BLACKSTONE MORTGAGE TRUST, INC.
Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDRs) of
The Rating Outlook is Stable. At the same time, Fitch has affirmed BXMT's secured debt and senior unsecured debt ratings at 'BB' and 'BB-', respectively. A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
The ratings affirmation reflects BXMT's relationship with
Rating constraints include BXMT's narrow focus on the commercial real estate (CRE) market, with concentrated exposures to office against the backdrop of challenging real estate trends; a predominantly secured funding profile and the distribution requirements associated with being a mortgage real estate investment trust (mREIT).
BXMT's asset quality has shown signs of deterioration over recent periods but remains supportive of its current rating. The firm's impaired loans to gross loans ratio rose to approximately 4.0% 1Q23, up from 1.3% at YE 2021 due to the internal downgrade of multiple loans, primarily tied to the office portfolio. While BXMT has reduced its net exposure to office properties to 34% of total loans at 1Q23, the exposure remains higher compared to peers. Fitch believes there remain longer-term uncertainties related to office given the impact of the pandemic on work patterns, which could continue to affect asset quality metrics over the medium term.
BXMT's conservative underwriting's focus on higher-quality buildings in locations with solid demographics as well as its asset management capabilities through the broader
Similar to peers, BXMT's profitability declined during 2022 reflecting higher credit provisioning offset by stronger spread revenue from higher rates and a larger balance sheet. BXMT's pre-tax ROA was 1.1% in 2022 compared with a four-year average (2019-2022) of 1.5%, which was within Fitch's 'bb' category earnings benchmark range of 1.0%-2.5% for balance sheet heavy finance and leasing companies and an operating environment score in the 'bbb' category. The firm's pre-tax ROA for the trailing 12 months ended 1Q23 was 1.1%. A sustained reduction in the firm's pre-tax ROA to below 1% would be viewed negatively by Fitch.
BXMT's leverage (gross debt-to-tangible equity including off-balance sheet, non-recourse funding comprised of CLO liabilities, senior syndications and loan participations), though higher than peers, remains supportive of its current rating, at 4.9x at 1Q23. This was towards the lower-end of Fitch's 'bb' category benchmark range of 4x-7x for balance sheet heavy finance and leasing companies with an operating environment score in the 'bbb' category. BXMT targets net debt leverage below 4.0x, excluding non-recourse and off-balance sheet debt net of unrestricted cash.
On this basis, leverage was 3.8x at 1Q23. While Fitch expects leverage to remain elevated compared to peers throughout 2023, Fitch believes the firm's ability to retain earnings given its over-distributed position on a tax basis, combined with a more muted lending environment could allow for modest de-leveraging. An inability to sustain leverage below 5.0x, based on Fitch's calculation could result in negative rating action.
BXMT's unsecured funding is below that of rated peers, representing less than 3% of on-balance-sheet debt at 1Q23, which was within Fitch's 'b or below' benchmark range of less than 10% for balance sheet heavy finance and leasing companies. The firm has historically relied on secured bank financing facilities, non-recourse securitizations and the secured Term Loan B market for funding, which it accessed multiple times during 2022. While Fitch views BXMT's ability to cost-effectively access the secured debt markets favorably, an increase in the unsecured funding mix would enhance its financial flexibility and would be a credit positive.
As a REIT, BXMT is required to distribute at least 90% of its annual net taxable income to shareholders, which constrains the firm's ability to build equity and Fitch's assessment of its liquidity. At 1Q23, the company had
The Stable Outlook reflects Fitch's expectations for BXMT to show a strong ability to navigate headwinds within the CRE sector such that credit quality remains solid resulting in consistent earnings performance, the maintenance of Fitch-calculated leverage at-or-below 5x and a solid liquidity profile.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Sustained increase in Fitch-calculated leverage above 5.0x and/or a sustained increase in company-calculated leverage above 4.0x;
Inability to maintain sufficient liquidity relative to near-term debt maturities, unfunded commitments and margin call potential associated with collateral loan nonperformance or material credit deterioration;
Material deterioration in credit performance whereby impaired and nonperforming loans are above 4.0% of loans for an extended period and meaningful credit losses are ultimately realized impaction cash earnings;
Sustained reduction in pre-tax ROA at or below 1.0%.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Given current macroeconomic conditions as well as sector headwinds related to commercial real estate, near-term positive rating action is considered unlikely. However, over the longer-term, the following could lead to positive rating actions:
Sustained increase in the proportion of unsecured debt at or above 25% of total debt;
Measured and appropriately risk-adjusted diversification into other CRE asset classes or expansion of business model;
Sustained decrease in Fitch-calculated leverage at-or-below 4.0x;
Exhibited ability to manage credit quality deterioration with minimal realized credit losses such that pre-tax ROA and/or DE remain in line with historical performance.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The rating on the secured debt is equalized with the Long-Term IDR, indicating Fitch's expectation for average recovery prospects. The rating on the unsecured debt is notched down from BXMT's Long-Term IDR, and reflects the predominantly secured funding mix and the limited size of the unencumbered asset pool, which suggests below average recovery prospects in a stressed scenario.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The secured and unsecured debt ratings are primarily linked to changes in the Long-Term IDR and would be expected to move in tandem. However, a material change in the funding mix or collateral pool for each class of debt could result in the ratings being notched up or down from the IDR depending on how recovery prospects are impacted.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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