Thanks to a rash of loan payoffs, Blackstone Mortgage Trust is looking to invest its record-high cash reserves in traditionally low-risk retail properties.

The commercial lender said it is targeting net-lease properties that have tenants paying insurance, utilities and other costs in addition to rent. The REIT’s initial focus will be space tied to essential retail, following the lead of institutional and private equity firms, CoStar reported.

The mortgage trust arm of investing titan Blackstone also plans to grow its lending pipeline outside of the U.S.

During its fourth-quarter earnings call last week, firm representatives said it plans to add new income sources given that interest rates will likely stay elevated following the reduced loan volume of the last two years.

“With interest rates remaining elevated, a positive outlook for the U.S., consumer and essential needs-based retail showing resilient performance, we see a compelling setup today to build a credit-oriented, diversified net lease strategy,” Blackstone Mortgage CEO Katie Keenan said during the call.

Net-lease investments are based on the credit ratings of tenants as well as their ability to pay rent.

Blackstone Mortgage joins JPMorgan Real Estate Income Trust, JLL Income Property Trust, Fortress Investment Group, Ares Commercial Real Estate, CIM Real Estate Finance and Ladder Capital in investing in low-risk assets favorable to owners.

In addition to tenants covering a portion of the building's operating expenses, properties net-leased to individual tenants benefit from potential value appreciation and annual rent increases. That lines up well with Blackstone Mortgage’s floating-rate lending business, Keenan said.

“We believe we can acquire assets at a significant discount to replacement costs with 10- to 20-year leases and strong [earnings before interest, taxes, depreciation and amortization] coverage generated by established businesses,” Keenan said on the call. “Over time, we expect to curate a diversified portfolio.”

The REIT has already completed two net-lease transactions, though it declined to provide any additional information during the call. As part of its annual filing with the Securities and Exchange Commission, the firm reported it ponied up $7.2M to a joint venture focused on the net-lease strategy, with an undisclosed investment fund advised by Blackstone.

“While this strategy will take time to ramp, it is meaningfully scalable with a total addressable market in the trillions,” Keenan said on the call.

“Further, it brings the benefit of adding another attractive outlet for capital deployment, further expanding the scope of the [REIT’s] new investment pipeline and positioning the company to capture the best relative value across real estate credit markets.”

The company reported repayment activity of $5.2B in 2024, up 36% over 2023. That included $2B in payoffs on 10 separate office loans.