Moody's Ratings has downgraded Blackstone Mortgage Trust's corporate credit rating on what it sees as a deterioration in the real estate investment trust’s office loan portfolio.
The downgrade from Ba3 to B1 was primarily related to Blackstone Mortgage’s office loans and the resulting net losses so far this year, Moody’s said. A Ba3 rating is judged to have speculative elements and a significant credit risk; a B1 rating is a step lower, according to Moody’s.
The downgrade comes as U.S. office vacancies climb. Tenants have given back more than 210 million square feet since the onset of the coronavirus pandemic in early 2020, according to CoStar data.
As banks and other traditional lenders back off financing the office sector, some commercial mortgage REITs, such as Blackstone Mortgage, have stepped up to fill the gap while taking on some of the risks.
Blackstone Mortgage assigns a risk rating of one to five on its individual loans with one being very low risk and five an impaired loan with a loss likely.
The REIT's total loan balance with a risk rating of five increased from $1.49 billion a year ago to $3.41 billion at the end of September, according to quarterly reports filed with the Securities and Exchange Commission. About $1.21 billion of the loans were tied to office debt a year earlier. This past quarter, that amount nearly doubled to $2.35 billion.
'Problem loans'
Blackstone Mortgage reported a net loss of $241.3 million over the first three quarters of 2024, driven by a $519.7 million increase in its current expected credit loss reserve, according to Moody’s.
“The increase in problem loans and CECL reserves have largely been driven by deterioration in [Blackstone Mortgage’s] office exposure, which represents 33% of total loans,” Moody’s analysts wrote.
Blackstone Mortgage declined to comment to CoStar News.
In its third-quarter earnings call, Blackstone Mortgage CEO Katie Keenan reported progress in dealing with its impaired loans.
“Post-quarter end, we have completed or agreed terms to resolve over $600 million of our impaired assets and have clear visibility on the path to resolution of a further $500 million plus,” Keenan said. “Altogether, this means that in the coming quarters, we believe we can resolve over half of the $2.3 billion of impaired loans we carried at the end” of the third quarter.
Keenan said the resolutions will come through a combination of loan sales and restructurings, and in limited cases, foreclosing on properties.
Property moves
Blackstone Mortgage has two loans under contract for sale, including one on an office building in New York that drew a highly competitive bidding process, she added.
The REIT plans to foreclose on two properties this quarter: a hotel in San Francisco and an office building in Washington, D.C., Keenan said.
“And while not included in the numbers I just quoted, we are in the market for sale or negotiating deals on several other resolution candidates, which may add to the total as we move into 2025,” she said.
Moody's noted a few positive developments for Blackstone Mortgage, including originating new loans in the third quarter.
“These new loans should generate strong earnings and loss absorption capacity for existing loans while also having greater asset protection, thereby minimizing future loss content,” Moody’s said.
After the downgrade, Moody’s changed its outlook for the firm from negative to stable. Even though Moody's noted a few more loans could migrate to higher risk levels, the credit rating firm said Blackstone Mortgage has built up sufficient loan reserves as a buffer to absorb any additional potential losses.
“The stable outlook reflects our view that despite expected weakening in asset quality and profitability, [Blackstone Mortgage’s] capital position and funding profile will remain stable and supportive of the company's credit profile over the next 12-18 months,” Moody’s said.