Q3 2024 Blackstone Mortgage Trust Inc Earnings Call
Okay.
Speaker Change: Good day and welcome to the Blackstone mortgage trusts third quarter 'twenty 'twenty four investor call Today's conference is being recorded.
Speaker Change: 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'd like to ask a question. Please press signaled by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment at this time I'd like to turn the conference over.
Speaker Change: Tim Hayes, Vice President shareholder Relations. Please go ahead.
Tim Hayes: Good morning, and welcome everyone to Blackstone mortgage trusts third quarter 2024 earnings conference call.
Tim Hayes: I'm joined today by Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, Jonathan Daniels Executive Vice President of investments.
This morning, we filed our 10-Q and issued a press release with a presentation of our results which are available on our website and have been filed with the SEC.
Tim Hayes: I'd like to remind everyone that today's call may include forward looking statements, which are subject to risks uncertainties and other factors outside the company's control.
Tim Hayes: Actual results may differ materially.
Tim Hayes: For a discussion of some of the rest of that can affect results. Please see the risk factors section of our most recent 10-K.
Tim Hayes: We do not undertake any duty to update forward looking statements.
Tim 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.
Tim Hayes: Audiocast is copyrighted material of Blackstone mortgage trust may not be duplicated without our consent.
Speaker Change: For the third quarter, we reported a GAAP net loss of 32 per share all distributable earnings and distributable earnings prior to charge offs were 39, and 49 cents per share respectively.
Weeks ago, we paid a dividend of 47 cents per share with respect to the third quarter.
Speaker Change: Let me know if you have any questions. Following today's call with that I'll now turn things over to Katy.
Katy: Thanks, Tim.
Katy: Third quarter brought the long anticipated commencement of the rate cut cycle in the U S.
Katy: <unk> major developed markets short rates are coming down driven by cooling inflation.
Katy: At the same time economic indicators remain strong supporting the prospect of a soft landing.
Katy: For real estate, the combination of lower rates and a more benign outlook has created an inflection point in the cycle.
Katy: Liquidity has returned to the market normalizing cost of capital and bringing transaction activity off the sidelines.
Katy: Real estate valuations have bottomed with three consecutive quarters of increasing values.
Katy: With new supply down 40% to 75% across major sectors longer term tailwind are in place.
Katy: This recovery is driving strong forward momentum mdx MTS business accelerating portfolio turnover through repayments resolutions and redeployment.
Katy: With $1 $8 billion of pay offs, three Q was our fourth highest repayment quarter ever and double the average pace of the first half of this year.
Katy: Capital coming back can be redeployed into today's attractive investment environment with a basis credit lens sector view and spread profile all reset to current levels.
Katy: With plenty of liquidity and a fruitful origination environment, we are squarely in new investment mode here.
Katy: To date, we have nearly $700 million of new originations closed or in clothing across favorite sectors, including multifamily industrial self storage and resort hotels.
Katy: And the environment today supports lending at a lower basis with stronger cash flow coverage and higher return.
Katy: Our largest in clothing deal is a case in point.
Katy: This is a $450 million senior loan backed by a portfolio of stabilized self storage assets.
Katy: Elsewhere in Brad's, we've participated in the capital structure of this investment before.
Katy: It's always been a great portfolio of credit to the solid real estate and skillful sponsorship.
Katy: But in this vintage wider market cap rates mean that our 62% LTV loan that's up towards that 20% higher than a levered return nearly double the 2021 at a ratio a factor of both wider spreads and higher base rates.
Katy: This dynamic extends beyond one loan.
Katy: <unk> average origination LTV of year to date loans closed during closing is 60% the weighted average debt yield is over 9%.
Katy: And collectively do you feel is set up to mid teens rois at today's base rates highly attractive relative value.
Katy: These deals also exemplify our competitive edge in sourcing pipeline and driving differentiated investments Ali.
All are with repeat borrowers several many times over all of our source directly or in limited competition.
Katy: And I'll have generated strong appetite from our financing relationships with marginal pricing moving squarely into the mid to high 100 spread levels.
Katy: We expect more activity from here U S transaction volume is up 20% the largest sequential increase since the fourth quarter of 2021.
Katy: More deal activity has spurred greater demand for new loans and our pipeline continues to expand.
Katy: Our future deployment outlook is underpinned by the repayment dynamic of our existing loan.
Katy: We have a relatively short duration portfolio. Our loans are typically five years in term repaying after two to three.
Katy: In periods like the last few years loans stick around longer with borrowers preferring to extend their hold periods and existing financing notwithstanding strong performance from underlying collateral.
Katy: But when capital markets reopen there's a catch up which is what we're seeing now the.
Katy: The MBS market agencies insurance companies and debt funds are all active and borrowers are refinancing into the next phase of their business plan.
Katy: Going forward, we expect an accelerated repayment period for our 1% to three risk rated loans, which today account for around $15 billion of the portfolio.
Katy: As we look out over the next 12 months, we had $2 7 billion of total one to three risk weighted loans, that's scheduled final maturity.
Katy: <unk>, which is the spiral a newbuild trophy in New York City Office building located in Hudson yards, and our top loan commitment.
Katy: This asset is squarely a winter in today's office market, having leased up from 28% when we made the construction loan to over 90% today and attracting the premier tenants in the market Pfizer Debevoise Alliance Bernstein HSBC.
Katy: Well, we would be delighted to keep this loan in our portfolio. It is definitively refinance them all and we expect it will repay in the coming quarters.
Katy: So turning of the credit cycle and increased capital markets liquidity is rippling through our more challenged assets as well.
While we completed just one resolution and <unk>, we were busy lining up a number of deals for the fourth quarter.
Katy: At quarter end, we have completed or agreed terms to resolve over $600 million of our impaired assets and have clear visibility on the path to resolution of a further 500 million plus.
Katy: Altogether. This means that in the coming quarters. We believe we can resolve over half of the $2 3 billion of impaired loans, we carried at the end of Q3.
Katy: These resolutions will come through a combination of full cash sale, a b note restructuring and unlimited cases are out.
Katy: We have two assets under hard contract for sale at prices above our reserve levels, including a $250 million office deal in New York City that drew a highly competitive bidding process and our final sale price equating to a high fours in place and high fives stabilized cap rate.
Katy: We closed a recapitalization of an office deal earlier this month, bringing in several new equity, bringing substantial new equity commitments subordinate to a reset in our basis and have several other large office restructurings in the queue.
Katy: We plan to take two assets <unk> and <unk> hotel in San Francisco and in office in D. C, where we will pursue longer term value recovery strategy.
Katy: And while not included in the numbers I just quoted we are in the market for sale or negotiating deals on several other resolution candidates, which may add to the total as we move into 2025.
Katy: And finally, our specific seasonal reserve, averaging 28% of impaired loan balances continues to prove appropriate with the resolutions closed during closing to date expected to shake out at or above our carrying values.
Katy: The progress we are making is a crucial step toward repositioning the portfolio for sustained performance and an indication of the broader credit trends, we see in our portfolio today.
Katy: Every single performing loans that reached maturity this quarter repaid satisfied its performance test our extended with over $400 million in new equity commitments or additional economics to be excellent team and this includes over $1 billion of offices.
Katy: Great cap renewals are a nonissue multifamily its 99, 5% performing and lower short rates support stronger debt service coverage ratios going forward, we collected or agreed paydowns on three of our four watch listed multi loans with the fourth slated for repayment.
Had over $650 million of repayments across large portfolios of hotels in Australia and Europe.
Katy: And even in office, we've collected over $675 million in repayments, thus far in the second half, bringing the year to date total to $1 $4 billion through today.
Katy: This includes full repayment of our $286 million loan oncology square in Atlanta, and in $115 million Paydown on our Irish office and industrial portfolio alone. The second in two years as we continue to support the build out of highly accretive industrial collateral within the asset base, while improving our credit position.
Katy: Well credit outcomes can take time to play out as evidenced by two additional impaired office loans. This quarter, we see the balance shifting from here with resolutions outpacing impairments there.
Katy: Therefore based on what we see today this quarter as nonperforming loan measure at 12% should be the peak with improvement over time as we move forward.
Katy: As resolutions crystallized, we will realize onetime losses through E, but unlock the earnings potential of this capital.
Katy: <unk> will be a rebuilding period, but looking forward to 2025, the combination of resolutions and redeployment should provide a tailwind to earnings power and coverage of our reset dividend.
Katy: And we believe this transition period is more than priced gym.
Katy: The SMT today trades at 0.84 times post diesel book value.
Katy: The market is pricing in another $600 million plus of credit losses beyond the $1 billion already reserved for in our book value.
Katy: A punitive scenario based on what we see today.
Katy: While a subset of our watch listed office continues to be a focus for potential credit deterioration. We also see the emerging potential for market value recovery to translate through to our impaired asset embedded optionality that shareholders today on for free.
Katy: And our stock currently offers a 10% dividend yield providing an attractive stream of current income that becomes increasingly valuable as global yields decline.
Katy: More importantly, no firm is better positioned to capitalize on the current market opportunity and Blackstone.
Katy: 150, real estate that professionals around the world covering 600, plus borrowers with deep repeat customer relationships.
Katy: Our scale and global footprint provide differentiated access to attractive investments, allowing us to pursue the best relative value across markets.
Katy: Our deep capital markets expertise drive superior cost of capital, allowing us to take less credit risk to achieve attractive returns.
Katy: And as the largest owner of commercial real estate globally, Blackstone's deep knowledge and experience underpins it all.
Katy: The market has historically valued these advantages at a premium rational given their translation to generating premium risk adjusted returns today, we trade at a steep discount and attractive entry point as we capitalize on the cyclical real estate recovery and reignite our core investment business.
Speaker Change: Thank you and with that I'll turn the call over to Tony Thank.
Tony: Thank you Katie and good morning, everyone.
Tony: In the third quarter <unk> reported a GAAP net loss of <unk> 32 per share and distributable earnings of.
Tony: <unk> 39 per share.
E prior to charge offs, which excludes a $17 million realized loss from the resolution of the nonperforming office loans. This quarter was <unk> 49 per share and above our third quarter dividend of <unk> 47 cents per share.
Tony: Before expanding on our results for the quarter I'll first spend a moment discussing the earnings trajectory of our business.
Tony: With Kt outlined <unk> is well positioned for future growth.
Tony: Have a strong pipeline of new investment opportunities, providing an outlet for accretive deployment of our current excess liquidity, which is expected to further increase with anticipated repayments next quarter.
Tony: Equally important we have a strong pipeline of nonperforming loan resolutions with a clear path to more than half of our impaired assets.
Tony: As a reminder, we do not recognize any income from these investments through GE, given our accounting policy. Despite many of these loans continuing to pay interest we're generating positive cash flow at the property level.
Tony: While the economic impact of the individual resolutions will vary depending on the size structure and execution.
Tony: Spec these near term resolutions will ultimately increase our run rate quarterly <unk> by an aggregate $7 10 per share once they close.
Tony: In the near term, we expect these resolutions will crystalize 225 million to $275 million of realized losses.
Tony: Which are already embedded in our book value will be recognized upon closing.
Tony: We expect most of these losses to flow through our <unk> results in advance of the subsequent expected earnings uplift following the resolution.
Tony: The remaining Npls, we continue to pursue strategies to maximize our outcome.
Tony: The strategy is in timelines of these resolutions will vary.
Tony: I'm, taking shape with medium to long term holds to maximize our ultimate recovery value. We are highly focused on unlocking the earnings potential of this capital over time.
Tony: In the meantime, our earnings with respect to these longer term NPL resolutions will remain encumbered by approximately <unk> <unk> per share of interest expense per quarter no offsetting recognized.
Tony: We also expect that <unk> results will reflect the temporary earnings drag from the timing mismatch of when repayments and resolutions complete relative to win such capital was subsequently redeployed.
Tony: As well as the two incremental loans, we impaired this quarter.
Tony: But importantly, we see this dynamic reversing course of 2025 as we move through more NPL resolution and benefit from the deployment of capital into new accretive investments.
In establishing our dividend level last quarter, we consider this near term earnings variability as well as our view on ultimate long term earnings power among other factors.
Tony: Since that time, we believe the range of potential earnings scenarios have narrowed with capital markets continuing to recover bolstering demand and values for institutional real estate assets, including office and supporting loan resolutions that constructive levels.
Tony: These trends reinforce our view that the current dividend level sustainable relative to our long term earnings power.
Tony: Turning back to the quarterly results, we reported third quarter book value of $22 17 per share, which includes $1 billion or $5 89 per share of <unk> reserves.
Tony: From $906 million last quarter.
Tony: The increase in our <unk> reserve was largely attributable to two office loans that were downgraded to a risk rating of five during the quarter.
Tony: We also added two new Oreo assets, which were brought onto our balance sheet at levels consistent with prior quarter carrying values virtually no impact on book value.
Tony: Looking ahead, we see support to book value through the execution of near term NPL resolutions at or above current carrying values and the strong credit performance for the majority of our loans.
Tony: Outside of U S office portfolio was 95% performing and we had no risk rating downgrades aside from one mixed use loan with a meaningful office component.
Tony: We also upgraded three multifamily loans and recognized stable performance broadly across multifamily industrial and hospitality at non U S office sectors.
The performance of our multifamily portfolio is further highlighted by strong repayment activity with over $350 million collected across seven full loan repayments this quarter predominantly through agency take out.
Tony: With rates lower in transaction activity picking up we see increased activity from the GSE is a natural next step in source of capital for many of the stabilized assets in our portfolio.
Tony: We also see this dynamic providing a tailwind to our agency lending partnership with <unk> that we announced last quarter and we are pleased to have our first three loans close with M. A T. Subsequent to quarter end formally launching this new capital light business for <unk>.
Tony: In total we collected $1 $8 billion of repayments this quarter, our fourth highest quarterly repayment volume ever and.
Tony: Bringing our <unk> year to date total to $3 $6 billion.
Tony: And so far in October we've collected nearly $400 million of additional repayments demonstrating the continued liquidity in our portfolio and increased transaction volume, we're seeing in the market generally.
Tony: Reflecting this elevated repayment activity, we maintained strong liquidity of $1 5 billion.
Tony: Or reducing debt to equity to three eight times from three nine times quarter over quarter.
We feel comfortable sitting within our target leverage range of three to four times and expect to continue repayment activity and NPL resolutions of capital markets recover to be supportive of maintaining leverage levels within this range.
Tony: Further on that point, we repurchased $41 million of corporate debt at discounts in the quarter, which contributed to our leverage reduction and generated a modest book value gains.
We also repurchased $11 million of our common stock at a discount to book, reflecting our long term view of the expertise equity value.
Tony: And with our net future funding commitments down nearly 30% since last year $850 million today.
Tony: Average term of two three years, we have plenty of capital to allocate to additional new investments.
Tony: Our debt and equity buybacks.
Tony: In closing, we look forward to the next chapter of <unk> pushed through legacy loan resolutions and deploy capital into new investments supported by improving market fundamentals are well structured balance sheet and the strength of Blackstone's real estate platform.
Tony: Thank you for joining today's 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.
Speaker Change: We ask you limit yourself to one question and one follow up to allow as many to participate as possible.
Speaker Change: We will take our first question from Dan Fund Dirty with Wells Fargo.
Speaker Change: Hi, Good morning couple of questions first I just wanted to clarify I understand that the resolution of nonperforming supportive of book value, but are you, saying that you think the kind of quarterly hits to book are behind you or do you still see migration.
Speaker Change: Five rated that could drive that.
Speaker Change: Got it.
Speaker Change: Yes.
Speaker Change: So I think as we look at it as we mentioned in the script, we see the universe of potential challenges shrinking down we've highlighted in the past. The main focus is really on the non modified four rated office loans. This is about $700 million today down from 1 billion last quarter, and we're making progress on a lot of these we.
Speaker Change: Actually have deals on some of them post quarter end, but this is really where the sort of universe of potential challenge going forward could be combined as far as the impaired loans resolution. That's obviously a positive for <unk> as we bring that capital back and either reinvested or bring it back to earnings power and we see the reserves, we have existing on those impaired loans as appropriate given the resolutions that.
Speaker Change: We have negotiated to date and what we're seeing in the market.
Speaker Change: Got it and in terms of what's driving the sort of higher level of resolution since the market more supportive on the refinancing side could you dig in a little bit more on that.
Speaker Change: Yeah, absolutely I mean, I think that what we saw this quarter is really a market acceleration of liquidity in the real estate market generally you can see it in the MBS market very clearly where issuance at that four times a year to date you can see it in particular in office issuance in the MBS market you can see it in transaction activity, which is up 20%.
Speaker Change: Quarter over quarter, So I think that as people have realized that the range of outcomes for real estate is narrowed they've been focusing on the fact that relative value for real estate is really attractive versus other alternatives and therefore in the fact that their portfolios are generally underweight real estate and therefore, they are kind of flowing back into the real estate market supported.
Speaker Change: By the rates dynamic and the new supply dynamic so the overall balance of increased liquidity in the space has benefited our performing loans, obviously through repayments and I think also the resolutions through increased value transparency increase liquidity increased urgency to get these guilt on and more capital coming into the space that enables them.
Thank you.
Speaker Change: Well go next to Tom Catherwood with BTG.
Tom Catherwood: Thanks, and good morning, everybody, maybe Katy to start on the origination side, obviously as you get repayments back and putting that capital back to work is kind of paramount to maintaining earnings.
Speaker Change: Has.
Tom Catherwood: Kind of I know, obviously back some t's originations had been low but have started to ramp but has kind of blackstone parent been originating the kind of transitional loans that would traditionally be in the <unk> book.
Tom Catherwood: Kind of in its fund business and then you can just step into that now or is there a ramp process you have to go through as you look to put more money to work.
Tom Catherwood: Yeah.
Speaker Change: So I think the fact that we have over $500 million of loans closed and in clothing is sort of a good indication of the fact that we can turn it back on pretty quickly I mean, we have 150 people around the world actively originating these loans, we covered the waterfront and in terms of risk return for loan origination we're talking to all of the as far as constant.
Speaker Change: With all of the different pools of capital that we have so it is a huge advantage in terms of being able to identify what the targeted investments for <unk> and drive really attractive pipeline quickly in terms of getting our capital invested and again I think the fact that we've really turned it on just in the last couple of months is is an indication of that.
Speaker Change: Yeah.
Speaker Change: Got it appreciate that Katie and then Tony This is a dividend question, but it's got a couple of parts and pieces here.
Speaker Change: Coverage was taken in Q3 I got your comments that there's something like seven to eight cents.
Speaker Change: Uptick from the near term loan resolutions and putting that capital back to work.
Speaker Change: But there is a timing mismatch between repayments and new investments and then there's also the drag to distributable earnings as the fed cuts rates further and again that all depends on the pace of rate cuts, but as you put all of these pieces together do you get to the point, where you're below that 47% dividend level.
Speaker Change: For some period and in 2025 and when do you think you can get back above that is that a year end thing or can you put enough money to work early on that becomes more mid year 'twenty five.
Speaker Change: Thanks for the detailed multi part question you hit on a couple of points there maybe I'll start high level and then I wanted to hit on a couple of questions.
Speaker Change: So firstly, when we think about our 47% dividend.
Speaker Change: We said last quarter and also as I mentioned this quarter, we think about that similar to the 62 cent dividend. Its a level that we think is appropriate over the long term.
Speaker Change: Just like when we had 62 cents, we had periods, where we went out and we had some periods. We were below you should think of 47 the same way.
Speaker Change: So that's that's one just sort of backdrop points.
Speaker Change: As it relates to the different push polled on earnings.
Speaker Change: The headwind from rates declining it's actually relatively modest at this point.
Speaker Change: The fact that you have some of our nonperforming loans that are generating earnings and we have floating rate debt.
Speaker Change: The drag on earnings from rates going down and to your point it depends on the pace and magnitude of those rate cuts is much more modest than it was previously.
Speaker Change: More importantly, or more to the point the benefit of lower rates is actually more significant over time, because that facilitates our resolution of these npls and ultimate redeployment of that capital into new loans and are generating or generating earnings. So I think net net although you may see a short term decline from rates coming down.
Net a positive thing for us over the medium term.
Speaker Change: All of that sort of coming together to your point.
Speaker Change: One of your last points is <unk>.
Speaker Change: You do have a timing element here, where we have loans that are going to be resolved in the near term. We think a lot of those will be resolved in the fourth quarter.
Speaker Change: That will be a downward pressure on earnings.
Speaker Change: Two loans, we impaired will be downward pressure on earnings in the fourth quarter, we will be redeploying that capital Katy mentioned, our pipeline and so we think that the.
Speaker Change: If you will will be relatively short.
Speaker Change: And we look to 2025 is a period, where earnings will rebound and start to generate pretty strong performance, but there will be a short term dip, but we don't think it's going to be a very long term.
Speaker Change: Recovery, because we've got some good that one is behind us.
Speaker Change: Got it appreciate those thoughts Tony that's it for me thanks, everyone.
Speaker Change: Thank you we'll go next to harsh Kumar <unk> with Green Street.
Harsh Kumar: Thank you.
Harsh Kumar: So first maybe repayments have accelerated quite a bit and so how are you thinking of deploying those.
Speaker Change: First time in U S. You've mentioned would be.
Speaker Change: The new loans, the other would be buying back more shares or.
Speaker Change: How do you bid it was 30.
Speaker Change: But it seems like yes, good risk adjusted return on commercial real estate loans might be better, but it seems like.
Speaker Change: It adds have been coming in a little bit I noticed them, though.
Speaker Change: It hasn't basin.
Speaker Change: The target investment moved from Super plus 225 Super plus 275.
Speaker Change: So how do you bring new originations versus perhaps they're doing in cap rates.
Speaker Change: Sure thing, thanks, harsh and welcome to the call.
Speaker Change: So I think that the.
Speaker Change: One of the things we like the best about our business is our ability to be very strategic as we think about how to allocate our capital and obviously you know in the last quarter. The answer was all of the above and I think we're going to continue to look across the avenues that we have to invest and be very thoughtful about the relative value of what we're seeing.
Speaker Change: Do think on the new origination front, we do today see a very attractive investment opportunity.
Speaker Change: Most importantly, the credit profile of the new loans, we're doing 60% LTV above the nine that you're all very strong fundamental asset classes.
Speaker Change: And obviously investing at a mid teens Levered return is very attractive and we're going to try and continue to expand on that that is something that is core to our business and we think creates.
Speaker Change: Long term durable strong current income which is.
Speaker Change: Our goal of our business and the shareholders.
Speaker Change: We're also going to look to be a strategic in terms of buying back in the capital structure, where we see the opportunity.
Speaker Change: I do want to comment on the spread dynamic in general because I think it's a really important nuance. So our business is obviously, a levered spread business. So one of the.
Speaker Change: Dynamics, that's driving the recovery in the real estate market as base rates coming down a bit. We've also seen spreads come down a bit but critically for our business first of all I think spreads are wider than they have than they were in sort of the types of historical levels, that's definitely borne out by data, but critically for our business. It's really about the difference between where we landed and where we borrow and where we borrow is also coming in very cigna.
Speaker Change: So the spread between those two levels is as good a really better than it has been historically and as a result, we see the opportunity between credit being better and returns being attractive we see that combined relative value opportunity as something that we really want to lean into.
Speaker Change: On an absolute and relative basis, it's just a very attractive set of Brian Batman.
Speaker Change: Got it that's helpful.
Speaker Change: Oh, and then maybe as you mentioned in the bedroom amongst states, they're going be staggered the processes lowered it.
Speaker Change: And so all of those.
Speaker Change: It still remains uncertain due that will end up the bulk of these rate cuts et cetera. So in sort of this environment have you been seeing perhaps higher sulfur floors on newer loans that you're originating are you, having those conversations with borrowers and.
Speaker Change: How are those going.
Speaker Change: It's a great question I would say so for Florida is a huge focus of ours on both the investment side and on the modification side. So we can add Florida to our portfolio. Both in terms of putting on new loans at reset those reports today and in terms of when we're touching loans sort of along the way incorporating so for Florida.
Speaker Change: Today, its level and I think that is one of the things that overtime will become a more important dynamic relative to rates.
Speaker Change: Got it thank you.
Speaker Change: We'll take our next question from Steve Delaney with citizens JMP.
Speaker Change: Hey, good morning, Thank you everyone.
Steve DeLaney: So 500 million of Npls in the third quarter and indicated another $600 million closing hopefully in the fourth quarter. So with that $1 1 billion. How much do you expect will be less than either of the five rated loan bucket or in Oreo.
Steve DeLaney: As of the end of 2024, thank you.
Speaker Change: Sure So I think to it.
Speaker Change: The numbers just to clarify so $500 million may have closed and in closing post quarter end. We closed a couple of deals are ones you all in the last couple of weeks we have.
Speaker Change: Contracts in place on a couple of others et cetera, and then we have another 600 that we have very firm visibility on so yes, net net that adds up to about $1 1 billion relative to the $2 3 billion of impaired loans that we have on the books as we look forward towards quarter end, obviously, the timing of closings can be a little bit lumpy. We think those are all near term and we're going to.
Speaker Change: Very hard to get them all done in the fourth quarter, but could a few slip to the first quarter, possibly.
Speaker Change: I would say that in terms of what's left at the end of that that is really the math on the impaired loan the Oreo assets are really small.
Speaker Change: We actually have some good action on a couple of those as well so I don't think its going to meaningfully change the numbers.
Speaker Change: Okay.
Speaker Change: Just so we understand that the magnitude of and the new things are fluid quarter to quarter, but I believe five rated loans.
Speaker Change: Timber authority were $3 2 billion is that correct.
Speaker Change: I think that 3.2, you're mentioning is the gross OPB amount, but we've obviously taken a very significant amount of reserves against those so we sort of think about it is how much of it in our book value, which is about $2 3 billion.
Speaker Change: Okay very good okay. Thank you for the comments.
Speaker Change: Okay.
Speaker Change: We'll take our next question from Jade Rahmani with K B W.
Jade Rahmani: Thank you very much how confident are you that the problems that is squarely focused on the risk four to five rated.
Jade Rahmani: Bucket and we won't see further migration from threes to fours.
Jade Rahmani: This quarter there were a couple of downgrades I believe three from three to four.
Speaker Change: Thanks, Chad I think as you know we go through the portfolio with a fine tooth comb every quarter and we are we try to really get ahead of it I think theres a lot of loans as you know that had been four rated for years and so.
Speaker Change: Anytime we see something that like could be an issue has a question Mark we try and be very transparent with our investors about where we think there is a question Mark and Thats really what exists and of course many of those loans have been modified subsequently had been very stable had been performers for years and so when we think about the universe of what's in that bucket.
Speaker Change: Right.
Speaker Change: It can be a bit sticky, but there really are.
Speaker Change: Different subcategories within that bucket, which you know we've outlined in the past into that.
Speaker Change: As far as the 3% to four potential downgrade again, we go through the portfolio with a fine tooth comb I think really the big picture element. There is that the momentum has really shifted.
Speaker Change: We have U S office has been the primary issue when we look at what's in the three rated category of U S office, it's like 95%, new construction or high cash flow Sunbelt, they've got some European office in there, which is a completely different dynamic and then everything else is sort of non office category. So we look at the composition of what's in the three years.
Speaker Change: There's really very little left in there are sort of non high quality, either European or well performing U S office and anything that kind of didn't get those categories. We downgraded and that's really why you see what happened this quarter as far as three to four so we have 149 loans in our portfolio because we have some idiosyncratic thing happen it's possible.
Speaker Change: But I think that we try and go through with a fine tooth comb. The momentum has really shifted and that is that is really the critical dynamic is that things I think going forward from here are much more likely to be positive surprises versus having you know things that we're not looking outward and deterioration.
Speaker Change: Thank you very much and can you give an update on the Spain, and Australia deals just because we haven't heard much about those lately.
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: So the same deal you know I think youre, commenting on the large portfolio of individual.
Speaker Change: Loans from pre Covid in Spain that wasn't really continues to just pay down and minor in small increments over time I think it's paid down by about 50% since we originated it and there continues to be liquidity for those deals.
Obviously has lower rates and a more clearly lower rate picture, even in the U S and so I think that's a positive and then as far as Australia, we've invested a tremendous amount of capital in that portfolio to make it the safest place to play in Australia, and it's really sort of on a positive trajectory and obviously a very high focus deal.
Speaker Change: You know that we that we feel good about.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: We'll take our next question from Doug Harter with UBS.
Doug Harter: Thanks, Katie you mentioned that you're seeing attractive.
Doug Harter: Spreads on returns net of financing costs today, if you could just kind of.
Speaker Change: Quantify what how that sort of translates into a return on capital on a new dollar that youre putting to work today.
Speaker Change: How do you think that compares to two to kind of <unk> 'twenty.
Speaker Change: 'twenty one vintage of loans that you wrote.
Speaker Change: Sure. So I would say that today, what we're seeing as I mentioned, the 2024 originations 60% of LTV over nine at Yahoo, and they're basically setting up to 1000 over base rates from an ROI perspective. So you know today that means mid teen.
Speaker Change: Return on our invested equity and I would say that that is the credit metrics are obviously more attractive versus kind of the swath of the market in 2021, especially because we're talking about reset values and then I think that on a return basis, we're kind of a little higher than where we've been for similar credit quality product.
Speaker Change: And when you look at our portfolio across the board in the past we've done some construction, which has been really good credit profile, but obviously on the face of it has wider spreads.
Speaker Change: We've also done a lot of more stabilized assets on the multifamily side et cetera. So when we look at the returns on a same store basis. They are better today, and we think we're at reset value. So all in a risk adjusted return is better.
Speaker Change: Great. Thank you.
Speaker Change: Yeah.
Speaker Change: We'll go next to Rick Shane with Jpmorgan.
Thanks, everybody for taking my question.
Speaker Change: Look there's a lot going on here and what I take away and this has been our thesis.
Speaker Change: Pieces for a bit is that it feels like you guys have greater confidence to dimensionalize the risk.
Speaker Change: But we're now entering a period, where resolutions are really going to accelerate.
Peter you made the point.
Speaker Change: The difference of the difference between the stock price and a fully reserved book value.
Speaker Change: Always kind of look at that as a burned down value and realistically that's not what you guys are striving for.
Speaker Change: The discount reflects that day.
Speaker Change: Is probably on an ROE basis, two or three points above sofa, which is well below your historical hurdle rate of 7% to 8% above benchmark is.
Speaker Change: Is that still a realistic target as we emerge from this period.
Speaker Change:
Speaker Change: I think a couple of ways to approach. The question I mean, I think look like when we look at the dividend yield that we're paying today and obviously, we thought about the dividend with respect to the long term ROE earnings power of the business.
Speaker Change: It's pretty attractive, especially when you look at it relative to longer term base rates I mean, I think you can look at it relative to the sofa you can look at it relative to the five year or the tenure I think people coming into the stock today, one of the attractive things that you're buying in at a yield that has as much duration to it as you want.
Speaker Change: And I think so I think for that reason, it's more appropriately compared to longer duration alternative.
Speaker Change: And I think that to your point the other really critical thing is this isn't a burn down company. This is a company that is backed by it.
Speaker Change: The largest owner of real estate in the world.
Speaker Change: One of the strongest real estate credit businesses in the world and our ability to create the next generation of the portfolio here and produce very attractive new investment opportunities and sort of think through what this is going to look like a year from now two years from now that's really not priced in at all today and so I think that that is something that people really.
Speaker Change: To think about in terms of getting a very attractive current income yield obviously, along the way continued portfolio turnover. So the overall scope of the existing portfolio. That's being invested in is obviously shifting and improving and then what are sort of the prospects going forward.
Speaker Change: Totally agree look I and it dovetails into my second the second part of my question, but I would.
Speaker Change: Disagree slightly in terms of what the benchmark is because when I think of of your earnings model and given the asset sensitivity charts that you guys have shown over the years I'm thinking not of return to shareholders from a dividend perspective, but your ROE is a function of <unk>.
Speaker Change: Short rates, which is frankly is kind of the way you guys have always shown it.
Speaker Change: But.
Speaker Change: To your second point and I think this is really the key here based on Tony's comments about the resolution and redeployment.
Speaker Change: Is it realistic to see bx empty returning to those hurdle rates.
Speaker Change: Sort of eggs.
Speaker Change: Exiting 2025 is that what the target is that because again to your point, it's the potential and the question is how long does it take to realize that potential.
Speaker Change: I think that is exactly the question I think that as we sit here today, we think that the path towards that potential has gotten shorter or it'll happen more quickly because obviously the acceleration in the capital markets. That's really the key dynamic there.
Speaker Change: And we're focused on getting there as quickly as we can.
Speaker Change: Okay.
Speaker Change: Thanks, and clearly one of the things Thats happened is that as the bid ask spread has narrowed.
Speaker Change: That drives transaction volume and I think that that's really contributing to what's going on.
Speaker Change: Yeah I completely agree.
Speaker Change: Thanks Scott.
Thank you we'll take our final question from Eric <unk> with Bank of America.
Speaker Change: Hi, Katie just one more on credit was just curious how you guys think about the rate backdrop and how that can impact you talked about kind of a shift in the market is there any risk.
Speaker Change: Kind of credit deterioration and I guess I don't know like this pick up just kind of stalled if we don't get the rate cuts that we're seeing and the forward curve right now or how do you guys think about that.
Speaker Change: Yeah, I think it's a good question I mean, I would start by highlighting the fact that obviously, 30% of our portfolio is outside of the U S and Europe, where I think that trajectory is even clearer than the U S. But I also think when you look at the U S. While it's never quite linear in terms of rates the direction of travel is pretty clear, especially when we look at our kind of inflation indicators.
Speaker Change: And look at overall, what's going out in the market so it might be.
Speaker Change: The curve has moved a bit between last quarters call in this quarters call with the drop in the middle.
Speaker Change: I think that you know the direction of travel is pretty clear I also think it is really about that narrowing of range of outcomes. So when you think about what impacts credit where we were sitting a year ago. You know people did not know where rates were going to peak people did not know sort of quote unquote, how bad it was going to be in terms of the real estate market I think really a lot of those questions have been asked.
At that point and you can see it in the capital markets today and the indicators, whether it's you know the REIT market, whether it's what's going on in the MBS market. There is a reset clearly that's come as rates have been higher but the range of outcomes is much much narrower and that's really what's driving the liquidity of the transaction activity the reinvestment of capital I think that.
Speaker Change: You know if rates kind of at the current curve or kind of me Andrew had been around I don't think that's going to meaningfully change the out there.
Speaker Change: Yeah.
Speaker Change: Okay, Great. That's helpful and then one more on the pipeline.
Speaker Change: Moving into 2025 are there any areas that you guys really targeting that kind of expect to see some outsize broken whether that's plotting type or geography, or just kind of what you guys are seeing in the pipeline.
Speaker Change: Sure you know I think on where we see really good interesting investment opportunity is clearly multifamily in the U S. I think has very strong long term drivers. We continue to like industrial data centers are a huge focus we see a lot of growth there and I think geographically, we really like the <unk>.
Speaker Change: What's the value in Europe, it's an area, where we've always had a very strong competitive advantage. We have a very deep kind of long term presence in the market and understanding of the different.
Speaker Change: Different countries in different jurisdictions, there and I think that competitive advantage will continue to hopefully produce good investments there as well. So we do see a lot of opportunity around our markets U S. Europe, Australia as well I think there could be more to do there. So.
I think right now.
Speaker Change: Sectors are sort of where we've seen the talent that they have been in end markets, we see opportunities in various geographies.
Speaker Change: Thank you with no additional questions in queue I'd like to turn the call back over to Mr. Hayes for any additional or closing remarks.
Tim Hayes: Thank you Katie and to everyone for joining today's call. Please reach out any question.
Tim Hayes: Uh huh.
Tim Hayes: [music].