Scott Kennedy’s mREIT Earnings Series: Assessing Blackstone Mortgage’s And Annaly Capital’s Performance For Q1 2024
Summary
This earnings assessment article reviews BXMT’s and NLY’s BV and core earnings performance during Q1 2024 and compares results to my expectations. Earnings remain a key driver to stock performance.
BXMT’s BV slightly underperformed my/our expectations (within range) while its adjusted core earnings/EAD was a minor-modest outperformance. However, there is an important caveat to this outperformance.
No change in BXMT’s percentage recommendation ranges or risk/performance rating. We already downgraded BXMT in late March 2024 due to the company’s commercial (mainly office) exposure and rising non-accruals.
NLY’s BV slightly outperformed my/our expectations (within range) while its core earnings/EAD was a minor-modest underperformance. These metrics basically “offset” each other.
No change in NLY’s percentage recommendation ranges or risk/performance rating. NLY is currently deemed appropriately valued (HOLD).
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) BXMT:
Commentary
Quarterly BV Fluctuation: Minor Underperformance (1.3% Variance).
Adjusted Core Earnings/EAD: Minor-Modest Outperformance.
A largely “as expected” quarter on BV for Blackstone Mortgage Trust (BXMT) in my opinion. BXMT recorded a modest quarterly BV decrease which was correctly anticipated. When factoring in impacts from recording net realized losses during the quarter (also known as “charge-offs”), BXMT recorded a net increase to the company’s CECL reserves of ($174) million (increases are bad). In comparison, I projected a net increase of ($125) million so a bit of a larger quarterly increase. This directly led to a BV underperformance of ($0.28) per share which was the vast majority of the company’s overall quarterly BV underperformance of ($0.32) per share.
BXMT remained in “defensive mode” as the company only originated $353 million in loans during Q1 2024 while having loans prepayments/repayments/sales/transfers of ($1.0) billion. This directly led to the quarterly decrease in adjusted core earnings/EAD due to a lower investment portfolio size. This was correctly anticipated on my end. That said, the severity of BXMT’s adjusted core earnings/EAD decrease was less than I expected.
BXMT’s minor-modest adjusted core earnings/EAD outperformance (which excludes all realized losses/charge-offs; consistent sector-wide methodology) was mainly due to the fact the company continued to record quarterly accrued interest income on new loans placed on non-accrual status as of 3/31/2024. This is an “aggressive” stance regarding the recording of accrued interest income. In my professional opinion, BXMT should have reversed all quarterly accrued interest income on all new non-accrual loans as of 3/31/2024. That said, I can only make subscribers aware of what BXMT did regarding accrued interest income during Q1 2024 and model out the ramifications of this decision in future periods (will be a large quarterly decrease during Q2 2024).
A risk/performance rating of 4.5 for BXMT remains appropriate in the current environment/over the foreseeable future (“higher-for-longer” regarding rates/yields).