Blackstone Mortgage's rating downgraded by Fitch amid credit pressures

Investing.com -- Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of Blackstone Mortgage Trust, Inc. (NYSE:BXMT) to 'BB-' from 'BB'. The downgrade, announced on Friday, April 11, 2025, also includes a downgrade of BXMT's secured and senior unsecured debt ratings. The outlook for the ratings is stable.

The downgrade comes in response to ongoing asset quality challenges faced by BXMT, including significant loan concentrations in office properties and a rise in impaired loans to 9.6%. Fitch expects these challenges to persist, further pressuring BXMT's earnings, which were negative in 2024. The firm's cash earnings are also likely to be adversely affected by realized credit losses in 2025 as it continues to resolve problem loans.

Fitch also cited BXMT's weaker funding flexibility compared to its peers as a factor in the downgrade. The firm's unsecured debt represents only 1.7% of total debt at the end of 2024. Despite these challenges, BXMT's ratings continue to be supported by its affiliation with Blackstone (NYSE:BX) Inc. and its external manager, BXMT Advisors L.L.C. This relationship provides BXMT with investment and asset management resources, risk management tools, and bank relationships as part of one of the largest global real estate platforms.

BXMT's focus on the commercial real estate market, along with elevated loan exposures to office properties, presents rating constraints. The firm's impaired loans to gross loans ratio was 9.6% at the end of 2024, up from 7.9% a year ago. These loans, secured by office buildings, reflect high risk or a potential of realizing a principal loss due to challenged collateral values.

BXMT reported a pretax loss of $199.5 million in 2024, primarily due to a decrease in net interest income from a lower portfolio balance, additional loans moving to cost-recovery status, and increased credit provisioning. Fitch expects further migration of 4-rated loans to impaired status, which could keep provisioning levels elevated throughout 2025, pressuring returns.

BXMT's leverage, measured by gross debt-to-tangible equity, was 4.1x at the end of 2024, higher than its rated peers. Fitch expects leverage to remain elevated compared to peers but below the firm's target throughout 2025.

BXMT's funding profile is weaker than peers, with unsecured debt representing just 1.7% of total on-balance-sheet funding at the end of 2024. The firm has historically relied on secured bank financing facilities, non-recourse securitizations, and the secured term loan B market for funding.

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. At the end of 2024, the company had $323.5 million of cash and equivalents and $1.1 billion of borrowing capacity on its funding lines, which Fitch believes is sufficient to address funding needs in the near term.

Factors that could lead to further negative rating action include further deterioration in credit performance, a sustained reduction in pretax ROA at or below 1.0%, an inability to maintain sufficient liquidity relative to debt maturities, and a sustained increase in leverage. On the other hand, factors that could lead to positive rating action include the ability for BXMT to resolve problem loans without a meaningful impact to cash earnings, diversification into other CRE asset classes, a sustained increase in the proportion of unsecured debt, a decrease in leverage, consistent core earnings performance, and maintenance of a strong liquidity profile.

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