Assessing Blackstone Mortgage’s Performance For Q2 2024 (NYSE:BXMT)

stockcam Quarterly BV Fluctuation: Basically an Exact Match (Within a 0.5% Variance). Adjusted Core Earnings/EAD: Minor Outperformance ($0.02 Variance). An “as expected” quarter regarding Blackstone Mortgage Trust, Inc.’s (NYSE:BXMT) BV in my opinion. BXMT recorded a minor – modest quarterly BV decrease which was correctly anticipated. When factoring in impacts from recording net realized losses during the quarter (also known as “charge-offs”), BXMT recorded a net increase to the company’s CECL reserves of ($143) million (increases are bad). In comparison, I projected a net increase of ($125) million so a bit of a larger quarterly increase. This directly led to a BV underperformance of ($0.10) per share which was the vast majority of the company’s overall quarterly BV underperformance of ($0.10) per share. To be precise, there was also a ($0.027) per share of FMV underperformance within BXMT’s investment portfolio outside the CECL reserves which was basically fully offset by the $0.024 per share of adjusted core earnings/EAD outperformance (net change of ($0.003) per share). BXMT remained in “defensive mode” as the company only originated $0.4 billion in loans during Q2 2024 while having loans prepayments/repayments/sales/transfers of ($0.7) billion. Along with factoring in the seven new non-accrual loans during Q1 2024, this directly led to the quarterly decrease in adjusted core earnings/EAD (due to a lower investment portfolio size). This was generally correctly anticipated on my end. That said, the severity of BXMT’s adjusted core earnings/EAD decrease was slightly less than I expected. BXMT’s minor adjusted core earnings/EAD outperformance (which excludes all realized losses/charge-offs; consistent sector-wide methodology) was mainly due to the fact the company’s investment portfolio size only decreased ($0.3) billion during Q2 2024. In comparison, I projected BXMT’s investment portfolio size would decrease ($0.5) billion. BXMT’s “all-in” yield remained relatively unchanged which was correctly anticipated. I would remind readers BXMT continues the practice of recording accrued interest income during the quarter on newly placed non-accrual loans at the end of the quarter. This was something discussed last quarter. This is an “aggressive” stance regarding the recording of accrued interest income. In my professional opinion, BXMT should have reversed all Q2 2024 accrued interest income on all new non-accrual loans as of 6/30/2024. That said, I can only make subscribers aware of what BXMT did regarding accrued interest income during Q2 2024 and model out the ramifications of this decision in future periods (there will be another quarterly decrease during Q3 2024). A risk/performance rating of 4.5 for BXMT remains appropriate in the current environment/over the foreseeable future. BXMT continues to invest in commercial whole loans and continues to have a high concentration in office loans (41% as of 6/30/2024). We will use many terms in this article that may be unfamiliar to readers. We’ve created a glossary for those that are interested. Change or Maintain BV/NAV Adjustment (BV/NAV Used Interchangeably): Our projection for current BV/NAV per share was adjusted: Down ($0.10) (To account for the actual 6/30/2024 BV/NAV Vs. prior projection). Price targets have already been adjusted to reflect the change in BV/NAV. The update is included in the card below and the subscriber spreadsheets. Percentage Recommendation Range (relative to current BV/NAV): No Change (Was Already Downgraded in Late March 2024). Risk/Performance Rating: No Change. Remains at 4.5 (Was Already Downgraded in Late March 2024). Earnings Results The REIT Forum Note: BV at the end of the quarter. Subscriber spreadsheets and targets use current estimates, not trailing values. Valuation The REIT Forum Ending Notes/Commentary As a reminder, regarding setting an appropriate CECL, a very high degree of managerial judgment occurs/specialized expertise is needed. All of BXMT’s commercial whole loans are level 3 assets per ASC 820. Simply put, there’s not a widespread, active marketplace for commercial whole loan pricing/valuations as each mortgage (and underlying collateral) is unique. This makes setting valuations difficult; especially pertaining to impairment testing. Regarding credit metrics, BXMT added three loans to the company’s non-accrual status as of 6/30/2024 when compared to 3/31/2024. As noted in prior BXMT earnings assessment articles, I stated I expected additional credit risk/portfolio stress/non-accruals as 2024 progressed. This especially held true within the office sub-sector and certain geographical locations (in particular parts of CA and the Northeast). This came to fruition during Q2 2024. For example, BXMT added two large NY office loans to non-accrual status during the quarter. Both loans being placed on non-accrual status were correctly anticipated on my end (both each loan’s classification and geographical location were specifically pointed out in prior assessments). BXMT also received partial repayment of one previous non-accrual office loan. As a result, BXMT’s non-performing/non-accrual loans increased from 10.7% of the FMV of the company’s investment portfolio balance as of 3/31/2024 to 13.2% as of 6/30/2024. This increase was already anticipated in my modeling. Non-Accrual Loans The REIT Forum As noted over a handful of quarters now, I correctly anticipated non-accruals would experience, at the least, a modest “uptick” during 2023 – 2024. We already began to see this occur during the latter half of 2023 which accelerated during the 1st half of 2024. Again, this is already “baked” into my/our sub-sector modeling, percentage recommendation ranges, and risk/performance ratings. That said, when peak non-accrual percentages are forecasted to increase from prior modeling (including the direct impact on projected adjusted core earnings/EAD), changes to price targets/recommendation ranges will occur. For example, changes occurred during late March 2024. That said, my projected BXMT peak non-accrual mean percentage of 15.00% has not changed from the prior revised modeling in late March 2024. As such, I believe we’re getting near said peak (probably a couple of quarters away). Still, I believe BXMT will continue to place additional loans on non-accrual status (increasing this percentage). That said, I also believe more “legacy”/older non-accrual loans will begin to be resolved as well (lowering this percentage). I was a bit disappointed by the severity of BXMT’s dividend cut for Q3 2024 ($0.65 to $0.47 per share). This was slightly outside my projected Q3 2024 range of $0.50 – $0.65 per share. Simply put, I assumed BXMT would cut the dividend more gradually over consecutive quarters. However, BXMT simply performed one larger cut which leads to a higher probability of an unchanged dividend during Q4 2024 (not “set in stone” yet but a general comment regarding this initial assumption). BXMT is a HOLD at current pricing. However, as echoed in the last three quarters, cautious investors may want to wait until more market participants believe it’s safer to invest in commercial real estate as a whole. I currently believe that in a couple of years BXMT’s stock price will be higher than its current per share amount. However, it will likely be a “bumpy/see-sawing” road over the next couple of quarters (as it recently has been as well). As continuously pointed out via various articles, subscribers/readers need to have patience for cycles/trends/catalysts to play out. For the commercial whole loan mREIT sub-sector (ACRE, BXMT, FBRT, GPMT), this is still going to take some time to play out (very likely not until 2025).

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