BLACKSTONE MORTGAGE TRUST, INC.
Fitch Ratings has assigned
The Rating Outlook is Stable. Concurrently, Fitch has assigned a 'BB'/'RR4' rating to BXMT's secured debt and a 'BB-'/'RR5' rating to its unsecured debt.
Key Rating Drivers
The ratings reflect BXMT's relationship with
Rating constraints include BXMT's narrow focus on the commercial real estate (CRE) market, with concentrated exposures to office and hotel properties, against the backdrop of evolving real estate trends; a predominantly secured funding profile; the potential for margin calls on secured credit facilities associated with collateral loan nonperformance or material credit deterioration; and the distribution requirements associated with being a real estate investment trust (REIT).
BXMT's asset quality continues to be strong. Fitch believes credit performance is supported by strong underwriting standards, as the portfolio had an average loan-to-value ratio of 64.6% at 1Q22. Impaired and nonperforming loans were 1.1% at 1Q22, down from 1.9% at YE20 but up from a four-year average of 0.8% between 2018-2021.
BXMT's portfolio is relatively concentrated by CRE property type, with office, multi-family and hotel properties accounting for 42%, 26% and 16% of the portfolio value at 1Q22, respectively. Fitch believes there are longer-term uncertainties related to office properties and hotels, given the impact of the pandemic on work patterns and business travel, which could affect asset quality metrics over the medium term. Still, Fitch believes BXMT's conservative underwriting should help mitigate the risks. Fitch views favorably the increasing share of multi-family in BXMT's portfolio given the segment's continued solid performance.
The portfolio is relatively diverse by geography. BXMT has increased originations across sunbelt states, which represented 27% of the portfolio at 1Q22, up from 17% at YE19, as the firm has focused on higher growth locations since the pandemic. BXMT also originates loans outside the
Pretax returns on average assets were 2.1% for the trailing 12 months (TTM) ended
BXMT's leverage (gross debt-to-tangible equity including off-balance sheet, non-recourse funding comprised of CLO liabilities, senior syndications and securitizations) was 4.5x at 1Q22, which was within Fitch's 'bbb' category benchmark range of 3x-5x for balance sheet heavy finance and leasing companies. Leverage was up from 3.6x at YE20 driven largely by growth in non-recourse borrowings to support portfolio expansion. While BXMT's baseline leverage is higher than rated peers, leverage would be lower, at 3.4x, if all non-recourse borrowings were excluded from the calculation.
BXMT's unsecured funding is below the peer average, representing approximately 4.4% of total debt at 1Q22, which is within Fitch's 'b or below' benchmark range of less than 10% for balance sheet heavy finance and leasing companies. While Fitch views BXMT's ability to access the unsecured debt markets favorably, an increase in the unsecured funding mix would enhance its financial flexibility, which would be a credit positive.
As a REIT, BXMT is required to distribute at least 90% of its net taxable income to shareholders, which constrains the firm's ability to build equity. At
The Stable Outlook reflects Fitch's expectations for continued strong asset quality, consistent earnings performance, the maintenance of Fitch-calculated leverage at-or-below 5x and a solid liquidity profile.
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.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
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.
Positive rating action would also be conditioned on maintenance of strong asset quality performance, consistent earnings, and a solid liquidity profile.
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 excluding all non-recourse debt and net of cash;
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;
Sustained reduction in pretax returns at or below 1.0%.
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 '
Date of Relevant Committee
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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