We are leveraging the broader resources of the Blackstone platform to manage the property, with the goal of maximizing recovery value beyond what we believe is achievable in the current market. As equity for the office sector is still on the rise, the asset is recorded at its fair value of $60 million on our balance sheet. 35% lower than our prior loan. Further on loan resolutions, we expect to complete the sale of another collateral asset underlying an impaired office loan in the second quarter of 2020, with collective real life losses from the loan resolution discussed last quarter in line with our 1231 reserve. Validating the accuracy of our CECL process.
Speaker Change: Yes. It is recorded at fair value of $60 million on our balance sheet.
35% lower than our prior loan amount.
Speaker Change: Further on loan resolutions, we expect to complete the sale of another collateral asset underlying it and head office line in the second quarter.
Speaker Change: With collective realized losses from the loan resolution discussed last quarter in line with our 12 31 reserves.
Speaker Change: Validating the accuracy of our seasonal process.
Anthony Francis Marone: As Katie noted earlier, loan resolutions are a focus for BX, and they're also an important catalyst for future earnings generation. As a reminder, we currently do not recognize any income from impaired loans, but the interest expense associated with these loans continues to burden our results, impacting 1Q earnings by $0.16 per share. Over time, we expect we will recoup these earnings as loan resolutions generate capital that can be immediately applied to repay debt and eliminate this earnings drag in advance of eventually redeploying capital into new investments. In the interim, we expect to benefit from the cash flows currently generated by many of you.
As Keith noted earlier loan resolutions our focus for <unk>.
Speaker Change: They are also an important catalyst for future earnings generation.
Speaker Change: As a reminder, we currently do not recognize any income from impaired loans, but the interest expense associated with these loans continues to burden our results impacting.
Speaker Change: Impacting <unk> earnings by <unk> 16 per share.
Speaker Change: Overtime, we expect we will recoup these earnings as loan resolutions generate capital that can be immediately applied to repay debt and eliminate this earnings drag in advance of eventually redeploying capital into new investments.
In the interim we expect to benefit from the cash flow is currently generated by many of these loans and.
Anthony Francis Marone: $0.10 per share this quarter, that has not recognized internings but instead reduces our loan principal balance and supports book value. In the near term, the net impact of new cost recovery loans, loan modifications, and net portfolio contraction will contribute to more variability in BX&T's earnings and outweigh the longer-term earnings tailwinds from impaired loan resolution. As we've discussed in the past, we determine our dividend each quarter with our board of directors, focused on the long-term earnings power of our business and considering a variety of factors, including interest rates, a range of credit outcomes, and the environment for new originators.
Speaker Change: <unk> per share this quarter.
Speaker Change: It is not recognized in earnings, but instead reduces our loan principal balance and support its book value.
Speaker Change: In the near term the net impact of new cost recovery loans loan modifications and net portfolio contraction will contribute to more variability in <unk> earnings.
Speaker Change: And outweigh the longer term earnings tailwind from impaired loan resolutions.
Speaker Change: As we've discussed in the past, we determined our dividend each quarter with our board of directors.
Speaker Change: Focused on the long term earnings power of our business, considering a variety of factors, including interest rates.
Speaker Change: <unk> credit outcomes and the environment for new origination.
Speaker Change: More broadly on credit.
Anthony Francis Marone: More broadly on credit, we upgraded nine loans this quarter, reflecting continued business plan progression within multifamily and hospitality assets and the resolution of two impaired loans that are now once again performing. For these two loans, borrowers injected new cash equity, and capital structures were reset to improve our basis and sustain strong current income generation. We also downgraded 13 loans this quarter, seven of which were U.S. office loans that were placed on cost recovery and repair, and the reserves increased by $174 million quarter over quarter to $766 million, largely reflecting these new impaired loans. Our aggregate CESA reserves of $4.40 per share are embedded in our book value of $23.83 as of March.
Speaker Change: Upgraded nine loans this quarter, reflecting continued business plan progression within multifamily and hospitality assets.
Speaker Change: And the resolution of two impaired loans that are now once again performing.
Speaker Change: For these two loans borrowers injected new cash equity and capital structures were reset to improve our basis and sustained strong current income generation.
Speaker Change: We also downgraded 13 loans this quarter seven of which were U S office loans that were placed on cost recovery and I'm here.
Speaker Change: Our system reserves increased by $174 million quarter over quarter to $766 million largely reflecting these new impaired loans.
Speaker Change: Our aggregates. These reserves of $4 40 per share are embedded in our book value of $23.83 as of March 31.
Speaker Change: Importantly, our balance sheet remains solid and is built to withstand the pressure we face in the current market environment.
Anthony Francis Marone: Importantly, our balance sheet remains solid and is built to withstand the pressure we face in the current market environment, diversified funding sources, term-matched financing, and no capital markets driven market to market. These are the key tenets on which we have constructed our balance sheet since BXMT's business launched in 2013, and which continue to underpin our stability today. Over the past year, BXMT increased liquidity to near record levels, $1.7 billion, while also reducing asset levels and corporate financing by $1.8 billion.
Speaker Change: Diversified funding sources term matched financings and no capital markets driven mark to market provision.
Speaker Change: These are the key tenants on which we can start with our balance sheet <unk> business launched in 2013, and which continue to underpin our stability today.
Speaker Change: Over the past year, <unk> increased liquidity to near record levels of $1 $7 billion, while also reducing asset level and corporate financings by $1 8 billion.
Speaker Change: This included $60 million of senior secured note repurchases, which we executed at a significant discount to face value generating $8 million of gains over the past four quarters and $3 million in Q1, specifically.
Anthony Francis Marone: This included $60 million of senior secure note repurchase, which we executed at a significant discount to face value, generating $8 million of gains over the past four quarters, and $3 million in Q1. Debt-to-equity has increased slightly this quarter to 3.8 times as a result of higher cease-to-reserve, but remains within our target range, and we remain in compliance with all financial covenants; repayments continue to exceed loan funding. $1 billion collected versus $353 million funded in Q1.
Speaker Change: That's the equity has increased slightly this quarter to three eight times as a result of higher seasonal reserves are remains within our target range and we remain in compliance with all financial covenants.
Repayments continue to exceed loan fundings.
Speaker Change: $1 billion collected versus $353 million funded in Q1.
Anthony Francis Marone: This dynamic has yielded net cash proceeds that have fortified our balance sheet and liquidity position for five consecutive quarters, and while repayments can be lumpy, we see this overall trend continuing, with clear indications of demand for our highest quality collateral, including in office. Looking ahead, we expect near-term results to reflect the realities of a higher interest rate environment and also the proactive portfolio management measures we are taking to pursue the best long-term outcomes for our investors. Our business is well-positioned, with strong liquidity and a stable balance sheet. Sustainable Current Income Generated by Our Portfolio Thank you for joining the call. I will now ask the operator to open the call to questions.
Speaker Change: This dynamic has yielded net cash proceeds that are fortified our balance sheet and liquidity position for five consecutive quarters in a while.
Speaker Change: Repayments can be lumpy.
Speaker Change: See this overall trend continuing with clear indications of demand for our highest quality collateral, including an office.
Speaker Change: Looking ahead, we expect near term results will reflect the realities of a higher interest rate environment and also the proactive portfolio management measures. We are taking to pursue the best long term outcomes for our investors.
Speaker Change: Our business is well positioned.
Speaker Change: Strong liquidity stable balance sheet and a substantial current income generated by our portfolio.
Speaker Change: Thank you for joining the call I will now ask the operator to open the call to questions.
Speaker Change: Thank you as a reminder, please press star one to ask a question.
Operator: 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 Doug Harter with UBS.
Speaker Change: Ask you limit yourself to one question and one follow up to allow as many questions as possible.
We will go first to Doug Harter with UBS.
Speaker Change: Yes.
Douglas Michael Harter: Thanks. On the loan extensions that you completed this quarter, can you talk about how long the extensions were typically granted?
Oh thanks.
On the loan extensions that you completed this quarter can you talk about how long.
The extensions, where you typically granted.
Katharine A. Keenan: Doug, are you referring to the extensions, the sort of credit-positive mods that we're doing where we're getting paydowns and giving borrowers more time, or specifically on the multi-family I referred to?
Douglas Michael Harter: Doug are you referring to the extension.
Douglas Michael Harter: Credit positive mods that we're doing where we're getting pay downs and and giving borrowers more time or specifically on the multifamily I referred to.
Doug: Oh, just kind of in general on that on that Pie chart, you had with the <unk> maturities and just kind of getting a sense as to how much.
Douglas Michael Harter: Just kind of in general on that pie chart you had with the few maturities and, you know, just kind of getting a sense as to how much additional time is being granted.
Doug: Additional time is being granted.
Speaker Change: Sure. So it falls into a couple of categories. So when you look at that Pie chart. The loans that are extending and passing their task. That's generally just a one year extension that's provided for under the typical structure of the loan.
Katharine A. Keenan: Sure. So, it falls into a couple of categories. So, when you look at that pie chart, the loans that are extending and passing their tests, that's generally just a one-year extension that's provided for under the typical structure of the loan. For situations where borrowers are putting in more equity and we're granting them more time, it's really a continuum, and it comes down to how much equity we're getting. And we're really just making an investment decision at that point about where our basis is, where our credit position is, what we see as the business plan for the asset, is it capitalized appropriately based on the new equity we're getting in, and how do we optimize our outcomes between return and recovery over that period of time. So, it's generally one to two years. We're not talking about longer than that, but within that continuum, it's really about making an investment decision at the point when we do the
Speaker Change: For situations, where borrowers are putting in more equity and we're granting them more time, it's really a continuum and it comes down to how much equity, we're getting and we're really just making an investment decision at that point about where our basis is where our credit position is what we see as the business plan for the asset is it capitalized appropriately based on the new equity we're getting in.
Speaker Change: And how do we optimize our outcomes between return and recovery over that period of time. So you know, it's you know that.
Speaker Change: One to two years generally we're not talking about longer than that but within that continuum, it's really about making an investment decision at the point when we're doing them.
Speaker Change: Yeah.
Katharine A. Keenan: Great, thank you for that, Katie. And then just on the loans that were downgraded this quarter, kind of what changed during the quarter that led to a downgrade, you know, in 1Q versus how they were positioned in 4Q?
Speaker Change: Great. Thank you for that Katie and then.
On the loans that were downgraded this quarter or kind of what exchange during the quarter that led to a downgrade.
Speaker Change: <unk> versus kind of how they were positioned in for Q.
Speaker Change: Yes.
Katharine A. Keenan: Sure. So, each one of these loans obviously has specific situations that can change over time, but it's largely U.S. office, you know, reflecting the well-known challenges we've seen in the market but also some changes in occupancy and sort of tenant dynamics in the individual assets. And then on the multifamily side, as I mentioned, really looking at temporary impacts of supply in certain markets compounded by higher rates. But there, you know, those are watch list assets, just 1% of the overall portfolio, and we expect them to be pretty marginal.
Katie: Sure. So you know it's each one of these loans, obviously has specific situations that can change over time, but it's largely U S office.
Katie: Reflecting the well known challenges we've seen in the market, but also some changes in occupancy and sort of kind of dynamics in the individual assets and then on the multifamily side as I mentioned really looking at at temporary impacts of supply in certain markets compounded by higher rates, but they are those are watch list assets, just 1% of the overall portfolio.
Katie: Leo and where we expect it to be pretty marginal.
Leo: Great. Thank you.
Leo: Thank you. We'll go next well go next to Stephen laws with Raymond James.
Stephen Albert Laws: Thank you. We'll go next to Stephen Laws with Ramin Jain.
Stephen Albert Laws: Hi, good morning.
Stephen Albert Laws: Hi, good morning Tony. I wanted to start with a question about the numbers. You know, on the positive side, you mentioned some of the resolutions, I believe, in Q1 and the expected one in Q2 will help remove some drag on the financing of non-accrual assets. And then around the downgrades, I think you mentioned that seven of those are new non-accrual loans. Can you talk about the net impact and how we should see those two things, you know, balance out in the near term?
Stephen Albert Laws: Tony I wanted to start with a question on the numbers.
Stephen Albert Laws: I think on the positive side you mentioned some of the resolutions I believe in Q1 and expected. The one in Q2 will help remove some drag off the financing of non accrual assets.
Stephen Albert Laws: And then around the downgrades I think you mentioned that seven.
Stephen Albert Laws: All of those are new nonaccrual loans can you talk about the net impact and how we should see.
Stephen Albert Laws: Those two things.
Stephen Albert Laws: Balance out in the near term.
Speaker Change: Sure. So as we're resolving some of these were.
Anthony Francis Marone: Sure. So as we're resolving some of these, you know, we're Without getting into specific guidance for next quarter in particular, I think you could expect to see a similar impact, from moving loans to cost recovery, as we've seen in the past. So, given the magnitude of that portfolio, you could think of that as something in that 8 to 10 cent range. That is something that you might expect. And then on the resolutions, those will be dependent on how much leverage we have against them.
Without getting into specific guidance on next quarter in particular, I think you could expect to see a similar impact.
Speaker Change: Moving loans to cost recovery as we've seen in the past so given the magnitude of that portfolio. So you could think of that as you know something in that eight to 10 range is something that you might expect.
Speaker Change: And then on the resolutions.
Speaker Change: Those will be that will be dependent on how much leverage we have against them. So it'll be a more muted impact maybe a couple of cents per share.
Anthony Francis Marone: So it'll be a more muted impact, maybe a couple of cents per share. But importantly, as I mentioned in my remarks, when you're thinking about the earnings impact of the loans going to cost recovery, many of these loans, in particular, some of the more recently impaired loans, continue to pay. So we're still getting that cash flow, and it's benefiting our basis, even though it's not coming through our DEM.
Speaker Change: I think importantly.
Speaker Change: I mentioned in remarks, when Youre thinking about the earnings impact of the loan is going to cost recovery. Many of these loans in particular some of the more recently impaired loans continue to pay so we're still getting that cash flow that's benefiting our basis, even though it is not coming through are the key metrics.
Speaker Change: Great I appreciate the clarification, there and then.
Anthony Francis Marone: Great I appreciate the clarification there. And then, you know, I know you've mentioned kind of one outlook or expectation for one resolution here in Q2, but, you know, as you look over the balance of the year and you consider the current five rated loans or those with specific reserves, you know, how much of that, I think it was $1.2 billion, or maybe that was the office, but how much of that do you think you can get resolved, you know, this calendar year? And how do we think about resolutions in the second half?
Speaker Change:
Speaker Change: I know you've mentioned kind of one outlook or expectation for one resolution here in Q2, but as you look over the balance of the year and you consider the current five rated loans, where those were specific reserves how much of that I think it was $1 2 billion.
Speaker Change: That was office, but how much of that do you think you can get resolved.
Speaker Change: This calendar year, and how do we think about resolutions in the second half.
Speaker Change: Yeah. It's a great question I think from a general overall.
Speaker Change: Market perspective.
Speaker Change: We are very focused on taking advantage of the fact that there is more liquidity more transparency in the market, there's capital coming back including for office. Obviously, it's one of the luxury resolved. This quarter are two of the ones. We have resolved this quarter.
Speaker Change: From a sale and restructuring perspective, we're both office loans. We also took one Oreo.
Anthony Francis Marone: Yeah, it's a great question. You know, I think from a general overall recovery point of view for our investors. But where we see the opportunity to sell or move on from an asset at a level that makes sense when we look at our wholesale analysis from a return perspective, we are absolutely going to do that. And I think that the fact that there is more liquidity in the market, more turnover, more stuff is moving, it's going to create some noise, but it's ultimately the best thing in order to move us through this cycle and get to the other side, get back focused
Speaker Change: And our overall approach is going to be one of maximizing recovery for our investors, but where we see the opportunity to sell or move on from an asset and a level that makes sense. When we look at our whole cell analysis from a return perspective, we are absolutely going to do that and I think that the fact that there is more liquidity in the market more turnover.
Speaker Change: For a more stuff is moving it's going to create some noise, but it's ultimately the best thing in order to move us through this cycle and get to the other side get back focused on our core business. So we have a couple of others that are in process relatively near term we're obviously.
Anthony Francis Marone: So, you know, we have a couple of others that are in the process relatively near term. We're obviously, you know, all systems go in terms of trying to make sure we resolve these things as soon as possible. So I think it's tough to project for the second half of the year, but we're very focused on moving these assets to resolution and getting through it.
All systems go in terms of trying to make sure. We resolve these things as soon as possible. So I think it's tough to project for the second half of the year, but we're very focused on moving these assets to resolution and getting through it.
Great I appreciate the comments this morning. Thank you.
Stephen Albert Laws: Great. I appreciate the comments this morning. Thank you.
Speaker Change: We'll go next to Sarah <unk> with BTG.
Sarah Barcomb: We'll go next to Sarah Barcomb with BTIG.
Sarah Barcomb: Hi, good morning everyone. My question is related to leverage on watchlist assets. Could you walk me through some of the resolutions of the five rated assets in CLOs, meaning was there an additional cash need to avoid losses at the CLO level when those resolution proceeds came in? And approximately how much leverage is on the new five rated assets? Thank you.
Sarah: Hi, Good morning, everyone. My question is related to leverage on watch list assets could you walk me through some of the resolutions of the fiber asset CLO.
Sarah: CLO, meaning.
Sarah: Meaning was there an additional cash need to avoid losses at the CMO level when those resolution proceeds came in.
Sarah: And approximately how much leverage is on the new five rated assets. Thank you.
Speaker Change: Sure. So you know thinking about are our general approach there for most of the five rated assets. We generally have delever at them along the way. So the typical advance rate on our five rated asset is materially lower than our overall portfolio. So usually we have already sort of put ourselves into a more stable position on the CLO.
Anthony Francis Marone: Sure. So, you know, thinking about our general approach there, for most of the five-rated assets, we generally have de-leveraged them along the way. So, the typical advance rate on a five-rated asset is materially lower than our overall portfolio. Usually, we've already sort of put ourselves into a more stable position. On the CLO specifically, you know, when we look at these assets, we're really looking at optimizing recovery and return for our investors and for all of our investors throughout the capital structure.
Speaker Change: Specifically when we look at these assets, we're really looking at optimizing recovery and return for our investors and for all of our investors throughout the capital structure, sometimes that will involve buying portions of the loan out of the CLO or in some cases all of the loans out of CLO and in other cases, we'll look at it and say the best thing really is to continue with an asset in the CLO and it's really.
Anthony Francis Marone: Sometimes that will involve buying portions of the loan out of the CLO or, in some cases, all of the loans out of the CLOs. And in other cases, we'll look at it and say, you know, the best thing really is to continue with an asset in the CLO. And it's really going to come down to a decision looking at all of the factors to maximize the outcome for the overall company. So, in terms of capital, you know, you really have seen, for the most part, along the way, impact with these loans.
Speaker Change: <unk> come down to a decision looking at all of the factors to maximize the outcome for the overall company. So in terms of capital.
Speaker Change: You have seen for the most part along the way impact with these loans because obviously you know impaired assets are on the watch list for a while we know what's going on and we're talking to our lenders. This is not something that is happening overnight. So.
Anthony Francis Marone: Because obviously, you know, impaired assets are on the watch list for a while. We know what's going on. We're talking to our lenders. This is not something that, you know, is happening overnight. So, we don't see a material change in liquidity. And it's really just about making sure each one of these assets is optimally capitalized to maximize sort of the return and recovery value as we move through our business.
Speaker Change: So we don't see a material change in liquidity and it's really just about making sure. Each one of these assets is optimally capitalize to maximize sort of the return and recovery value as we move through our business plan.
Speaker Change: Okay. Thank you and then just a quick modeling question. So you mentioned you are expecting one more of a decision in the second quarter are you still expecting about $70 million to $80 million total realized losses for the first half of this year.
Sarah Barcomb: Okay, thank you. And then I have just a quick modeling question.
Anthony Francis Marone: So you mentioned you are expecting one more resolution in the second quarter. Are you still expecting about 70 to 80 million total realized losses for the first half of this year? And how are those expectations shaping up for the full year? I would stick with that expectation, as I mentioned in our remarks, you know, the law.
Speaker Change: And how are those expectations expectations shaping up for the full year.
Speaker Change: I would stick with that expectation as I mentioned in our remarks.
Anthony Francis Marone: I would stick with that expectation, as I mentioned in our remarks. The losses between the first and second quarter are coming in right on top of our year-end CESA reserves, which we think is a great validation of our valuation process, so I would stick to that expectation. As it relates to the back half of the year, I think Katie covered that earlier, that it's going to be very dependent on.
Speaker Change: Losses between the first and second quarter are coming in right on top of our year end reserves, which we think is a great validation of our valuation process. So so I would stick to that expectation.
As it relates to the back half of the year I think Katie cover that earlier that it's going to be very dependent upon what kind of transactions that we see in the market what kind of liquidity there is so.
Speaker Change: Don't know if there's a specific number that I would focus on at this point.
Speaker Change: Okay.
Jade Joseph Rahmani: Thank you. We'll go next to Jade Rahmani with KBW.
Speaker Change: Thank you we'll go next to Jade Rahmani with K B W.
Katharine A. Keenan: Thank you very much. How is the higher rate outlook impacting borrowers? I attended CREFSI in January, and everyone was ecstatic about the prospect of lower rates. Clearly, that's changed. And could you address multifamily in particular?
Jade Joseph Rahmani: Thank you very much how is the higher rate outlook impacting borrowers I attended <unk> in January and everyone is ecstatic about the prospect for lower rates clearly that's changed.
If you could address multifamily in particular.
Speaker Change: Yeah.
Jade Joseph Rahmani: Sure Yeah. It's a great question I think that obviously the expectation for the pace of rate cuts had been tempered, but I think the important thing to keep in mind, we still have the view that the overall path of rates from here is downward we're seeing that as we look across an inflation data that we see here internally.
Katharine A. Keenan: Sure, yeah, it's a great question. You know, I think that obviously the expectation for the pace of rate cuts has been tempered. But, you know, I think the important thing to keep in mind is that we still have the view that the overall path of rates from here is downward. We're seeing that as we look across inflation data that we see here internally. It's all happening at a slower pace, but the direction of travel has not changed.
Jade Joseph Rahmani: All happening at a slower pace, but the direction of travel has not changed and I think that importantly, when you think about the impact of rates a lot of it has to do with market liquidity spreads overall cost of capital and despite a month of volatility are sort of going back and forth on expectations of rate cuts, we've continued to see liquidity.
Katharine A. Keenan: And I think that importantly, when you think about the impact of rates, a lot of it has to do with market liquidity spreads and the overall cost of capital. And despite, you know, a month of volatility or sort of going back and forth on expectations of rate cuts, we've continued to see liquidity in the market. We've seen the cost of capital come down, and spreads are normalizing across real estate lending markets, both public and private. And so, all has kept sort of the direction of travel in the same direction.
Jade Joseph Rahmani: <unk> in the market, we've seen cost of capital come down spreads are normalizing across real estate lending markets, both public and private and so that all has kept sort of the direction of travel in the same direction.
Katharine A. Keenan: You know, I think in more marginal situations, obviously higher rates, and in particular, the pace of rate cuts could have an impact in terms of carry costs, and in terms of, you know, conversations about liquidity for sponsors. I think that's going to happen, particularly in multifamily, in the corner of the market with sponsors who are really less well-capitalized, and it's going to create a lot of headlines, but it's not indicative of the overall market. So, you know, I think that the rate impact is obviously not helpful, but I think it's really about long-term rates, the direction of travel for rates, and critically, liquidity in the market.
Jade Joseph Rahmani: I think I'm more marginal situations, obviously higher rates and in particular the pace of rate cuts could have an impact in terms of carry cost in terms of comp.
Jade Joseph Rahmani: Conversations on liquidity for sponsors I think that's good I think youre going to see that particularly in multifamily more in the corner of the market with with sponsors who were really less well capitalized and it's going to create a lot of headlines, but it's not indicative of the overall market.
Jade Joseph Rahmani: I think that the rate impact obviously not helpful. But I think it's really about long term rates the direction of travel for rates and critically liquidity in the market.
Speaker Change: Thank you.
Jade Joseph Rahmani: Thank you. Just thinking about the dividend cash flow from operations, this quarter was below the dividend at $96.4 million. You mentioned the $16.8 million of interest that was accrued that's now non-accrual. You received the cash, but that will be a decrement to earnings.
Speaker Change: Just thinking about the dividend cash flow from operations. This quarter was below the dividend at $96 4 million you mentioned the $16 8 million of interest that was accrued that's now.
Speaker Change: Non accrual you received the cash but that will be a decrement to earnings and there are other factors, including the smaller portfolio given repayments.
Jade Joseph Rahmani: And there are other factors, including the smaller portfolio given repayments. But should we think about the dividend as being? Is this a steady state because it's based on a long-term premise about returns, or does it make sense to think about a lower dividend, which would give the company some additional liquidity and also some flexibility in managing through the current turbulence? And it seems that with a 13% yield, the stock, in fact, is already pricing in a dividend reduction. One of your peers, a similar type of company, trades at around a 10% yield on it.
Speaker Change: Should we think about the dividend as being.
Steady state because it is based on a long term premise about returns or does it make sense to think about.
Speaker Change: Lower dividend, which would give the company some additional liquidity and also some flexibility in managing through the current turbulence and it seems that with a 13% yield the stock in fact is already pricing in <unk>.
Speaker Change: Dividend reduction in one of your peers similar type of company.
Speaker Change: Trades at around a 10% yield on its reduced dividend.
Anthony Francis Marone: Thanks for the question, Jade. So to maybe hit the first point quickly, we would point you to the DE before charge-offs as the metric, more so than cash flow from operations. There are different things that impact the gap cash flow, and we think the best metric for folks to look at is DE prior to charge-offs when you're contextualizing the dividend, so the $0.65 this quarter relative to Class B. And we're not going to overreact to one quarter or another along the way.
Speaker Change: Yeah.
Speaker Change: Thanks for the question James.
Speaker Change: Maybe the first point quickly.
Speaker Change: We would point you to the day before charge offs as the metric more so than cash flow from operations, there's different things that impacted the GAAP cash flow and we think the best metric for folks to look at LTE prior to charge offs. When you are contextualized the dividends. So 65 this quarter relative to the 62.
Speaker Change: As it relates to the dividend longer term.
Speaker Change: We've had the same dividend level.
Speaker Change: For almost nine years, sometimes we far out earn that level, sometimes we've been slightly below that level I think that shows that we've continued to set our dividend with a long term view in mind.
Speaker Change: As I mentioned in the remarks, we're looking at this quarterly we discuss with our board of directors and what we think really drives the decision is where is the long term earnings power of this company over time, and what dividend makes sense relative to that and we're not going to overreact to one quarter or another you know along the way.
Richard Barry Shane: We'll take our last question from Rick Shane with J.P. Morgan.
Richard Barry Shane: Hey, thank you. It's actually almost a perfect segue.
Thank you.
Speaker Change: Yeah.
Speaker Change: We'll go next we will take our last question from Rick Shane with JP Morgan.
Anthony Francis Marone: So, if we think about setting a dividend policy on distributable earnings at the end of the year, Realized Losses, it essentially kind of takes credit out of the equation, which I'm not really convinced is the best way to look at the business. One of the outcomes of that is that, particularly given the start to 24, it looks like book value will be down for the third year in a row. You talk about the sustainable dividend and the economics.
Richard Barry Shane: Okay. Thank you, it's actually almost a perfect segue. So if we think about setting a dividend policy on a distributable earnings ex.
Richard Barry Shane: Realized losses.
Richard Barry Shane: It essentially kind of takes credit out of the equation, which I'm not really convinced it is.
Richard Barry Shane: The best way to look at the business one of the outcomes of that is that.
Richard Barry Shane: Particularly given the start to 'twenty four it looks like book value will be down for the third year in a row.
Richard Barry Shane: You talk about sort of the sustainable dividend and the economics get.
Anthony Francis Marone: Given where book value is today, to earn that dividend would require about a 10.5% return on capital or economic return, which is a pretty high watermark for you guys. So, I really do wonder or ask-I guess I would ask the question-do you think that a 10-plus percent return, given the near-term headwind of non-accruals and, potentially, as we move into 25, lower base rates, is an achievable long-term target
Richard Barry Shane: Given where book value is today.
Richard Barry Shane: And that dividend will require about 10, 5% return on capital or economic return, which is a pretty high watermark for you guys.
Richard Barry Shane: So I really do wonder or as I guess I would ask the question do you think that a 10 plus percent.
Richard Barry Shane: Term given the near term headwind of non accruals and potentially as we move into 'twenty five lower base rates.
Richard Barry Shane: And achievable long term target.
Speaker Change: I think it's a great question the way we look at it is very much in that way. So I think putting aside sort of short term and the encumbrance of non accruals. It really is about the long term earnings power of the business, which relates to the equity value of the book value and ROE. If you look back over the history of the business we are very.
Anthony Francis Marone: I think it's a great question. You know, the way we look at it is very much like that. So, you know, I think putting aside sort of the short term and the encumbrance of non-accruals, it really is about the long-term earnings power of the business, which relates to the equity value, the book value, and our ROE. If you look back over the history of the business, we have very consistently generated a return that is about 900 basis points over base rates.
Speaker Change: Consistently generated a return that is about 900 basis points over base rates and so base rates are a really important part of the equation for most of the history of the business base rates have been well below even what we see as sort of the terminal rate. When we look at the sofa curve today, So I think that when you're thinking about where that normalized Roe could be over time, we need.
Anthony Francis Marone: And so base rates are a really important part of the equation. For most of the history of the business, base rates have been well below what we see as sort of the terminal rate when we look at the SOFR curve today.
Anthony Francis Marone: So I think that when you're thinking about where that normalized ROE could be over time, we need to think about sort of where ROE levels off. And obviously, there are other puts and takes in the overall business. But ultimately, you know, the impact of credit is where equity value or book value ultimately ends up. And obviously, that's how we take it into account. It's just less impactful when you think about sort of this quarter or that quarter realized losses coming through the DE. It's about the long-term equity and the long-term earnings power of that.
Speaker Change: To think about sort of where our ROE levels off and obviously there is other puts and takes in the overall business, but ultimately the impact of credit is where equity value or book value ultimately ends up and obviously, that's how we take it into account. It's just less impactful when you think about sort of this quarter or that quarter realized losses coming through the day, it's about the.
Speaker Change: Long term equity in the long term earnings power of that equity.
Speaker Change: Got it.
Anthony Francis Marone: Got it. And given that, how should we think about the nature of the dividend for 24, given where we started the year? Should we assume that that will be a return of capital as opposed to a true dividend?
Speaker Change: Given that how should we think about the nature of the dividend.
Speaker Change: For 2004, given where we've started the year should we assume that that will be a return of capital as opposed to a true dividend.
Speaker Change: I think it's early in the year to give tax attributes for our dividend.
Anthony Francis Marone: I think it's early in the year to give tax attributes for our That's where you're at.
Speaker Change: Okay.
Fair enough fair enough. Thanks, guys.
Richard Barry Shane: Fair enough. Thanks, guys.
Speaker Change: Thanks, so much thank you.
Operator: Thanks so much. That will conclude our question and answer session. At this time, I would like to turn the call back over to Mr. Hayes for any additional or closing remarks.
That will conclude our question and answer session. At this time I would like to turn the call back over to Mr. Hayes for any additional or closing remarks.
Timothy Paul Hayes: Thank you, Katie, and to everyone joining today's call. Please reach out with any questions.
Hayes: Thank you Katie and to everyone joining today's call. Please reach out with any questions.
Hayes: Okay.
Hayes:
Hayes: [music].
Hayes: Yeah.
Hayes: [music].