Good day, and welcome everyone to the Blackstone Mortgage Trust fourth quarter and full year 2022 investor call. At this time, all participants are in listen-only mode. If you require assistance at any time, please press star zero on your telephone and the coordinator will be happy to assist you. If you would like to ask a question during the call, please press star one. I would like to advise all parties that this conference is being recorded. With that, let me hand it over to Tim Hayes, Vice President with Shareholder Relations. Please go ahead.
Thank you. Good morning, welcome to Blackstone Mortgage Trust fourth quarter and full year 2022 conference call. I'm joined today by Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, and Austin Peña, Executive Vice President of Investments. This morning, we filed our 10-K 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'd like to remind everyone that today's call may include forward-looking statements which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect our results, please see the risk factor 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-K. This audiocast 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 $0.28 per share, while distributable earnings were $0.87 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the fourth quarter. If you have any questions following today's call, please let me know. With that, I'll now turn things over to Katie.
Thanks, Tim. The snapshot of this quarter's earnings comes down to two key numbers. $0.87 per share, our distributable earnings, an all-time record for BXMT. Ninety-four cents per share, our net change to book value, reflecting the impact of our CECL reserve increase given the more challenging credit environment. The two are integrally related. The primary factor pressuring credit performance is also driving record income for our business, and that is the precipitous rise in short-term interest rates. 425 basis points over the course of 2022, the steepest tightening cycle in 50 years. They are also integrally related for our company. Our powerful earnings stream protects the lion's share of returns for our investors as we work through a credit cycle.
Our dividend is delivering a nearly 10.5% current income yield, well in excess of the 3.5% impact on book value of our reserve increase. That dividend is well protected, 140% coverage this quarter, creating meaningful cushion against non-accruals. It is recurring. We've paid it for 30 straight quarters. When we outearn our dividend, the difference is retained as additional equity, further offsetting the impact of increased credit reserves on our book value. This interplay will persist. Rates are still increasing, the Fed has made clear that they will stay high for some time. This will continue to pressure credit performance for the most challenged real estate assets. At the same time, elevated rates drive outsized earnings power and current return, a powerful hedge for businesses like ours. The broader market has figured this out.
After a year of massive outflows from all sectors, inflows into fixed income so far in 2023 are robust. Credit assets are inherently defensive, and floating rate credit is even better today. This does not mean we will be immune from an economic slowdown. Few businesses can be. We believe our business is well-positioned to withstand it. We start with an asset base of loans made to best-in-class borrowers with significant subordinate equity. With the benefit of insights gleaned from the far-reaching Blackstone footprint, we then built up our defenses for a more difficult environment. Having seen cracks in the capital markets, we shifted BXMT to a more conservative posture at the outset of 2022. We raised the bar for our lending activities, focusing on our highest conviction themes and top-tier borrowers. We raised over $1 billion of corporate capital, accumulating a deep well of liquidity.
We proactively worked with our existing borrowers to collect paydowns and recourse, reaping the benefits of our well-structured loans to enhance our credit cushion while importantly maintaining constructive relationships. At the same time, the impact of rates on carry costs, valuations, and market liquidity will continue to weigh on the most vulnerable assets. This is an important concept. The impact of the current economic and interest rate environment on real estate is uneven. Income growth in multifamily, industrial, and hospitality assets remains robust, and supply has become more constrained due to rising construction costs, providing a longer-term tailwind to fundamentals. Capital demand is even more concentrated in these best-performing assets, providing strong support to valuations. On the other hand, office is facing well-known headwinds from post-COVID work patterns and the slowing economy. Here, too, the outcomes are uneven. The segment is not monolithic, and basis and quality matter.
There is scarcity in true class A office space, as evidenced by record-setting rents at trophy assets. Meanwhile, commodity office in cities that were already experiencing slowing growth prior to COVID are facing the sharpest headwinds. Our reserves are concentrated in these assets, as are the bulk of our asset management efforts. The four loans with new specific reserves this quarter date back to well before COVID, 2017 on average, on assets that were well-suited to their markets at the time. COVID was not in the model, and three of these loans are backed by office properties that are bearing the brunt of the post-COVID realignment in demand. Most notably, a significant reduction in government tenant office utilization. The loans also share the commonality of a material change in sponsor wherewithal toward the assets. We are sober about the value declines impacting the most challenged of commodity office.
On average, our reserves are 20% of our loan balance and imply asset value reductions of nearly 50%. These assets are not typical of our broader office portfolio. 54% of our office loans are backed by assets that are newly built or recently substantially renovated with an average vintage of 2021 and an average origination LTV of 60%. 34% of the office portfolio, most of the remainder, carries one or more significant credit-enhancing qualities, such as particularly low leverage, high debt yield, location in high-growth Sun Belt markets, or material additional sponsor equity commitment in the last year. Our four and five-rated office loans round out the rest and represent only 5% of the overall BXMT portfolio. A small fraction where we have meaningfully increased our reserves to account for the credit challenges we see today.
Our overall loan portfolio is 97% performing. This year, we collected $3.7 billion of repayments, nearly 50% of which were on office loans. Our borrowers contributed $675 million of incremental equity, continuing to invest in their assets. We captured nearly $350 million of partial pay downs or increased recourse on 17 existing loans, primarily office, resulting in an average 16% reduction in our basis. Of course, the most important protection for a lender is leverage point. The insulation provided by our loan basis should not be overlooked.
It would take lasting declines of 30% to 40% in real estate values for us to experience a loss at our position in the capital structure. Because the vast majority of our sponsors remain committed to their assets and have contributed more equity along the way, our basis has been further de-risked over time, enhancing the embedded credit protection in our portfolio. In 2020, we encountered an unprecedented disruption for the real estate market. We addressed that challenge much as we are addressing the delayed COVID impact on office today. Actively asset managing our loans, making appropriate risk rating and reserve adjustments, negotiating for credit enhancement, and providing time where appropriate. It is our job as a fundamental investor to look past the broad brush sentiment and judiciously and proactively manage our portfolio based on Blackstone's deep experience taking the long view.
Where the impacts of asset underperformance, capital markets, and sponsor behavior combine to create a workout dynamic, we have the experience and the infrastructure as one of the largest owners of real estate in the world to identify and execute the best path for value preservation over time. A differentiator that will become increasingly important through the credit cycle. At the same time, we believe the origination environment will become still more opportunistic as values adjust and new capital is needed. We started the Blackstone debt business in the GFC, and we are uniquely positioned to access the once-in-a-cycle capital relief trades that create outsized returns on well underwritten risk.
In the current market, we have found pockets of attractive regular way lending opportunities as well, exemplified by our nearly $700 million of second half originations that were 70% industrial, with yields 173 basis points wider than our overall portfolio. With transaction activity far below the norm, the addressable universe of standard new originations is smaller. To stand up to the opportunity cost of our capital, new deals today must be more attractive from both a risk and return perspective. Most importantly, the outstanding earnings power we've already established with our existing portfolio means we can well afford to be patient. As we look ahead, the market outlook is mixed. We see some green shoots with the turn of the calendar. The CMBS market has reopened with AAA spreads retracing 50% to 75% from historic wides in December.
The corporate debt market is active. Banks, having cleared their stress tests, are thawing. Stabilizing long-term rates create support for asset values and rational long-term borrowing costs, an important dynamic that should lead to more liquid markets. There are still headwinds. The accumulating pressure of sustained high interest rates, geopolitical uncertainty, and slowing economies around the world. As a result, we continue to position the business to withstand a more challenging period while continuing to capitalize on the advantages that supported our performance this year. A well-performing portfolio, record earnings power, substantial liquidity, and a well-structured balance sheet. While the coming year may present challenges, challenge creates opportunity, and there is no platform better placed to navigate this environment than Blackstone. We are the largest alternative asset manager in the world with unparalleled information, experience, and relationships.
We have a four-decade track record of performance for our investors in all market cycles. Here at BXMT, we look forward to continuing to deliver for our shareholders. With that, I'll turn it over to Tony.
Thank you, Katie, and good morning, everyone. I would like to start by unpacking our financial results for the quarter. We reported a GAAP net loss of $0.28 per share and distributable earnings or DE of $0.87 per share. DE is up $0.16 from the Q3, driven by continued income growth from our 100% floating rate portfolio, as well as a notable prepayment fee of about $0.07 per share this quarter. Excluding this fee, our regular way DE of $0.80 per share is up 13% from Q3 and 21% from the equivalent metric in Q4 of last year, reflecting the significant beneficial impact of rising rates on our portfolio.
We continue to see rising rates as a tailwind for our business with a 100 basis point increase in rates from Q4 levels, generating around $0.05 per share of incremental quarterly earnings, all else equal. The primary difference between our GAAP net loss and DE is the $189 million increase in our CECL reserve this quarter, primarily related to four loans with specific CECL reserves, as well as an incremental general reserve to reflect the broader market uncertainty and potential risk to our portfolio. Our aggregate asset-specific CECL reserve now stands at $190 million, or 20% of our five- rated loans, and our general CECL reserve of $153 million represents about 55 basis points of our total portfolio, which is up from 35 basis points last quarter.
While these reserves will not impact DE unless and until they are realized, we have also placed our loans with specific CECL reserves on cost recovery status effective as of 12/31. These loans received all interest payments due in the fourth quarter and generated about $0.05 per share of interest income. As we collect interest payments in the first quarter of 2023 and onward, cost recovery accounting will instead apply the cash payments we receive against our basis in these loans. Ultimately, should these loans fully recover, all such deferred revenue will be recognized at the time of repayment. In the interim, this headwind earnings will be substantially offset by the benefit of rising rates I mentioned earlier.
Continuing on the topic of credit, we upgraded eight loans this quarter as performance for these assets continued to improve and downgraded eight loans inclusive of the four loans with asset-specific reserves I mentioned earlier. Our five- rated loans with specific reserves represent only 3% of our gross loan portfolio. 10% of our loans have a risk rating of four, all of which are performing and current, but where we see the possibility of further stress if economic conditions worsen. Remaining 87% of the portfolio is rated three or better, where we continue to see business plans progress, including outstanding performance across many of our multifamily, industrial and hospitality assets. Combined represent over half of our portfolio.
We have continued to collect 100% of all interest due under all of our loans, and the vast majority of our loans, 97%, remain fully performing and recognizing income as usual. Although loan repayments remain muted, we did collect $648 million of repayments this quarter, roughly in line with our $690 million of loan funding. Turning to our capitalization, we continue to run BXMT's business with a focus on balance sheet diversification and stability. During the year, we added $3.6 billion of new credit facility capacity with our key banking relationships, and we remain an important customer for them during a period when banks are increasingly selective on credit.
None of our credit facilities allow for margin calls based on market-based valuations, and 64% of our total financings are non-mark-to-market, either structurally immune from any form of margin call or with mark-to-market provisions limited to defaulted assets only. Our liabilities are term matched to our assets, and we have no material corporate debt maturities until 2026. In the fourth quarter, we strategically upsized our term loan by $325 million, effectively refinancing the $220 million of convertible notes maturing in March and bringing our corporate debt raise to $1.1 billion for 2022. This incremental term loan was leverage neutral as we used the proceeds to repay revolving credit facilities. However, our reported debt to equity ratio did increase this quarter to 3.8 times from 3.6 times as of 9/30.
This is not the result of increased leverage against our assets, but rather the result of our CECL reserve reducing the GAAP equity used in these calculations. Excluding the impact of CECL, our adjusted debt to equity ratio is 3.6 times in line with Q3 and a level we generally expect to be stable going forward. Incremental capital we raised this year, as well as the incremental earnings we have been able to retain, have grown our liquidity to $1.8 billion as of 12/31, or $1.6 billion net of our convertible notes maturing in March. This capital provides us with plenty of resources to manage our business during a volatile period and creates further stability in our balance sheet.
Similarly, we believe our $0.62 per share dividend will remain stable and is well supported by the cash flow generated by our business. Our DE covered our dividend 116% over the course of the year and 140% this quarter, giving us ample dividend coverage in a wide range of credit scenarios. For example, in an onerous downside scenario where all of our five-rated loans and all of our four-rated office loans stopped paying interest, our Q4 earnings level would still cover our dividend with a healthy cushion, all else equal. We are not expecting this scenario to unfold, but it highlights the inherent resilience of our business and ability to maintain dividend stability.
We look forward to continuing to deliver consistent, reliable current income for our stockholders, and we maintain our focus on stability and downside protection amidst a more challenging environment. With that, I will ask the operator to open the call to questions.
Just to remind everyone, please press star one to queue up for questions. We would like to ask you to limit your questions to one question and one follow-up question only. Thank you. The first question is coming from Douglas Harter with Credit Suisse. Please go ahead.
Thank you. Katie, hoping you could talk a little bit more about the four loans that you put reserves on. You know, what specifically kinda occurred in the quarter that kinda led to that, you know, the downgrade and specific reserves?
Sure. The, the loans that we added specific reserves this quarter were three office loans and one very small rent-stabilized multi-loan. We previously had them on the watch list and talked about a few of them last quarter as areas of concern. We've had general supportive sponsorship behavior, and as Tony mentioned, all of these loans have been paying interest. We're in a dynamic environment, and the performance of these loans has changed over time. Some of the office loans, which are the lion's share, are in some of the most challenged markets: D.C., Long Island City, Orange County. I think also worth noting, the quality of these buildings is quite distinct from the norm in our portfolio. They're generally more commodity buildings.
We made the loans knowing that at low leverage points because they were relevant to a specific niche of the market that has now changed materially. The setup of these loans became more challenging in the post-COVID world, and then that combined with the impact of higher rates on carry costs and liquidity, combined with some upcoming maturities, created a decision point, and we made the decision to, you know, move those loans to five and take the specific reserves. We're actively working on these loans to resolve them and bring them to a conclusion. As a reminder, you know, the loans we downgraded are only 2.4% of the overall portfolio and really represent a different paradigm than what we're seeing in the most of the portfolio.
Just on the maturity point, Katie. You know, I guess what are the kind of the final maturities or extension dates that could kind of trigger a next decision point from the sponsors?
Well, I think we're already in that conversation. You know, they have the office loans have their maturities this year, that's really, you know, part of what is resulting in these reserves and the conversations we're having. There isn't another sort of impact or relevant timeline.
Great. Thank you.
Our next question is coming from Donald Fandetti with Wells Fargo. Please go ahead.
Don, we can't hear you. Maybe you're on mute.
Hi, Katie. Can you talk a little bit about how higher rates are pressuring borrowers, and can they handle much more if the Fed continues to raise? You know, are you able to give modifications and that type of thing to manage through that?
Sure. You know, I think that clearly higher rates, and especially the accumulating impact of higher rates for longer, create pressure for borrowers. They make carry costs more expensive. They make the option value more expensive for assets that are already challenged. You know, they change the, you know, perceived cap rate and certainly the higher rates and the overall Fed tightening is having a very material impact on liquidity. Those impacts are happening. I think it's important to note that even with that, we still have a 97% performing portfolio. Our assets are withstanding those impacts, which we have been felt for quite a period of time now. I think that's a testament to the equity value in the assets and our sponsors' view about the long-term value of the assets, which we share.
I think the other dynamic that you brought up, and it's really important, and I mentioned in my script, is that the impact of higher rates, it creates pressure on assets that were already more susceptible. For the lion's share of our portfolio, it creates very substantial excess earnings, and that creates insulation in our business in terms of our ability to retain those excess earnings in book value, our ability to cover our dividends, and our ability to work with borrowers. If they have a viable business plan and it's really just the significant increased interest cost that's causing the pressure, we have some flexibility there to put the asset on a better path, allow it to manage carry costs a little bit more reasonably and get to the other side here.
The fact of having much higher rates and the result of that on earnings in our portfolio gives us substantial margin to be able to have those conversations and a lot of optionality in terms of putting these assets on the right foot to manage through this period.
Got it. Thanks.
Our next question is coming from Steve Delaney with JMP Securities. Please go ahead.
Good morning. Thank you. Good morning, everyone. Congrats on a strong report in a obviously a difficult environment. Curious on the $0.80 of distributable EPS, excluding the $0.07 in prepays. I mean, it was very strong, $0.08-$0.10 above consensus in your own third quarter number of $0.71. Was there anything other than the obviously higher average LIBOR, was there anything unique or one-time in that number, such as maybe recognition of some accrued interest that had been, you know, deferred? I guess my question is, to Tony and to you, Katie, is the $0.80 a reasonable run rate for distributable EPS in the near term? Thanks.
Sure, Steve. The short answer is, as you highlighted, the $0.07 is really the unique sort of one-time-.
Sure.
item. The $0.80. That is the earnings power of the business. It's the impact of rising rates on the portfolio and the full performance of the portfolio. You know, when you talk about run rate, I'd say the two things to bear in mind, which I highlighted on the call, you know, on the one hand, we have some of the loans going to cost recovery that'll cut against that. On the other hand, we have the benefit of further rising rates that'll be a tailwind. Those happen to roughly offset. If you're thinking about the go forward, those are the three things that I would think about as the $0.80 baseline and then those two variables going forward.
Great. Thank you, Tony. On the $1.10 boost to the CECL reserve, $1.10 per share, about $180 million. Can you clarify how much of that? I think there were certainly specific, you mentioned the loans that had been 4 or 5 loans that had been put on the cost recovery. Is there a material increase in the general reserve include embedded in that $1.10?
Sure. The general reserve went from 35 basis points of our loans to 55 basis points, which is about, like $0.13. It's majority is the change in the impaired loans.
Right.
Excuse me, it's about $0.30. I misspoke.
Okay.
The majority is the move in the, in the five- rated loans, but you do have the general reserve growing as well.
Yeah. No, I think that's important because we at least can have some hope or expectation down the road in an improving market that some of that, you know, may revert to book value. Thank you very much for the comments.
Thank you.
Thank you.
The next question is coming from Jade Rahmani with KBW. Please go ahead.
Thank you very much. Wanted to ask about multifamily. We're seeing negative new lease rent growth, slowing demand. So it's a matter of time before renewal rents catch up in terms of magnitude of growth. In addition to that, one million multifamily units under construction. A massive increase in supply will pressure multifamily fundamentals. This sector had the lowest cap rates, a lot of deals done even, you know, below 4% caps. Many of those deals have challenges with interest rate caps that are coming up. What are your thoughts on multifamily, and how exposed do you think BXMT is to any credit issues there over the next 12 to 24 months?
Sure. Thanks, Jade. I would start by saying, you know, what we're seeing on the ground in multifamily is, you know, perhaps a little bit distinct, and it may speak to the quality of the markets and the assets that are in our portfolio and more generally at Blackstone. While we do see some deceleration in the growth of rents, we are still seeing positive re-leasing spreads. I think you alluded to it a little, but it is really critical to focus on the fact that the loss to lease in these rent rolls is still very significant. Even if you see top line market rents decelerating or flattening out, there is still significant loss to lease that will create positive NOI growth going forward. That's what we've seen.
I think the other important thing to note is if you look at the vintage of origination of a lot of these loans, the real question is, you know, where is NOI going to be relative to when we originated these loans? There's still a lot of growth between those two things, which supports our basis. I think the other thing to focus on, and again, supports DSCR and other cash flows. The other thing to focus on is there's a tremendous amount of capital that is focused on multifamily. There's been new capital formation focused on filling, you know, some of the gaps in the capital structures that may be caused by interest rates or rate caps rolling off or other needs. Generally, I think multifamily owners are very positive about the long-term prospects of their assets.
The market in general is supported by the agency, financing market. I think as a whole, you know, the combination of continued positive, albeit to your point, probably, you know, somewhat less quick, or decelerating growth, but continued positive growth, combined with the fact that there's a lot of capital markets interest and support for this asset class makes us as a lender feel very good about where our loans are relative to the NOIs and the values of these assets. There will be a little bit of a pop near term in supply, but beyond what's already on the ground this year, the supply pipeline is really very significantly falling off.
I think people will also see through an interim sort of short term delivery of some of the assets that are under construction and understand that over the next couple of years after this, there's gonna be very little new supply.
Thanks very much. On the office side, as I go through, the portfolio, there's many markets where we're seeing pressure. It's, it's extremely widespread, including markets like Austin, Nashville, parts of Dallas, and then, you know, the other, the other obvious markets. How confident are you that your fourth quarter CECL reflects, you know, a broad view of the office exposure and that we shouldn't expect material degradation in credit on that portfolio in the coming quarters?
Yeah. I think a lot of it comes down to quality. I mean, we're in a dynamic environment, so we look at the data and the trends we see today, and that informs what we do with our reserves and our overall risk rating process. We've identified the fives and the fours where we see, you know, more susceptibility. I think in particular with some of the markets you mentioned, you know, there's really a difference in the dynamic between, you know, a San Francisco and a Nashville. There's still growth in Nashville. It may be coming down a little bit. You think about rents and mark-to-market of where those assets were renting out historically versus today and the overall fundamental long-term dynamics. Combine that with the quality of assets we're focused on.
I mean, Austin, you know, our large office there is gonna be the newest office building in the market. It's a mixed-use project, 62% of cost with an outstanding sponsorship. It's really gonna be the most premier asset in the market. I think that that's part of why we feel good about the overall office portfolio. It's really looking at quality. You know, we're seeing in most markets is just this continuation of an accelerating flight to quality. You know, you'll see the larger market statistics, and certainly they have challenges. Our portfolio is not immune from that. That's why we have the fours and fives. By and large, the very high quality assets in the markets, you know, we broke our sort of new and recently constructed at 2015 vintage.
Those assets are seeing very different dynamics. They're seeing good net absorption, growing rents, you know, a five to 10 point differential in availability. While the overall market is slowing, those assets we think are gonna continue to outperform.
Thank you. The next question is coming from Eric Hagen with BTIG. Please go ahead.
Hey, thanks. Good morning. You know, how would you describe the approach to reserving and even potentially modifying loans because of the fact that price discovery is so weak in the market right now? Like, how do you handicap for that in cases where you think there could be more meaningful discrepancies between where you think value sits and where sort of the unknown of where it could realistically transact?
Yeah. You know, I think for office, we are in a very illiquid market. There's not a lot of transaction activity that's going on. The small amounts of transaction activity are generally, you know, in the more distressed category. I, you know, I think it's fair to say no one's gonna be perfect in that context. That said, we have an extremely rigorous process. We do a full deep dive underwriting in coordination with our broader real estate team using all the best available information we have on our assets, on the markets, all of the constant information flow we have coming into Blackstone, you know, both transactions that have occurred and transactions that have not occurred. We inform that all through our process, which is then, you know, thoroughly vetted by our senior leadership.
The reserves also go through an audit process, so there's a, you know, a third party auditor element to it. You know, it's an extremely rigorous and detailed process that we think, you know, reflects the appropriate level of reserves that we see today.
Great. Thanks. That's helpful. How would you maybe describe the outlook for sponsors to capture NOI growth as a result of the capital investment or the business plan that they're pursuing? Would you say that your sensitivity has changed with respect to unfunded commitments or construction financing in general?
I think it certainly depends on the asset class. You know, we still feel very good, as I mentioned, about the prospects on, you know, the majority of our portfolio, multifamily, industrial, hospitality, some other segments that are seeing good growth. On the office side, the majority, the vast majority of the future funding is in new build office. As I mentioned earlier, you know, the new build office element of the portfolio, which is, you know, naturally where most of the future fundings are, those assets continue to see very strong growth. There's been, you know, just recently in the last month, you know, good leasing coming out of Hudson Yards, including at The Spiral, which is our largest, you know, office loan. You know, as I mentioned, seeing continued, you know, very strong rents on new build offices across markets.
I think when we look at, think about, you know, our fundings going into new build office buildings, which are also just because of the way we make construction loans tend to be lower leverage on average than the rest of our portfolio. Again, by definition, you know, the best quality assets coming into the markets, we feel good about continuing to invest capital in those assets.
Yep, that's helpful. Thank you guys very much.
The next question is coming from Derek Hewett with Bank of America. Please go ahead.
Good morning, everyone. Kind of following up on some earlier questions, could you provide any update or color on the LTVs for the risk-weighted five loans?
Well, I think that the best indication and where we sort of see that today is really around our reserve levels. You know, as I mentioned in the call script, you know, we're, you know, pretty cautious and, you know, pretty sober about where we think values are for the most susceptible or sort of the most vulnerable commodity office assets. We've taken 20% reserves on those assets, reflective of asset values down 50%. That is specific to the assets that we see as most challenged. Older vintage markets that are really tough, you know, situations with the individual assets where they were addressing a segment of the market that has really changed, the government tenant segment being most significant. I think that's really how we think about the metrics on those assets.
Okay. Thank you. I realize that BREIT is principally an owner of real estate, but is there any investment overlap between BXMT and BREIT?
No, it's a totally separate vehicle.
Okay. Thank you.
The next one is coming from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning. Katie, can you talk about the, you know, what you expect the resolution path to be for the 5-rated loans and how we should think about the timing of those specific reserves moving into realized losses through distributable earnings?
Sure. You know, I think that with these loans, and the benefit of what we have, you know, here in the platform being the largest owner of real estate in the world, we are really taking a deliberate and thorough approach. These loans do generally cash flow. As Tony mentioned, they all paid interest in the fourth quarter. They're on cost recovery. You know, we continue to see cash flows coming in, which we'll apply to our basis. In the meantime, what we're doing is assessing, you know, the various potential outcomes, whether it's, you know, a sale in due time, a structured solution, taking them REO. We're gonna make the decision that we think is, you know, most beneficial for long-term value preservation for our shareholders.
I think that's a process that's gonna take some time because we really wanna be deliberate about it and make the right decision, and these are a very small part of our portfolio that, you know, is supported by the tremendous earnings power we have throughout the rest of the portfolio. Our goal is to preserve the most value we can on these assets over time using an ownership mentality.
Thanks. As a follow-up to that, Katie, can you talk about how these loans are currently financed? In the event that they're on facilities that have credit mark exposure, you know, can you give us an update on how those discussions go and kind of what the options are for financing these loans?
Yeah, absolutely. You know, they're financed consistently with the rest of our portfolio, which is, you know, a mix of different asset level financings. I would say generally, our conversations with all of our credit providers are extremely constructive. They recognize the same thing we see in terms of our ability to preserve and create and enhance value over time, and they recognize how responsible we've been with managing these and all of our assets in terms of, you know, creating, de-leveraging, putting ourselves into a better credit position. You know, they know that we're gonna act in the best interest for the long-term preservation of value of these assets, which of course inures to their benefit. They also have the additional credit enhancement of these generally being in crossed pools with a lot of credit enhancement. We have a lot of flexibility.
You know, they're calm. We keep them comfortable and, you know, they're well aware of all of these situations and, you know, it's been a very constructive dialogue.
Great. Appreciate the comments, Katie. Thank you.
Our next question is coming from Richard Shane with J.P. Morgan. Please go ahead.
Okay, thanks for everybody for taking my questions. Katie, you talked about the fact that higher rates are driving higher DE, and that totally makes sense. To some extent that is ultimately zero-sum, it puts more pressure on your borrowers to the extent yields are going up. I realize that so far a great deal of that has been offset by rate caps. I'm curious, as we see scenarios where loans are extended, either because of execution or because of unattractive takeout financing, how you think about those rate caps? Will you continue to have the same level of coverage if the portfolio fully extends?
Yeah, it's a great question, I think rate caps are one of the really important tools in our toolkit that allow us to have conversation with borrowers and sort of right-size our credit exposure on these loans. You know, it really starts with the borrower's equity value in terms of what they have to protect. You know, to your point, in a higher interest rate environment, clearly that eats into some of the equity value, but most of our borrowers still have a lot of equity value to protect, even if it's less than what it was in a 0% interest rate environment. That's a really positive backdrop. We have the rate cap conversations. You know, our portfolio is still 95% covered by rate caps or interest guarantees.
We've had a lot of loans come on those conversations in the last year, so that gives you an indication of our ability to preserve that structural protection. You know, we'll, we have rate cap requirements. We'll require that if we think that's the right thing. We may also, you know, trade it for an interest guarantee, more cash in an interest reserve or whatever we think is the best alignment for us and for our borrowers. You know, we have 25 people on our asset management team that are working through all of these, you know, decisions and discussions with our borrowers every day, and really always just looking for a way to, you know, put our loan and the asset on the most stable path going forward.
You know, I think it's been a great sort of dialogue with our borrowers. We've been able to preserve a lot of this protection, been able to, you know, pick up more sort of credit enhancement in the form of guarantees and interest reserves potentially along the way. We'll continue that approach.
Got it. It's a very helpful answer, and thank you very much.
The next question is coming from Aaron Ciganovich with Citi. Please go ahead.
Hey. Thanks. I was wondering if you could just talk a little bit about the office market and, you know, how much of this is driven just by, you know, rates and, you know, required cap rates versus the actual fundamentals. Obviously, you know, folks are going to offices less and using less office space. I'm just kind of thinking about, you know, what could turn this around. Is it solely rates or do you really have to see a dramatic change in the, in the fundamentals of folks in the offices themselves?
It's a great question, and it's really a combination. You know, I think that there are assets that are outperforming and doing fine even in the context of higher rates, whether that's, you know, in the multifamily or industrial sectors or, you know, new build office where we continue to see good leasing at strong rents. There are assets that have, you know, real secular issues, assets that targeted a component of the market, you know, like government tenancy, as I mentioned, that just really is not, you know, a growing or it's a significantly shrinking part of the market going forward. Commodity, you know, obsolete physical quality office has been something that's been challenged for years, you know, long before COVID. There's a continuation of the trend.
There are assets in the middle that, you know, cash flows perhaps were not growing or not as, not as substantial as, you know, they once were, but they work okay in a low interest rate environment and less so in the environment that we have today. You know, I think interest rates become a decision point for assets, you know, some assets that were experiencing some challenges but not, you know, really sort of permanently issues. You know, as rates fall, you may see some of those assets cross over. You know, there's certainly a number of assets in the market and a few in our portfolio that were just built and, targeted at a part of the market that has had lasting change. You know, I don't think rates are...
You know, they're certainly a contributing factor, but I'm not sure that lower rates are really gonna change for some of those assets. Again, that's a really small part of our portfolio.
Okay. Thank you. Our final question is coming from Jade Rahmani with KBW. Please go ahead.
Thank you very much. Just wondering if you could walk through liquidity post the convert repayment? What are the primary sources of liquidity? Is it just undrawn available borrowing capacity? Do you expect to issue any form of capital to potentially replace that convert, whether it be a preferred securitization or something else?
Sure. I'll start with the second part of your question. We think of the term loan that we issued earlier this quarter as effectively the replacement for the convert. We thought that was a good time to issue that in the market, that was a bit of a pre-refinancing. We would not expect at this point that we're gonna handle the convert maturity other than paying it in cash. As far as the sources of liquidity, you know, we always keep some cash on hand, but the majority of the liquidity is under our credit facilities. Those are revolving credit facilities where we can, as of right, borrow that money in 24 hours. That is not some sort of contingent availability that the banks need to approve or need to approve assets.
It's really as good as cash. We just don't keep the cash drawn to manage the interest expense.
No plans to issue a CLO, in the near term. I think, Katie, you did talk about some of the improvement in spread that we've seen in that market.
Yeah. I mean, we're certainly tracking the CLO market, and it's nice to see some additional liquidity in that market. You know, if we issued a CLO, it would really be a factor of our sort of opportunistic management of our balance sheet. As we talked about in the past, all of our, you know, our asset financing is designed to be term matched. CLOs, we really do if we see it as an opportunistic refi that improves our pricing, our structure, you know, some way that we think is better than the in-place credit facilities that we have. Certainly, if we see that opportunity in the market, you know, we'll take it. I think the market's not quite there yet. Certainly the momentum is moving well, and we'll, you know, we'll be tracking that.
Thanks so much.
There are no further questions in the queue, so let me hand it back to Tim Hayes for closing remarks.
Thank you, operator, and to everyone joining us today. Look forward to catching up shortly.