Blackstone Mortgage (BXMT) Earnings Transcript

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DATE

Wednesday, Oct. 29, 2025, at 9 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Katie Keenan
• Chairman and Incoming Chief Executive Officer — Tim Johnson
• Chief Financial Officer — Tony Marone
• Executive Vice President of Investments — Austin Peña
• Deputy Chief Financial Officer — Marcin Urbasic

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TAKEAWAYS

• GAAP net income -- $0.37 per share net income was reported for the third quarter, as stated in prepared remarks.
• Distributable earnings (DE) -- $0.24 per share in non-GAAP distributable earnings for the third quarter, with DE prior to charge-offs at $0.48 per share, exceeding the declared $0.47 per share dividend.
• Dividend -- $0.47 per share paid, covered by distributable earnings prior to charge-offs.
• Book value -- $20.99 per share book value, remaining largely stable quarter over quarter, as reported by Chief Financial Officer Tony Marone.
• Share repurchases -- $16 million of common stock repurchased at an average price of $18.69 per share; an additional $61 million repurchased so far in the fourth quarter, with total repurchases nearing $140 million since 2024 and Board-approved replenishment to a $150 million buyback capacity.
• Investment activity -- $1 billion of investments closed, with $1.7 billion more closed or in closing post-quarter end, as disclosed by Executive Vice President of Investments Austin Peña.
• Repayments -- $1.6 billion in total loan repayments received, including four loans each over $200 million.
• Portfolio composition -- 75% of loan originations in multifamily and diversified industrial sectors.
• Net lease investments -- $90 million invested across 60 properties, expanding the net lease portfolio to $222 million at BXMT share.
• Recent loan acquisition -- Acquired a 50% interest in a $600 million portfolio of granular loans secured by net lease retail assets, with a weighted average origination LTV of 52% in the acquired portfolio, and an in-place debt yield over 12%.
• Credit quality -- No new impaired loans this quarter; impaired loan balance declined to 71% below last year’s peak; portfolio was 96% performing.
• Loan upgrades and resolutions -- Two impaired loans resolved above carrying values; eight loans upgraded, including six office loans, with two removed from the watch list.
• Leverage -- Debt-to-equity declined to 3.5 times, with $1.3 billion in liquidity and over $7 billion of available financing capacity at quarter end.
• Cost of funds -- Borrowing costs decreased by over 15 basis points in the third quarter compared to the prior quarter; $400 million of corporate term loan was repriced, reducing spread by 100 basis points.
• CECL reserves -- Current expected credit loss reserves totaled $712 million ($4.16 per share), down from $755 million in the prior quarter, due to the crystallization of $42 million in specific CECL reserves following two impaired loan resolutions.
• Annualized return -- The $0.47 dividend resulted in an 8% annualized economic return for stockholders, according to Chief Financial Officer Tony Marone.
• Pipeline outlook -- Management expects to close over $7 billion in new investments this year across originations, acquisitions, and net lease strategies.

SUMMARY

Blackstone Mortgage Trust (NYSE:BXMT) systematically shifted capital from legacy and impaired positions into higher-yielding current vintage assets. Share repurchase activity accelerated through market volatility, with significant authorizations replenished by the board. Optimizations in funding terms further lowered borrowing costs, supporting management’s stated aim to deliver stable current income. Management noted that portfolio credit improved without new impairments, with impaired exposures now 71% below last year's peak. A $1.6 billion repayment pace reflected market liquidity, enabling continued investment deployment. Executive transition was confirmed, with Tim Johnson to serve as CEO, ensuring continuity of strategy and leadership for stakeholders.

• Chairman Johnson said, "liquidity certainly has returned to markets, I would say, both in the U.S. and in Europe," but noted that it was "a bit stronger on a relative basis in the U.S."
• Management’s commentary outlined that return of capital from real estate-owned (REO) assets and impaired loans "is a really strong offset to a lower rate environment."
• The company closed a new $250 million non-mark-to-market credit facility with an international bank, cited as evidence of the company's advantageous market position.
• Austin Peña reiterated that the direction of travel per credit is clearly positive in the portfolio, with no new impairments.

INDUSTRY GLOSSARY

• Distributable earnings (DE): A non-GAAP measure reflecting earnings available for distribution to shareholders, excluding certain non-cash items and unrealized gains or losses.
• CECL reserves: Allowances set aside under Current Expected Credit Loss accounting to absorb estimated future credit losses on loans and other financial assets.
• Loan-to-value (LTV): The ratio of a loan's principal to the appraised value of the underlying collateral property, expressed as a percentage.
• Net lease: Real estate lease structure where the tenant is responsible for some or all property expenses, including taxes, insurance, and maintenance, in addition to base rent.
• Debt yield: A measure of loan risk, calculated as the property's annual net operating income divided by the loan amount.
• CRE: Abbreviation for commercial real estate, used to reference income-producing property types.
• REO (real estate owned): Properties owned by a lender or investor, typically acquired via foreclosure or deed-in-lieu, pending disposition.
• CLO (collateralized loan obligation): A structured financial product backed by a pool of loans, which may include commercial real estate debt.

Full Conference Call Transcript

Tim Hayes: I am joined today by Katie Keenan, Chief Executive Officer; Tim Johnson, Chair of BXMT's board and global head of breads; Tony Marone, Chief Financial Officer; Austin Peña, Executive Vice President of Investments; and Marcin Urbasic, Deputy Chief Financial Officer. 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. I would 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 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 10-Q. This audio cast is copyrighted material of Blackstone Mortgage Trust, Inc. and may not be duplicated without our consent. For the third quarter, we reported GAAP net income of $0.37 per share and distributable earnings of $0.24 per share. Distributable earnings prior to charge-offs were $0.48 per share.

A few weeks ago, we paid a dividend of $0.47 per share with respect to the third quarter. Please let me know if you have any questions following today's call. With that, I will now turn it over to Katie.

Katie Keenan: Thanks, Tim. BXMT's strong third quarter results underscore the continued forward momentum across all aspects of our business, including earnings power, credit, investment activity, and balance sheet optimization. We reported distributable earnings prior to charge-offs of $0.48 per share, covering the $0.47 dividend and continuing this year's positive trajectory. Book value was essentially flat, reflecting a stable credit backdrop with no new impaired loans. We continued our robust investment activity, looking across channels, originations, portfolio acquisitions, and net lease and across geographies to find compelling relative value.

And we continue to drive a more attractive cost of capital to enhance our competitiveness, improving terms on both corporate and asset-level financing, to reflect the strong positioning and track record of our business through this period. BXMT's 3Q performance also reflects our ability to capitalize on the continuing recovery in market conditions. Real estate fundamentals remain strong, with demand stable or improving and new supply constraints. Liquidity and transaction activity are increasing, with SASBC MBS on track for a record issuance year. This dynamic continues to generate robust repayment levels in our pre-rate hike portfolio, $1.6 billion this quarter, and affords us a strong investment pipeline.

With $1.7 billion of total originations closed or in closing post-quarter end, building on the $1 billion of investment activity in 3Q. While spreads have normalized as liquidity has returned to the market, the diversity and reach of our platform's vast sourcing engine are crucial differentiating factors. And with a market-leading capital markets team, we have continued to drive down our cost of borrowing. These advantages on both sides of our business allow BXMT to produce compelling returns on both an absolute and relative basis. I will turn it over to Austin to speak in more detail about our investments portfolio and balance sheet. Before I do, I would like to spend a minute on BXMT's opportune positioning today.

Our portfolio is turning over, unlocking earnings from more challenged legacy deals and steadily increasing the proportion of our capital invested in high-quality current vintage assets. Our balance sheet is in fantastic shape, and we remain at the forefront of both structural and cost of capital innovation. And all of this has translated to healthy earnings generation supporting our dividend. The forward trajectory of our business is embedded in this quarter's results. Though BXMT's stock price has yet to catch up. Notwithstanding the tremendous progress we have made in the last several years, our stock today trades within 10% of the lows through this period and continues to provide a highly attractive 10.4% dividend yield.

This disconnect has created the opportunity for us to repurchase over $100 million of stock so far this year at a meaningful discount to book value. As my tenure as CEO comes to a close, I could not be more excited about the momentum of this business and our highly capable leadership team. I would also like to express my deep gratitude to the analyst and investor community for your support and attention to BXMT over the years. Congratulations to Tim and Austin on their new roles, and Austin, over to you. Thanks, Katie.

Austin Peña: BXMT's strong third-party investment activity demonstrates the distinct advantages of our platform's differentiated scale and sourcing capabilities. As we closed $1 billion of total investments, across loan originations, net lease assets, and a performing bank loan portfolio that we acquired at a discount. Our loan originations remain concentrated in our highest conviction sectors, with 75% in multifamily and diversified industrial portfolios, and over 60% in international markets, where we are capturing excess spread relative to comparable deals in the US. We continue to achieve attractive net interest margins, setting up investments to achieve a levered spread of more than 9% over base rates, or low teens all-in returns.

And importantly, credit characteristics remain very attractive, with strong cash flow profiles, light value-add business plans, and an average LTV of 67%. Investments this quarter include a 90% leased diversified UK industrial portfolio and a well-amenitized stabilized multifamily property near Miami. We also steadily grew our net lease portfolio, investing another $90 million across 60 properties in the third quarter, bringing the total portfolio to $222 million at BXMT share. Importantly, we have maintained a rigorous approach to credit, firing assets within durable industries and generating strong EBITDAR coverage, nearly three times on average, and at significant discounts to replacement cost. With another $100 million in our closing pipeline, we continue to expand our presence in the net lease sector.

To that end, this quarter, BXMT acquired a 50% interest in a $600 million portfolio of granular loans secured by fully occupied net lease retail assets, with a low weighted average origination LTV of 52%, and an in-place debt yield over 12%. We were uniquely positioned to evaluate this portfolio, leveraging our experience, net lease, and loan portfolio acquisition teams to underwrite and execute this transaction. Acquiring high-quality performing loans at discounts from banks remains one of our top investment themes across our platform. These transactions have a high barrier to entry, requiring bespoke sourcing capabilities, the capacity to underwrite granular portfolios quickly and accurately, and the operational wherewithal to onboard and manage hundreds of loans seamlessly.

But here at Blackstone, we have invested in building market-leading capabilities to execute, leveraging the scale of our team and our data. And the prize is quite compelling: high credit quality loans with convexity and duration, in thematic sectors and with outsized risk-adjusted returns. And with bank M&A accelerating, we see more opportunities like this on the horizon. In total, we expect to close over $7 billion of new investment this year, across originations, loan acquisitions, and our net lease strategy, diversifying our portfolio and enhancing credit composition through deliberate rotation into the sectors and markets best positioned in the current environment.

Turning to the portfolio, market tailwinds are driving increasing investor demand for assets large and small and supporting positive credit outcomes. We collected $1.6 billion of total repayments in the third quarter, including four loans greater than $200 million, two secured by Texas multifamily assets and two abroad, a European hotel portfolio and a London office building. We had no new impaired loans this quarter. We resolved two previously impaired loans at a premium to aggregate carrying values, and we upgraded eight loans, including six office loans, removing two from our watch list. Our loan portfolio is now 96% performing, and our impaired loan balance continues to decline, now at 71% below last year's peak.

We expect to complete additional resolutions next quarter, with one impaired office asset sold last week and others in advanced stages. The real estate recovery, while uneven, is extending to some of the most acutely impacted markets and sectors. In San Francisco, fundamentals are improving, driven by the growth of AI. Multifamily rents are up 10%, office demand is growing, and convention hotel bookings are up 60%. Investors are taking note, with acquisition volumes picking up across sectors. Altogether, 25% of our REO portfolio today is in the Bay Area, including our largest asset, a fully renovated hotel, held at nearly 60% below the prior owner's basis and more than 70% below replacement cost.

San Francisco has long been amongst the most cyclical markets in the country, and today, we are positioned to capitalize on the upswing. Amid a strong capital markets backdrop, BXMT has taken advantage, refinancing and extending over $2 billion of corporate debt in the last twelve months. Debt markets have been resilient through recent market volatility, spreads still sitting within 20 basis points of all-time tights. And we continue to see strong demand from our bank lenders, providing opportunities to introduce new facilities, further optimize our financing structures, and reduce our marginal secured funding costs.

We borrowed over 15 basis points tighter in the third quarter compared to the prior quarter, improving our cost of capital and advancing our overarching goal to generate an attractive stable stream of current income for our investors. And with that, I will pass it over to Tony to unpack our financial results. Thank you, Austin, and good morning, everyone. In the third quarter, BXMT reported GAAP net income of $0.37 per share, and distributable earnings, or DE, of $0.24 per share. DE prior to charge-offs, which excludes realized losses related to two loan resolutions, was $0.48 per share, an increase of $0.03 from the prior quarter and $0.01 above our $0.47 early dividend.

DE benefited from BXMT's continued execution on key initiatives, with investment activity, loan resolutions, and accretive capital markets executions all contributing to this quarter's strong results. We also recognized $0.02 of default interest from a multifamily loan that we paid in full. Looking forward, we expect our earnings will continue to benefit from capital redeployment and resolutions of impaired loans, including the two that closed on the last day of the quarter, as we unlock the earnings potential of that capital. For reference, we collected $0.06 of interest from impaired loans this quarter, which were excluded from earnings under cost recovery accounting.

Tony Marone: We ended the quarter with a book value of $20.99 per share, largely stable quarter over quarter, reflecting strong credit performance, loan resolutions executed above carrying values, and accretive share repurchases. Considering the $0.47 dividend, BXMT provided an 8% annualized economic return to stockholders this quarter. BXMT repurchased $16 million of common stock in Q3 at an average share price of $18.69, a significant discount to book value. And so far in Q4, we have accelerated buybacks through recent market volatility, repurchasing another $61 million of stock at even lower levels. In total, we repurchased nearly $140 million of shares since establishing our program in 2024.

And just last week, we received Board approval to replenish our $150 million buyback capacity. Our book value at $9.30 includes $712 million, $4.16 per share, of CECL reserves, which declined from $755 million, $4.39 per share in the prior quarter, as we crystallized $42 million of specific CECL reserves in connection with two impaired loan resolutions.

Katie Keenan: As Katie mentioned earlier, these resolutions were executed at a premium to aggregate carrying values, contributing to an $11 million net reversal in our specific CECL reserve, and offsetting the modest $10 million increase in our general reserve. Turning to our balance sheet, BXMT remains well-positioned to address today's attractive investment environment, with debt to equity down to 3.5 times, strong liquidity of $1.3 billion, and over $7 billion of available financing capacity as of quarter end. And in October, we closed a new $250 million non-mark-to-market credit facility with an international bank, recently established their CRE loan warehousing business, targeted Blackstone as one of their first and largest relationships.

Another example of our strong position in the market and ability to drive differentiated results for stockholders. We continue to take advantage of the supportive capital markets backdrop, further optimizing our cost of capital. As we repriced $400 million of corporate term loan during the quarter, reducing spread by 100 basis points, and upsizing the deal by $50 million, reflecting strong demand from institutional investors. And just last week, we collapsed BXMT's 2020 FL3 CLO, which we replaced with balance sheet financing at a lower spread. The CLO market remains robust, with new issuance nearly tripling last year's total and tracking its strongest year since 2022.

We have been a consistent issuer in this market, completing our fifth transaction earlier this year, and we are well-positioned to take advantage of the supportive market backdrop. Before opening the call to Q&A, I will turn it over to BXMT's Chairman and incoming CEO, Tim Johnson, for a few closing remarks.

Tim Johnson: Thanks, Tony. First and foremost, I would like to thank Katie for her dedicated service to BXMT, the board, and our shareholders. Katie leaves BXMT in a tremendous spot, with a global portfolio that's delivering for our investors and a team that's poised to capture this exciting investment environment. I have had the pleasure of working alongside Katie throughout her Blackstone tenure, and I am extremely grateful for all the hard work, strategic insight, and strong execution she's brought with her each and every day. She's been an inspiring partner and leader and will leave a lasting impression on our business.

While we will no doubt miss Katie, we wish her well in her next chapter, and our confidence as a team will step up in her place. Personally, I am excited to have been appointed CEO of BXMT, and to work closely with Austin to continue to build on the momentum our business has today. Austin and I are fortunate to have the strength of the Blackstone franchise behind us, our dedicated team of over 160 real estate credit professionals, and the critically important connectivity with our global real estate team. This has always been the backbone of BXMT's investment process. I am looking forward to working more with all of you along the way.

And with that, I will now ask the operator to open the call to questions.

Operator: Thank you. We ask you limit yourself to one question and one follow-up question to allow as many callers to join the queue as possible. We will take our first question from Catherine Wood with BTIG.

Catherine Wood: Thank you, and good morning, everybody. Katie, just first off, congratulations and best of luck in your new role. You know, it's been absolutely a pleasure having you in this position. And then second, just wanted to follow-up, Katie, on your prepared remarks, where you mentioned a recovery in transaction activity and return of liquidity to the CRE markets. Kind of two items around that. First off, can you provide a little bit more color on exactly where you're seeing that? Is that U.S. and Europe? Or is it just pockets that you're seeing that recovery?

And then second, if that recovery in transactions is more here in the U.S., is what it seems like to us, could we see a larger portion of your origination activity pivot back to U.S. loans instead of more Europe loans, which you've been doing so far this year?

Tim Johnson: Thanks, Catherine. This is Tim. I'll take that. I'd say liquidity certainly has returned to markets, I would say, both in the U.S. and in Europe. As you pointed out, a bit stronger on a relative basis in the U.S., and mainly driven by a more established CMBS market here in the United States. As Katie referenced, tracking toward an all-time high in terms of liquidity. So I would say it's a little bit further ahead as expected in the U.S. versus Europe, but both places are continuing to see capital markets open up and be pretty strong.

In terms of the U.S. versus Europe on an ongoing basis, what we love is being able to have a platform that can look across all of the regions and establish a view on relative value at any moment in time. So that does shift over time. And I think that, you know, the U.S. continues to be the biggest market for us, just a larger transaction market overall. So I think you'll continue to see this be the largest share of our investment activity over a long period of time. But we certainly look at both and play relative value across both.

Catherine Wood: Appreciate that, Tim. Thank you. And the second one for me, maybe Austin. In terms of the REO portfolio, first off, can you remind us of the potential earnings uplift? Is that capital comes back over time? And second, do you need to set aside incremental capital for the New York City hotel that you took on balance sheet during the quarter? Or is that one in pretty good shape already?

Austin Peña: Yes. Thanks for the question. I would say, you know, generally, you know, we haven't given specific numbers in terms of, you know, the potential earnings uplift. But obviously, the REO assets are not generating our target returns, and we certainly see the opportunity to, as we turn over the portfolio, exit these REO assets over time, to drive additional earnings power as we do that. Specifically with regards to sort of CapEx and conditions, I would say, firstly, we have a tremendous amount of insight into kind of the needs across these assets. And we, you know, we really don't feel that there's a significant component of CapEx needed, you know, to the extent it is needed.

We certainly have the capability to do that with over $1.3 billion of liquidity. But I would say, you know, the condition of these assets across the board is pretty good. And we feel comfortable with our position today.

Catherine Wood: Got it. Appreciate the answers. Thanks, everyone.

Operator: Thank you. We will take our next question from Harsh Hemnani with Green Street.

Harsh Hemnani: Thank you. Maybe one on how you're thinking about, you know, originating new loans versus buying back into the capital structure. Is there a particular premium or discount to book at which you're thinking that buybacks are perhaps more accretive than your originations? And it sounds like 4Q is stepping up on the origination front, but also on the buyback front. So I'm just trying to understand the relative value math there.

Tim Johnson: Yeah. I'd say we continue to look at both, in terms of, you know, every day just like we do across loans in the U.S. and Europe. We look at opportunities of where to invest capital, including share buyback, which of course we've been quite active in. So that's I'd say that's a pretty dynamic analysis, but we've captured the opportunity to buy back when the stock has traded at levels that we think are quite attractive and provide, you know, very high return on investment. So I think that's how we look at it. We continue to look at it dynamically over time.

Harsh Hemnani: Got it. And then maybe one on the makeup of the investment portfolio this quarter. It feels like roughly two-thirds of origination this quarter were in sort of the traditional floating rate loan portfolio, and roughly a third is in net lease and bank loan portfolio acquisitions. Should we be thinking about these fixed-rate loans as sort of being a lever you to be able to reduce your floating rate exposure ahead of what most are expecting to see lower floating rates in the future?

Austin Peña: Yeah. Harsh, this is Austin. I can take that. You know, I think you're correct in that we really are looking across different channels to deploy our capital right now. One of the things we like about net lease in these bank portfolios is that they do add some duration and create a natural hedge to our sort of traditional floating rate business. The bank portfolios in particular, you know, as we noted earlier, we're buying those at a discount to par. And that provides some upside convexity to the extent those loans repay more quickly than we underwrite. And we like that as well from a risk-adjusted return basis.

And so, you know, I think you'll continue to see us look across different types of investments across these channels to really think about the best relative value and really sort of diversify the composition of our earnings.

Harsh Hemnani: Got it. Thank you.

Operator: Thank you. We will take our next question from Jade Rahmani with KBW.

Jade Rahmani: Thank you very much. Each earning season brings its own unique development, and it seems to me that this earning season so far has been characterized by AI dominance, also pockets of weakness in the economy, whether it be in the consumer and jobs or discrete credit items in the financial space in the C&I lending and also a couple of CRE items. So the commercial mortgage REIT sector also seems to have been caught in this down draft. And my main question is whether you've seen any spillover effects into the CRE market as yet. And if you're doing anything differently, perhaps more to prepare for any weakness that may unfold?

Tim Johnson: Thanks, Jade. I'd say we're not seeing it in real estate credit. We are in an environment with real estate credit where we've gone through a pretty significant downturn. And now we're quite clearly in recovery mode in terms of coming out of that downturn. So I would say the real estate credit market has been somewhat uniquely tested already and has experienced its challenges. Not to say that there might not be other challenges around the corner, but it definitely is more battle-tested, I'd say, overall. And so that translates through to what we see on the new origination side of things in terms of credit quality.

Generically, you're going to have a more, you know, tighter lending market coming out of a cycle like we've been through where credit standards are higher. And so we're not seeing that type of deterioration that's been referenced elsewhere. We're seeing, you know, much like what you're seeing in the BXMT portfolio itself, improved credit overall.

Jade Rahmani: Thank you. And, in terms of the pace of 3Q investments and originations, notwithstanding the bank JV, which I believe would have higher ROEs than the traditional business, was there anything that drove a more muted pace of originations? Perhaps it was on the liability management side, putting in place the new repo line, you know, the tighter spreads on the term loan as well as calling the CLO. Was that in preparation of stronger originations and maybe weighed on volume in the quarter?

Austin Peña: Yeah, Jade. This is Austin. You know, obviously made a billion dollars of total investments this quarter, which we think is a good amount. You know, I would say that we have $1.7 billion in closing as well. So our pipeline of opportunities remains really robust. So I'd say we're actively investing in the environment. You know, I would say there might have been a modest impact, you know, seasonally, you know, with some of the volatility we saw sort of in the spring around some of the tariffs, which may have impacted, you know, some certain timings of transactions overall.

But really across our channels, we really see a lot of interesting opportunities, you know, both in Europe and the United States. So we feel good about the level of the transaction activity going forward.

Jade Rahmani: Thank you.

Operator: Thank you. We will take our next question from Doug Harter with UBS.

Doug Harter: Thanks. Sort of touching on that last point, you know, how do you see the pace of kind of net deployment in the portfolio, you know, in the coming quarters? And how do you think about what is the right level of leverage that you guys are targeting?

Tim Johnson: I'd say I'll take the first. In terms of deployment, I think it's a pretty good indication of what you saw this quarter where we're having a healthy amount of repayment activity and then turning that directly into new investment activities. So I think we're at a place where we feel pretty good about being kind of at a run rate in terms of repayments and deployment overall. So I think that would remain, you know, consistent.

Doug Harter: And on the leverage side, like, how are you thinking about what is the right level of leverage to run this business, you know, at this part of the cycle?

Austin Peña: Yeah, Doug. On leverage, obviously, we're at 3.5 times today, which is right in the middle of the range that we target. And so, you know, I think we've always been sort of in that, you know, mid-threes over the last, you know, quite a period. So, you know, we certainly have liquidity and capacity to sort of, you know, go up a little bit from there. And again, we're seeing good opportunities. So, you know, we feel very comfortable with the balance sheet today and where we are, you know, from that perspective.

Operator: Thank you. We will take our next question from Rick Shane with JPMorgan.

Rick Shane: Hey, guys. Thanks for taking my question, and I apologize, like everybody, we're bouncing around between calls. So if this has been covered, I apologize. Look. When we look at the implied dividend yield as a function of book, it's about 9%. You guys aren't quite here yet. When you think about the path to covering that dividend, which is obviously not only your goal but your indication by maintaining that dividend, can you walk us through sort of what the different levers in terms of higher yields, reducing non-accruals, reducing REO, what you think are sort of rank those opportunities, please, and perhaps give us some sense of what the contribution of each is.

Tim Johnson: Yeah. Thanks, Rick. I'd say, obviously, it was good to cover the dividend this quarter in terms of distributable earnings ex charge-offs at $0.48 relative to $0.47 dividend. As Tony noted, a couple of one-time small items in there, but pretty close to the dividend ex those. And as you said and as we've said for a while, we set the dividend with a long-term view in mind. And where we really still have earnings left to unlock is in the REO and the impaired loan portfolio where we can turn those assets into higher returning investments.

We're not particularly focused on quarter-to-quarter results as there's always a little bit of variability in terms of the ins and outs of fundings and things like that. But we continue to have confidence that we've set the dividend level at a long-term sustainable position.

Rick Shane: Got it. Okay. And, you know, is there when you think about, for example, funding loss rate outlook, you know, obviously, you're modestly asset-sensitive, but there's so much opportunity in terms of recycling capital. I'm assuming that you guys are even in a, you know, sharply lower short-term rate environment confident that you can continue to achieve those hurdle rates? Given the scale?

Tim Johnson: Yeah. I would say that's right. I think the opportunity to redeploy the capital within the REO portfolio and the impaired loan portfolio is a really strong offset to a lower rate environment. I would also add we only lose about once. 50 basis points of rate move, so it's not as drastic as you might be thinking.

Rick Shane: Okay. Appreciate that. Thank you, guys.

Operator: Thank you. We will take our last question from Don Fandetti with Wells Fargo.

Don Fandetti: Can you talk a bit more about what you're seeing in office market fundamentals? I mean, I think you had six upgrades. And I guess at this point, you know, is it possible that you'll end up being a bit over-reserved in your office book?

Austin Peña: Yeah. Thanks, Don. This is Austin. You know, I definitely would say we are seeing, you know, stability and improvement across office. I think you see that as you noted in the movements in terms of our upgrades this quarter. Six office loans upgraded. Two of them were removed from our watch list. That's really driven by leasing that we're seeing at these assets. And so, you know, I definitely think, you know, we're starting to see, you know, more broad-based green shoots, liquidity coming back into the market. As I noted earlier, you know, we've sold one of our impaired office assets, you know, post-quarter end.

So continue to see more transaction activity, more capital coming off the sidelines for the sector. I'd say in terms of, you know, reserves, we obviously go through those every quarter. We feel like our reserve levels are appropriate. You know, we feel good about where we set those. You know, it's obviously a detailed asset-by-asset analysis that we do, and so we feel good about where those are.

Don Fandetti: Okay. And then on a follow-up, I mean, you've had another quarter here where there was fairly steady credit migration. How are you thinking about, like, movement to four from three in the near term? Do you feel like you're in a steady state?

Austin Peña: I'd say the direction of travel per credit is clearly positive in the portfolio, with no new impairments. So I'd say, you know, the direction is quite clear. Obviously, you know, we're continuing to work through things, but in terms of credit migration, we feel like we've, you know, basically resolved 70% of our impaired loans at this point and a good line of sight to a significant amount more. We feel really good about the overall path here in terms of credit performance.

Don Fandetti: Okay. Thank you.

Operator: Thank you. That will conclude our question and answer session. At this time, I would like to turn the call back over to Tim Hayes for any additional or closing remarks.

Tim Hayes: Thank you, Katie, and to everyone joining today's call. Please reach out with any questions.

Operator: Goodbye. Please stand by. The conference will begin shortly.

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