Blackstone Mortgage Trust, Inc. (BXMT) Q4 2023 Earnings Call Transcript

Call End:

Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Q4 2023 Earnings Conference Call

February 14, 2024, 09:00 AM ET

Company Participants

Timothy Hayes – VP, Shareholder Relations

Anthony Marone – CFO, Treasurer, and Principal Accounting Officer

Katie Keenan – President and CEO

Austin Pena – Executive Vice President of Investments

Conference Call Participants

Steve DeLaney – JMP Securities

Sarah Barcomb – BTIG

Douglas Harter – UBS

Donald Fandetti – Wells Fargo

Stephen Laws – Raymond James

Jason Sabshon – KBW

Richard Shane – J.P. Morgan

Arren Cyganovich – Citi

Operator

Good day, and welcome to the Blackstone Mortgage Trust Fourth Quarter and Full Year 2023 Investor Call. Today’s call is being recorded. At this time all participants are in a listen-mode only. [Operator Instructions]. At this time, I’d like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead.

Timothy Hayes

Good morning, and welcome everyone to Blackstone Mortgage Trust’s fourth quarter and full year quarter 2023 conference call. I’m joined today by Jonathan Pollock, Blackstone’s Global Head of Real Estate Credit, Tim Johnson, Global Head of BREDS and Chair of the Board of Directors, Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, and Austin Pena, Executive Vice President of Investments. This morning, we filed our 10-Q and issued a press release with the presentation of our results, which are available on our website and have been filed with the SEC.

I’d like to remind everyone that today’s call may include forward-looking statements, which are subject to risks, uncertainties, and other factors outside 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 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and our 10-Q. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

For the fourth quarter, we reported a GAAP net loss of $0.01 per share, while distributable earnings were $0.69 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the fourth quarter. Please let me know if you have any questions following today’s call.

With that, I’ll now turn things over to Katie.

Katie Keenan

Thanks, Tim. The BXMT weathered a challenging 2023 with results that underscore the resilience of our business. We reported record interest income and distributable earnings, generating $3.05 per share for the year and covering our dividend 123%. This dividend delivered $2.48 per share of current income to our shareholders, exceeding the $1.10 net reduction in our book value from CECL reserve increases and underpinning a positive total return in 2023. And we maintained near record levels of liquidity and reduced our leverage over the course of the year.

Moving into 2024, while the path clearly will not be linear, we see an improving backdrop with inflation receding, rates moving lower, and the economy showing stability. It will take time for the tale of legacy credit issues to work through the system and our portfolio, but macro momentum has shifted. Benchmark commercial real estate borrowing costs are down 150 basis points in the last four months.

Issuance pipelines across corporate debt and CMBS markets have rebounded sharply. New construction starts are 30 to 60% below recent peak levels. This will not alleviate fundamental issues in certain segments like older vintage office. But for most of the real estate market, these dynamics are driving renewed confidence among lenders, incumbent owners, and new buyers.

At BXMT, we also enter 2024 with greater visibility. Our portfolio is 93% performing. Of $10 billion of loans that hit interim or final maturities in 2023, 89% repaid past their extension performance tests are extended with substantial new equity commitments. And notably, this includes nearly $6 billion of office. Those loans that didn’t are already impaired, part of the nearly $600 million of reserves that are already incorporated in our book value.

Our borrowers renewed or replaced 93% of the nearly $15 billion of rate caps that rolled in 2023 with new caps or guarantees. Fourth quarter outcomes were similar to the full year. $4.6 billion rolled, 89% replaced at in the money strike prices of 3.6% at renewal. And when borrower business plans were impacted by higher interest costs or other headwinds, the vast majority chose to support their assets, committing over $1.6 billion of incremental equity subordinate to our loans.

These are sophisticated, well-capitalized investors who carefully evaluate incremental investments. Their support is a powerful indicator. On multifamily specifically, we see continued resilience. Our multi-loans were 99.4% performing at year end, and we subsequently sold the single non-performer.

We lent at 67% average LTV at origination, and our operating collateral has seen average NOI growth of 35% since then. And we have virtually no exposure to New York City or San Francisco rent regulated multifamily. Perhaps most importantly, across the portfolio, our loans continue to repay.

We collected $3.8 billion of repayments in 2023, including over $600 million in 4Q. This included $1 billion of office loans, three in the fourth quarter alone. How does this work? A lot has to do with the types of loans we make. BXMT finances value-add business plans where high-quality sponsors invest capital to drive cash flow growth. Our underwriting is based on current and potential real estate value, and we lend at a meaningful discount to those levels

For transitional assets, real estate value cannot be measured by current cash flow alone. 40% of the loans that repaid this quarter had in-place debt service coverage ratios under one time, as take-out investors credited hard asset value and the potential for cash flow growth over time.

Our outcomes also have to do with our asset management approach. We have substantial structure in our loans, guarantees, performance tests, rebalancing rates, and sweep triggers that give us the path to enhancing our credit position.

We can trade additional equity for rate or time when we deem it accretive. We have the full toolkit of execution strategies and the benefit of deep experience and extensive real-time data. And we channel all of this toward improving our credit position over time, putting our portfolio in a better position to perform.

We saw this strategy at work in 4Q on two vacant office buildings where we secured incremental pay-downs or recourse over our loan term, moving the path to full repayments this quarter. This included a London office loan originated in 2019 to vacate, renovate, and deliver a full building to WeWork.

We heavily structured the deal up front given the tenant profile and used our structure over time to negotiate a 40% reduction in our loan commitment. The asset sold in October, empty to an institutional buyer, resulting in a full repayment at our lower basis. In other cases, we manage our loans to add collateral value over time. It is a clear positive for a senior lender to support accretive office leasing, and we generally fund leasing in concert with our borrowers.

As a lender, we get 100% of the benefit of incremental rent while funding a portion of the cost. We recently did this on a Chicago office loan where our borrower signed one of the city’s largest leases of the year, a testament to the asset’s strong positioning in the market. The BXMT expects to fund 70% of TILC costs going forward, capital that goes in only when leases are signed.

We gave our borrower additional term and a partial spread reduction in exchange for guarantees, an increased floor, and $21 million of additional equity commitment. While this deal remains on our watch list, this modification enhances the value of our collateral, secures additional equity support, and places this loan on stronger footing. In total, we have completed modifications on 50% of our watch list at office, stabilizing performance on these loans. We expect to take a similar tack on impaired assets, where we see the potential for better recovery over time through capital investments.

Our overall approach to impaired assets is guided by a singular focus on maximizing shareholder returns. We will exit assets when that’s the best path, but with our robust liquidity and long duration balance sheet, we are not a forced seller. Instead, we carefully evaluate strategies on an asset by asset basis, informed by Blackstone’s deep experience as one of the largest real estate investors in the world.

With this approach, we are making progress on our five rated assets. Post year end, we sold one loan, placed two others under hard contract, and completed a loan restructure, all generally in line with our reserves. We also expect to take one small office REO in the coming months, where we believe we can leverage our deep real estate operational expertise and reset basis to add value over time. This deliberate and strategic approach to asset management is supported by the strong balance sheet positioning we have established over the last several years.

We ended 2023 with $1.7 billion of liquidity, while reducing our leverage over the course of the year. Our financing complex, with an average cost of $195 over on our loan level financing and no corporate maturities until 2026, is a meaningful asset for our business, which enables us to pursue value maximizing resolutions while preserving distributable earnings and dividend coverage.

Our relationship with our lenders remains highly constructive. Loan on loan facility lending has performed very well for banks through this cycle. And with capital rules tightening, it provides them significantly better relative value than direct real estate lending. This evolution of the lending market is a distinct advantage for BXMT. As one of the top counterparties in the industry, we regularly hear from banks that wish to expand their relationships with us. And the rebound of the securitization market should provide further tailwinds for financing capacity.

To close, in late 2022 and into 2023, we fortified BXMT with a staying power to navigate a highly volatile period. We raised and preserved capital, extended our corporate maturities, and proactively managed our portfolio to reduce credit risk where we could.

Now in 2024, we see the backdrop improving. We will continue to talk about residual credit challenges in the portfolio with some potential reserves along the way. But market conditions are aligning for a more active 2024, both on legacy asset resolutions and new investments. While we expect to maintain a highly disciplined approach to deployment, we are starting to see new transactions that stand up to the opportunity cost of preserving our liquidity.

Our four key distributable earnings of $0.69, which are off the record levels earlier in 2023, but still comfortably above our dividend, are encumbered both by loans on cost recovery and excess liquidity, earnings power we can recapture over time. And while rate cuts affect interest income for a floating rate lender, they also provide a more constructive environment to deploy capital and resolve challenged credits. Our stock valuation, in contrast, prices in a far more punitive outlook. Trading at $0.72 of book value implies $1.2 billion of incremental losses beyond our reserves, over 43% across all of our watch-listed assets.

Meanwhile, our dividend delivers a 13.5% current income yield, cash return that is highly attractive relative to now lower rates and spreads. Finally, I want to end with a word about Mike Nash, whose long-planned retirement from Blackstone came at the end of 2023. Mike founded the Blackstone Real Estate Debt Strategies business, launched BXMT in 2013, and was the heart of our platform for over 15 years.

In concert with his retirement, Mike has stepped down as chair of the BXMT Board of Directors, but BXMT is privileged to have him continuing as a director. Tim Johnson, the global head of Blackstone Real Estate Debt Strategies, will succeed Mike as chair. Tim has been an integral part of the BXMT business since its inception, working closely with Mike and the entire BXMT team, and leads the overall BREADS business today. We sincerely wish Mike all the best and welcome Tim as BXMT’s new chair.

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

Anthony Marone

Thank you, Katie. Good morning, everyone. Starting with our results, BXMT reported distributable earnings of $0.69 per share for the fourth quarter and $3.05 per share for full year 2023, our highest annual earnings level since we launched BXMT in 2013.

We incurred a gap net loss of $0.01 per share for the fourth quarter, which reflects the sequential increase in our CECL reserves, primarily related to three new loans we impaired and placed on cost recovery accounting in the fourth quarter. Our 4Q earnings, while still above our $0.62 dividend, have come down from the levels we reported earlier this year, reflecting the cumulative impact of loans we have placed on cost recovery status and $1.7 billion of net portfolio contraction.

Our cost recovery accounting election will continue to negatively impact earnings until these loans are resolved through sales or other transactions. In the fourth quarter, we incurred interest expense related to these loans of $0.08 per share, net of incentive fees, which represents a potential immediate uplift to our recurring earnings power upon resolution of these loans and repayment of the attendant financing.

Redeployment of our capital invested in these loans could also generate an additional $0.02 to $0.04 per share of quarterly earnings, assuming returns in-line with our typical investments, reflecting further upside as we move through the credit cycle.

Looking at 1Q, we expect to resolve four loans currently on cost recovery, which will partially offset the impact of the three new loans placed on cost recovery at year end. Earnings will also be impacted periodically as impaired loans are resolved, and we realize losses through distributable earnings upon a sale, DPO, or foreclosure of an asset. In general, we expect such realized losses to align with our CECL reserves with minimal impact on gap earnings or book value, which validates the accuracy of our reserve estimates.

Taking into account the assets we have under contract to sell in a small office loan that we will likely take REO, we expect to recognize between $70 and $80 million of realized losses, likely in the first half of the year. Importantly, the majority of these come in concert with resolutions that allow us to unlock earnings from the assets currently on cost recovery.

When we think about our $0.62 dividend, which we have paid consistently for 34 consecutive quarters, we primarily focus on our distributable earnings for any such realized losses. We consider a variety of factors as we assess our ability to generate earnings over time, including changes in interest rates, a range of credit outcomes, and the environment for new origination. As in the past, we will make decisions regarding our dividend with this long-term perspective in mind, rather than reacting to any short-term changes in earnings that we believe are temporal in nature.

Lastly on earnings, $504 million, or 99.7% of the interest income we reported in Q4 was paid current, with tick income representing only 0.3%. This quarter, we enhanced our disclosures by adding a discrete line to our audited statement of cash flows in our 10-K, so stockholders can clearly identify the tick versus cash components of our income. We continue to manage our balance sheet conservatively, repaying over $1.4 billion of our asset and corporate level financing in 2023, and reducing our leverage to 3.7 times from 3.8 times at the start of the year.

Importantly, we achieved this result while increasing our liquidity to $1.7 billion at year end, and remaining comfortably in compliance with all financial covenants. With ample liquidity, stable term-matched financing for our assets, and no corporate debt maturities for the next two years, BXMT is well-equipped to meet our future funding obligations.

We currently have $1.2 billion of net future fundings under existing loans in our portfolio, which are generally subject to conditional asset performance and distributed over a weighted average term of 2.6 years. Our portfolio is supported by $16 billion of term-matched asset level financing, where we have maintained a low cost of capital despite more challenging market fundamentals.

And as noted on previous calls, we have zero capital markets marked to market exposure throughout our entire capital structure. A key component of our portfolio financing is our CLOs, which provide stable funding source for a portion of our U.S. loan origination. Over time, these payroll pools naturally concentrated down, and today are over 60% U.S. office, two and a half times our exposure outside of these vehicles.

Looking at our portfolio, overall credit performance remains strong, with 93% of our loans performing at year-end and a weighted average risk rating of 3.0, up modestly from 2.9 last quarter and at the beginning of the year. We upgraded four loans, including a $361 million Spanish hotel loan that had been on the watch list since COVID, but has since recovered, leading to its upgrade to a risk rating of three this quarter.

We also had 11 loan downgrades this quarter, including five U.S. office loans moving to a four rating and the three new five-rated loans that we impaired and placed on cost recovery at year-end. These loans were all previously watch listed and include two San Francisco hotels and one New York office and retail asset. As it stands today, 7% of our portfolio is risk rated five and impaired by 22% on average and by 26% for office loans specifically, reflecting sober assumptions around collateral value that imply valuation declines of more than 50% from origination.

Another 27% of the portfolio is risk rated one or two, reflecting their continued strong performance. The bulk of our portfolio, 55% overall, is risk rated three, loans that continue to demonstrate business plan progression and are performing in line with expectations. Over 60% of these loans are in multifamily, hospitality, and industrial, sectors demonstrating consistent fundamental performance. And of the 30% in office, more than half is in Europe where market dynamics are stronger. The last segment of our portfolio, 12% of the total, is our $2.7 billion watch list.

Over the past 12 months, we have modified 40% of our watch list loans, bringing in $335 million of additional equity commitments from borrowers and putting them on more stable footing. Another 22% has exhibited steady performance despite being on the watch list for seven years, several years. The remainder, about $1 billion of loans, is where we most directly focus our asset management efforts today.

Reflecting the credit migration in the portfolio and continued pressure from higher rates, we increased our CSR reserves by $115 million in the fourth quarter and $250 million throughout 2023 to $592 million at year-end. On the other hand, we retained nearly $100 million of excess earnings throughout the year, so our book value declined by only 3%, notwithstanding this substantial increase in our reserves.

In closing, BXMT’s business model continues to deliver resilient results during a period of greater uncertainty and pressure for commercial real estate investors. Our balance sheet held firm, our earnings remained strong, and while the pressures of the rate environment weighed on credit performance, the overall impact of book value and dividend coverage was manageable. With a well-structured balance sheet and near-record liquidity, we entered 2024 on strong footing to maximize value for our stockholders.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll go first to Steve DeLaney with JMP.

Steve DeLaney

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

Anthony Marone

That’s correct.

Steve DeLaney

Okay. And, Tony, in your comments, you were talking about, you gave us some information about realized losses, $70 million to $80 million. Just from an analyst’s standpoint of projecting, would you suggest we just split that in half as far as in terms of our DE, distributable earnings? Would it make sense to you if we just split it in half over the first and second quarter of the year?

Anthony Marone

I think that’s a reasonable assumption. It’s hard to predict when you’re talking about a handful of discrete events. More could land in the first quarter, more could land in the second quarter. So, I think if you want to just split the baby, that’s probably reasonable.

Operator

We’ll go next to Sarah Barcomb with BTIG.

Sarah Barcomb

Hey, everyone. Thanks for taking the question. So, we obviously saw a significant dividend reset last week from one of your peers. I was just hoping you could talk about your go-forward expectations for interest income in the context of both your income covenant and your dividend coverage.

You’ve obviously highlighted that sponsors are coming to the table, they’re buying new rate caps. The multi-family portfolio is performing quite well. But we’re still seeing some pressure on net interest margin, and it looks like the performing portfolio came down from 95% to 93%. We also, we’re going to see some REO potentially here. So, with all that said, I’m just hoping for some more detail on your expectations for go-forward earnings. Should we be modelling further contraction and pressure from NPLs, or how should we think about that?

Katie Keenan

Sure. So, I think just to level set, we covered our dividend by 123% over the year and 111% in the fourth quarter. And as we went into in some detail, we think our fourth quarter earnings are encumbered by about $0.10 to $0.15 from non-accruals and excess liquidity. So, those will both be gradual, but they provide a tailwind over time. I think as far as REO, that loan is already on non-accruals, so there’s no incremental impact from taking that loan from cost recovery or impairment to REO.

And I think that as we look at the overall portfolio, the 95% going to 93%, I think Tony laid out sort of where we’re focused as far as the watch list. The overall impact is pretty manageable. The other big picture factor is obviously rates. And I think we’re all watching what will happen with rates, but while lower rates could impact income, they also alleviate credit pressure and potentially accelerate some of these impaired asset resolutions. So, they provide a bit of a natural hedge.

So, we look at the dividend on a long-term basis. We’re thinking about our current income levels, where we see the potential for resolutions and incremental investments, and obviously sort of how we get there along the way. And I think that that’s the big picture view of how we’re looking at it.

Anthony Marone

Also, you asked for covenants. We are in compliance with our covenants, and that’s not something that we’re worried about in the near term.

Sarah Barcomb

Okay, great. And then just as a follow-up, in the presentation, you gave some great disclosure on sponsored decision-making in the context of the amount of SOFR caps they purchased in 2023. Looks like those are around a 3.7% strike today. Could you give us an idea of the total cost of those SOFR caps? What did those look like in Q4? How are they shaking out for upcoming maturities? I’m just trying to get a handle on the capital need for your sponsors in the near term here as those rate caps come due.

Katie Keenan

Yes. I mean, I think when you look ahead, the caps, as we provided in the disclosure, they weren’t a real issue in 2023 when rates were going up, and now rates are obviously moving in the other direction and the cost to replace caps are cheaper. I think that when we think about it from the sponsor perspective, the caps are not really a deciding factor. They’re a marginal cost relative to the substantial equity sponsors have in their deals, and it’s effectively just prepaying interest for a year.

So, the overall cost of the caps is a factor of where a sponsor buys the strike price on the caps relative to where the base rate is at that time. And so with base rates coming down into the fours, the weighted average cap rate or sort of strike of the caps in the portfolio today is 3.3%. So, you’re thinking about a 100 basis point sort of magnitude of differential based on sort of weighted average SOFR on the curve and where the caps are today. The cost really isn’t that meaningful, I think, to these sponsors. And as we saw in 2023, the vast majority of them renewed and it wasn’t a real decision point.

Operator

Thank you. We’ll go next to Doug Harter with UBS.

Douglas Harter

Thanks. How are you thinking about ’24 maturities and I guess how would you expect the outcomes for ’24 to look relative to kind of how they looked in ’23?

Katie Keenan

Yes. So, we look ahead at the portfolio and I think that looking at the ’24 maturities, you can see we put some loans on the watch list. That’s really a factor of looking ahead at what we expect. But overall, we have pretty good visibility on the ’24 maturities. We’ve obviously addressed a lot of the watch list loans so far this year. 50% of the watch list we have modified with substantial new equity. There’s a couple more that we’ve moved and that we’re watching, we’re working on.

But when we look at the overall scope of the final maturities in 2024, we think we’ve identified where the more challenging conversations should be in the majority of those we have visibility on. And we can see it in our risk ratings, one to three risk ratings, 81% of the overall portfolio. And I think in terms of the performance and our expectations of how those maturities will play out, that’s reflected in the risk rating.

Douglas Harter

Great. And then Tony, did you say how much that will be kind of repaid or how much capital is freed up with the resolution of those four loans?

Anthony Marone

I did not give a specific data point. What I would focus on is the earnings impact. I mean, there will be some liquidity that we’ll pick up from those repayments, being able to repay some debt. But what I would focus on is the earnings impact of unlocking the trapped earnings that we’re going to have in those deals.

Douglas Harter

And I guess, does that earnings come from putting that money back to work or is it immediate once you’ve resolved?

Anthony Marone

It’s immediate once you resolve and repay the debt. So you’ll pick up $0.01 or $0.02 from repaying the debt. And then if we redeploy that, then you’d have further upside from there. But just the repayment of the debt has.

Operator

We’ll go next to Don Fandetti with Wells Fargo.

Donald Fandetti

Can you talk a little bit about the Q1 resolutions? I think you’d mentioned there were four loans resolved. How were those resolved for those property sales, repayments?

Katie Keenan

Yes, absolutely. So as I mentioned, we have one loan that we already sold. We carried that asset unlevered. That was our Upper West Side Rent Stabilized Multifamily Asset, which we sold earlier this quarter. We have two others that are under hard contract for sale. One of those will be a full sale. The other will take back some seller financing at a much more rational level with new equity coming in.

And then the fourth is a restructure with one of our borrowers where we’re bringing new equity at a reset basis at a rational anode level where the loan will be performing at an anode level and covering. So it’s really a whole variety. And I think it’s a great example of the fact that we bring a customized approach to each one of these impaired loans.

We have assets where we see a good, appropriate valuation level in the market and where we’re prepared to exit at those levels. Sometimes that’s a full sale. Sometimes if we like the asset with new equity coming in, we can stay in at a lower leverage level either as an anode or as financing on it.

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

But I think that having the option of all three of those or even more broad options is a real advantage. And I think the fact that we’re resolving four of our impaired loans, generally just at our reserves, is a real positive in terms of looking at moving forward in the portfolio and freeing up earnings on those deals.

Donald Fandetti

Got it. What’s the sort of tone, Katie, in office in general? I mean, obviously still under significant pressure. I mean, are you seeing any signs of capital coming in, financing availability, or is it still, continues to be very difficult?

Katie Keenan

Yes. I think it’s interesting. I mean, obviously the bifurcation is really continuing. You’ve got, the older vintage, more challenged assets, certain markets like San Francisco where we continue to see real challenge. But I think that, as we’ve seen over the last year in terms of fundamental performance, and also we’re now seeing it in the capital markets, the high quality trophy assets are, they’re really continuing to show performance both on leasing occupancy as well as on the capital markets. just by way of data point, trophy CMBS capital structures today are 50 bps to 75 basis points tighter on spreads than they were three or four months ago.

You can obviously see it in the office read stocks. And there’s been a lot of news about capital formation coming into this space. So I think that it’s pretty clear that there is a segment of the office market that is going to work going forward and pricing is starting to reflect that, as we’ve talked about in the past, the vast majority of our office portfolio is newer build. We have a lot of new construction assets, new build assets and Hudson yards, et cetera. And so I think that, the capital markets are coming around to the value and the investability of those assets. And I think that, the market’s getting a little bit more rational.

Operator

We’ll go next to Stephen Laws with Raymond James.

Stephen Laws

Hi, good morning. First question. I’d like to follow up on the, on the cap. Can you provide a little additional color on the weighted average duration of the caps? And I know you said 97% of performing loans have a cap kind of, when do we think about the expiration of those?

Katie Keenan

Yes. So, the caps, the way the caps are structured are generally co-terminus with, the initial term of the loan and then the extension test. So, we’re going to expect to see that, the caps will continue to roll in similar magnitude to the $15 billion of caps that we saw roll this year. And I think, as I mentioned, I think we expect to continue to see, a similar result.

So, the vast majority obviously of the caps that rolled this year were replaced. we, we look forward and, and don’t see any real change to that other than the fact that rates are coming down. And so the overall cost differential is, is going to be less. The average caps are, as I mentioned, 3.3% in terms of, the, the cap expiration and, and that’s for the 2024 rolls. And so, look at that relative to where SOFR is and other base rates, it feels quite manageable.

Stephen Laws

Great. Appreciate the color there, Katie. And as a follow-up, you talked about new origination starting to sort of pass the test, I guess, to, to use some liquidity. How do you think about the right time to do that? Is it, is it looking at leverage? Is it based on these resolutions in the first half? Is it more of an adjusted leverage adding back just the general or maybe the total reserve? How do you think about the right amount of liquidity, the right size of, of the balance sheet with respect to, to doing some new originations as we move through the year?

Katie Keenan

Yes, well, I think a big part of it comes down to the investment opportunity. And I think right now is a really compelling time to be a lender. You have a competitive environment that is much more favorable, banks pulling back. You also have fundamentals, which we see on the ground improving. And yet, as is obvious from the last week, you have real volatility and sort of real pockets where we think we can make interesting risk-adjusted returns.

So, we feel that now is a really compelling moment to be a lender in our space. And of course, we’re also looking at the balance sheet liquidity leverage. We have plenty of liquidity. We have plenty of, capacity in terms of our facilities. We also have various ways we can finance these deals, how we can participate.

And so, I think that where we are today, we’re not going to go out and, and do, a ton of new loans, obviously, we’re going to be monitoring repayments, we’re going to be monitoring liquidity, monitoring, managing our overall portfolio. But I think that, putting a couple of chips on the table right now in this, in this environment as a lender is the right thing in terms of, setting up our portfolio on the go forward to access interesting opportunities.

Operator

We’ll go next to Jade Rahmani with KBW.

Jason Sabshon

This is Jason Sapshon on for Jade. So, I’m curious what you’re hearing from your multifamily and life science borrowers. If properties were underwritten to much lower cap rates and lease up is slower, and NOI is taking longer to stabilize, how do they typically manage through the next 18 months?

Katie Keenan

Sure. So I think that’s a, that’s a great question. And, as we mentioned in the remarks, our multifamily portfolio today is 99.4% performing and post quarter end selling the asset that we sold, it’s now 100% performing. We’ve seen NOI growth of 35% since we originated these loans, and we started at 67% LTV.

So, while we do see some pressure, especially obviously, it’s been broadly discussed in the Sunbelt from new supply, that’s really resulting in rents kind of flattening out, there’s been a lot of growth in these markets, a lot of NOI growth in our assets, and then obviously business plans, these are all value add assets to start. So they had incremental business plans to renovate increased rents as, in addition to the growth in the market generally.

So in terms of, how the borrowers are addressing, I mean, I think you can see it in the rate cap rolls, we had, a couple billion dollars of multi rate cap rolls have already happened in ’23. You can see it in the performance of the portfolio. And I think that really a lot of it comes down to the leverage point and the types of borrowers that we’re lending to. These are well capitalized borrowers, they see the supply demand fundamentals easing up in ’25, new starts or, construction deliveries in ’25 are much lower than ’24.

And this is really sort of a temporary moment in time, in a very liquid asset class where there continues to be a lot of capital, a lot of debt availability from agencies, insurance companies and others. And it’s really going through a temporary pocket that, I think by and large are sort of long, patient, well capitalized borrowers are going to be able to see their way through and we haven’t seen any indication otherwise in the performance of the portfolio.

Jason Sabshon

Great, thank you. And then with respect to life science borrowers, as have you seen lease uptaking slower than expected or have the business plans generally been following expectations?

Katie Keenan

Yes, so we have very little life science in the portfolio. the largest asset is a brand new build asset, in Berkeley in California, right on the water. It’s a super high quality trophy asset at a low leverage point. That’s in the process under construction. So it’s really a little too early to tell. I would say by and large, we really only have a couple of assets and they’re all low leverage new construction.

Operator

We’ll go next to Rick Shane with JPMorgan.

Richard Shane

Thanks, everybody for taking my question. Katie, I’d love to talk a little bit about the interplay between gap earnings, distributable earnings and dividend policy. You’ve spoken clearly about over-earning the dividend this year on a distributable earnings basis. If we take, for example, and I’m going to make a couple assumptions here, we look at your reserve, we say that you are 25% over-reserved versus what you’re going to realize for losses.

Seems like a three years for the reserves that you’re going to use to run through the distributable earnings. That represents about $150 million a year drag to distributable earnings. It’s probably $0.85, $0.90. How will you think about the dividend if it materializes along that path, which seems reasonable in terms of continuing the dividend at the current level, if you’re not likely to earn it on a distributable basis?

Anthony Marone

Great question. So I’d say the jump to the dividend policy question, which we spoke about a little bit in the prepared remarks, what we focus on when we’re setting our dividend, which is what we focused on for several years now, is what do we think is the right dividend level relative to the long-term run rate earnings power of BXMT? You’ve seen many quarters where we well out-earned the dividend, for example, and we didn’t increase our dividend because we felt like that was a peak that might come down.

We had some quarters, although not many, going back to 2015, where we under-earned the dividend, but we again felt like that was temporal and so didn’t cut the dividend. So what we really focused on is what do we think is the earnings power of our dividend? And so we would anchor to our earnings for this quarter, which were not impacted by losses, and the things that we’ll move at over time, which we’ve highlighted on the call.

So you would have impact from rates, you’d have impact from other loans going non-accrual, you’d have the benefit of previous non-accrual loans coming back online, new originations when they happen, et cetera. So we look out over time at how do we think those factors will come together to impact the earnings power of the company. And if that aligns with the $0.62 dividend, then we feel good about our dividend. When that doesn’t align with the $0.62 dividend, then of course we’re going to reconsider our dividend level.

But that’s more where we’re focused and less trying to make a judgment and the numbers you drew out are a fine estimate if one wanted to make one, but we’re less focused on where do we think the episodic losses are going to head over a period of time and more where do we think the overall earnings power of the company is.

Richard Shane

Got it. And that’s helpful. And look, there’s this inherent disconnect here. Gap makes you assume losses, distributable makes you realize losses, and it is imperfect in the context of that dividend policy. Ultimately, you can’t be a lender and not consider the costs of credit. When we look at distributable income for this year, it was about $3, just over $3, and the dividend was $2.48. Is a reasonable way to look at this that you see the long-term credit costs and the dividend policy that you just described is about $0.50 per year? And that, because again, we can’t ignore credit, but we also can’t, we realize that there’s a tax implication in terms of distributable as well?

Anthony Marone

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

Richard Shane

Yes, exactly.

Anthony Marone

Yes. So I think, so firstly, as a REIT, maybe this is where you’re going. As a REIT, we have to anchor to the taxable income impact, which says that we have to distribute our taxable income, 90% of it, and you can pay some tax. So we satisfy that. So we don’t have any issues as far as satisfying the tax requirements. As we’re realizing losses, to your point, that does impact your tax accounting.

So if you do realize a loss on a loan because you get a DPO or you foreclose and sell for less than your basis, that is a tax deduction. So all of those flow through. The timing may not be the exact same, but all of those realized losses will flow through overtime, GAAP, and DE, and tax. Again, timing may be different. So I wouldn’t interpolate that we think that there’s some sort of an imputed $0.50 credit loss based on how we out-earned our dividend this year.

What impacted our ability to out-earn our dividend this year isn’t because there’s some tax losses existing below the surface that we think would perpetuate on a year-by-year basis. It’s because in some prior periods, we had other tax attributes, for example, NOLs from our legacy capital trust business, or some periods where we had over distributions on a tax basis, again, going back many years.

Those carried forward to this year and allowed us to earn a level well above our dividend while satisfying the tax rules because we had this cushion coming in. It’s not that there’s some sort of imputed $0.50 tax loss that was allowing us meet our dividend requirement that you should think of as a go-forward $0.50 loss rate that I would predict.

Katie Keenan

I think, Rick, big picture, what matters in terms of how we look at the dividend is what our earnings power is after we get through the impairments and the losses. So we’re going to have some quarters where we have gap earnings impacted by reserves, as we did this quarter. We’re going to have some quarters where we’re going to have DE impacted by realized losses. But what really matters is, on the other hand, on the other side of that, our investable equity, the earnings power of that relative to our overall business, and that’s how we think about the dividend.

Operator

We’ll take our final question from Arren Cyganovich with Citi.

Timothy Hayes

Arren, are you there?

Operator

Please check your mute function. Your line is open.

Arren Cyganovich

Sorry. Can you hear me now?

Operator

Please go ahead. Yep.

Arren Cyganovich

Sorry about that. The Los Angeles office that was downgraded to four from five, there’s a much smaller, I guess, net book value on that versus the principal. Is that something that where you sold a piece of that? Or maybe you could just talk a little bit about that loan?

Katie Keenan

Sure. So that’s a really high quality asset in West LA. It signed a couple of big high rent leases well above our underwriting, but taking longer to lease, I think in part because of the strikes and what happened over the last year in the content industry.

We have a loan there that we originated as a whole loan and then sold the senior loan. So that’s the difference in terms of book value that you’re seeing. And we’re in a very constructive conversation on that deal in terms of the modification, but we downgraded it because we’re in that conversation.

Arren Cyganovich

Okay. Got it. And then you have a couple of risk-rated five loans that matured in January. Are those some of the loans that you’re going to be realizing losses on in the first half or were those modified?

Katie Keenan

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

I think maybe one or two of them might have co-terminus maturities, but we’re in work out on the impaired loans and the maturity dates themselves are not particularly meaningful. Not particularly impactful in terms of our disposition. We’re just going to do the disposition on the timeline that we think maximizes recovery.

Operator

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

Timothy Hayes

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