Blackstone Mortgage Trust Inc (BXMT) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust third-quarter 2013 results conference call.

(Operator Instructions)

Later we will be conducting a question-and-answer session.

(Operator Instructions)

As a reminder today's event is being recorded for replay purposes.

I would like to turn the conference over to your host for today, Mr. Weston Tucker, Head of Investor Relations. Please go ahead, Mr. Tucker.

Thanks, Regina.

Good morning, and welcome to Blackstone Mortgage Trust's third-quarter conference call. I'm joined today by Steve Plavin, President and CEO; Mike Nash, Executive Chairman; Doug Armer, Treasurer and Head of Capital Markets; and Tony Marone, Principal Accounting Officer. Last night we filed our 10-Q report and issued a press release with the presentation of our 3Q results, which hopefully you have all had some time to review.

I would like to remind everyone that today's call may include forward-looking statements, which, by their nature, 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 the Company's results, please see the risk factor section of our 10-K report. We do not undertake any duty to update any forward-looking statements.

We will refer to non-GAAP measures on this call. For reconciliations to GAAP measures, you should refer to the press release and to our form 10-Q filings. This audiocast is copyrighted material of Blackstone Mortgage Trust, and may not be duplicated, reproduced, or rebroadcast without consent.

So, a quick recap of our results before I turn things over to Steve. We reported quarter earnings of $0.28 per share for the third quarter, our first full quarter of operations since our recapitalization in May. The strong results were driven by growth in our loan origination portfolio, which reached $1.3 billion as of September 30, up from $757 million at the end of the second quarter.

A few weeks ago we announced and paid a dividend of $0.27 per share with respect to the third quarter. The dividend was the first we paid since the recapitalization, and reflected the success we have had in quickly ramping the business to date.

If you have any additional questions following today's call, you can reach out to me or Doug directly. With that I turn things over to Steve.

Thank you, and good morning.

It has been very exciting for us at BXMT since the relaunch in May. As we discussed last quarter, our focus has been the responsible and rapid deployment of our capital in order to achieve a stabilized run rate dividend. I'm happy to report that we have made great progress on both fronts. In hindsight, we relaunched the Company at an ideal time.

Market conditions for our simple, focused strategy of providing floating-rate first mortgage loans remains very favorable. We benefit from transaction activity, and with more properties trading, we're being improved and repositioned, we have more opportunities to lend. We see this increased transaction volume and greater borrower demand in both the US and Europe, our target markets. Also, real estate fundamentals are improving, which further supports our business.

In short, it is a great time to be a value-added senior mortgage lender. More importantly, our affiliation with Blackstone's a great competitive advantage. Our access to proprietary deal flow and property and market information is unparalleled given the scale of Blackstone's real estate business.

As part of Blackstone, we are better positioned to obtain market-leading credit. The low cost and superior structure of our financing enhances the returns in our loans. So our connection to Blackstone allows us to benefit on both sides of the balance sheet.

We've done an enormous amount of business since May. Over $2 billion of loans closed during closing in less than six months. We have great momentum going forward. Our ability to win business is a direct result of Blackstone's reputation with borrowers, mortgage brokers, and financial firms.

The market's response to our relaunch and the way we do business has been very positive. Borrowers love our efficient and definitive analysis and decision-making. Our brokers' relationships are unparalleled and generate the best possible opportunities to win competitively. We are well ahead of our initial expectations for our business, but we are still in the early stages of rolling out our direct-lending platform.

As we mentioned last quarter, we are going to lend in Europe, as Blackstone's presence there is particularly strong. We have a well-established debt investment team in London and expect to close our first BXMT loan and credit facilities in the UK in the fourth quarter, further expanding our loan origination business.

We have remained vigilant in maintaining the senior mortgage risk profile of our expanding loan portfolio. We were able to rapidly deploy capital in this strategy and generate an attractive dividend yield that will grow with increases in LIBOR. As we have highlighted before, we will benefit from a rising rate environment given our emphasis on floating rate loans.

With that, I will turn to our financial results for the third quarter, which reflect a significant growth in our loan portfolio during our first full quarter as BXMT. We will run through some detail, but I'd like to emphasize two important numbers -- $0.28 and $0.44. The $0.28 is our core earnings per share for the third quarter, which was our first full quarter post-recap. The $0.44 reflects our dividend run rate based upon our current portfolio and loans in closing as of today.

We reported net income of $8.3 million, or $0.29 per share, and core earnings of $8 million or $0.28 per share. You can find the details of our core earnings calculation in the earnings release and 10-Q. At quarter end, total assets stood at $1.6 billion, up 45%, driven by strong loan growth. During the quarter we closed 10 new floating rate loans, representing total commitments of $729 million.

We funded $629 million under these and existing commitments during the quarter, bringing our total loan portfolio to $1.3 billion as of September 30, with a weighted average yield of LIBOR plus 488. Including all loans now closed and in closing, we have reached cummulative originations of $2.2 billion.

We extended our access to tightly-priced, well structured credit for our business, upsizing two of our credit facilities by $250 million each, and closing $92 million of asset-specific financings for a total of $592 million of additional term-match credit. We are in the process of adding more credit capacity in both the US and in Europe. This quarter we borrowed a net $478 million under our credit facilities to finance the growth of our loan portfolio.

Our quarter-end weighted averaged all-in borrowing cost was LIBOR plus 249, with $345 million of additional immediate available borrowing, based upon our quarter-end loan portfolio. We believe that our stable, longer duration LIBOR indexed liabilities, combined with our LIBOR indexed senior mortgage loan assets, produce a more liable income stream. At quarter end, our book value was $713 million, or $24.68 per share. Over 90% of our book value relates to our loan origination business, with the balance related to our declining CT Legacy Portfolio.

CT Legacy Partners, the largest component of our legacy portfolio, does not directly contribute to our quarterly dividends, but it does periodically distribute cash from underlying loan repayments to its shareholders, the largest of which is BXMT. In October, we received a net $20 million distribution from CT Legacy Partners, which we plan to redeploy in our lending business and further augment our dividend paying capability.

We announced our first dividend as Blackstone Mortgage Trust during the third quarter. The $0.27 dividend reflected the great progress that we made deploying equity capital in our first four months originating senior mortgage loans. Post quarter end, we have maintained a brisk origination pace. Our existing portfolio and loans in closing generate $0.44 in quarterly run-rate core earnings. In addition we have a great pipeline of prospective loans that should further advance our ramp and increase our dividend paying capability.

With that I will ask Regina to open the call to questions.

( Operator Instructions )

Dan Altscher, FBR.

Great first -- I guess second quarter out of the gate, everything looks good. $2.2 billion is a great number, that clearly by year end is going to hit. Is it too early to start thinking about 2014, can this pace of origination continue? How should we think about that as we approach 2014?

Dan, the business opportunity is still great for us. We think that the pace will continue rolling into 2014. And we are targeting larger and larger loans, really give us the ability to I think increase the absolute dollar volume of our originations.

In thinking about that, 2014 isn't that far away. Clearly there is capacity on the credit facilities that you can draw down on. But thinking more about permanent capital to expand the platform -- at this point how are you thinking about that? Is it there an absolute need for more capital and even if there is not, is it a convert market might be open or maybe a preferred market instead of doing straight common, if needed?

Given our current pace of deployment and the opportunities that we see out there to invest, we are going to need some additional capital over the next few months. We are looking at the common market and the alternative markets as well, and we will make the decision based upon market conditions at the time.

Jade Rahmani, KBW.

A follow-up on the leverage side, can you discuss how you think about the difference between the actual available borrowing capacity and the potential borrowing capacity that is shown in the slides?

Jade, hey, it's Doug. I can help you with that. The potential available borrowings -- is the maximum amount that we could borrow, given the collateral that we have pledged today. What is available is that number less what is actually outstanding today. If you look at the press release you can read those three numbers straight across.

Thanks for that clarification. As you look across the Blackstone real estate debt platform, would you characterize deal flow as accelerating, and how much of that would you attribute to the market growth rate or borrower changes, borrower preferences for floating rate debt, any changes you have seen there, and finally to the strength of the overall Blackstone platform itself?

Jade, all of those factors really contribute. The platform gives us great access to everything that is occurring in the market, so we see deal flow not only from our own loan originators but also from all the investors and portfolio companies that are housed in the equity side of the business here. Transaction activity in the market continues to accelerate. We are a direct beneficiary of that transaction activity, so we see the set of opportunities for us continuing to grow. That is what is so exciting about the business now is the opportunity really seems to be expanding as we move along in the cycle.

I wanted to see if you could discuss the AV note financing strategy and how important a part of your business you would expect that to become? Do you think that strategy could provide a potential significant source of capital? What percentage do you think you might look to originate that would be a candidate for financing through and an A note?

When we originate whole loans and look to apply a leverage to those loans, we also evaluate whether or not selling an A note into the market would be a better economic alternative for us. And generally we will pursue the path that we think results in the highest yield on what we retain in BXMT. If we think the A note market is at a lower spread, or more favorable terms than when we borrowed, then we will go to the A note market. Otherwise we will continue to borrow on our credit facilities. We also actively monitor the CLO market which is a third alternative for us to finance the loans that we originate. That market also is rapidly evolving, and we think there is a reasonable chance that we will deploy some of our balance sheet leverage that way as we get into 2014. As we sit today, our best alternatives are our own credit facilities, and also the A note market.

Steve DeLaney, JMP securities.

Steve if you would clarify -- I was multitasking and I apologize I may have not heard your comments clearly -- about the first UK facility. Were you saying to us that you have established your first UK credit facility to help support your lending effort there?

Yes. It is not yet closed, but we have reached agreement with one of our core lenders for a facility that is available to us to make common denominated loans in the UK. We expect that to close in the next 30 or so days in conjunction with the first loan closings that we have in that market.

That was my follow up question -- whether any of the loans included in the $2.2 billion would be based in UK or Europe? It sounds like -- you're saying that is the case.

Yes. We have one UK loan in closing, but the forward pipeline in the UK is very strong. The environment there is a little bit different than the US, it is more opportunistic, there is less liquidity. We are really seeing a very interesting flow of deals in the UK. And our presence in that market is very strong. We have a great team in London and so we really do get to see a good flow of opportunities. I think they will become a larger percentage of our business in 2014 as we go through the year.

Looking at that business, should we assume some incremental higher all-in yield compared to the current -- I think you're LIBOR plus 488 currently, do you see that business as just volume or do you see it enhancing the overall yield of the portfolio?

I would say at this stage, we are seeing the overall net returns in the same range as we are seeing them in the US. In some cases we're able to achieve those returns at a little bit lower loan to value, so reflecting some of the systemic risk that exists in the UK, because things are in earlier stage of recovery, there is also less liquidity. The opportunities we are seeing generate similar yields, but I think the risk profiles of those transactions is very attractive.

Picking up on Dan's question earlier, it is helpful you have given us a run rate indication of $0.44, and for what it is worth, we were modeling $0.45 in the first quarter. I assume that is when you are looking at the $0.44 to really apply, given full deployment of capital. All good there. Just curious if you have run any numbers internally. You do have certain fixed costs, and is it realistic to think, on the next round of capital, that in terms of better cost efficiencies, spreading the cost over a larger base, that there could be a penny or two upside to that run rate moving forward from scale?

Yes, there really should be. Most of our G&A fixed costs truly are fixed and don't move in lock step with our loan portfolio. We will achieve greater efficiency as we grow the business.

Stephen Laws, Deutsche Bank.

A couple of things have already been hit on, but I wanted to talk about return, I know Steve just asked about some European opportunities. So maybe talk about what you're seeing in the US, how are terms on new investments changed today versus even three, four, five months ago? What are you hearing back from your borrowers as you look at pricing and opportunities in the market?

I would say on an overall basis, we haven't seen a fundamental shift in the deals that we are seeing now versus what we saw two, three, four months ago. We are seeing a greater volume of opportunities. I think as we go through this cycle, more of the properties that hadn't been refinanced are now ready for refinancing, or ready to be traded. So the set of opportunities is definitely expanding. I think from a competitive environment, there are people out there that we see on a regular basis as we pursue loans, but our ability to win continues to be very good. I think the prospects continue to be a very favorable and are not really meaningfully changed in the last three or four months.

One follow up, looking at the portfolio table you guys provided in your earnings presentation, Loan 3 and Loan 8, Loan 8 specifically is mentioned as a land loan. But Loan 3 is well short of duration with the maturity date in 2014 and 2015, I think, respectively, but much higher yields on those. Can you talk to those loans or loans similar to those, do you expect to see more loans like that in the portfolio? Is it a specific mix as far as the size? A mix in the portfolio you'd like to see as higher yielding, I assume it's also got higher-risk type land loans? Obviously those will turn over a little faster. Are there any origination fees or early repayment penalties that are associated with those, if those do pay off early, which clearly would result in a lower blended yield on the portfolio? If you could speak to those two loans and similar opportunities like those.

Good question. I think the two loans you referenced really were really special situations for us. The land loan was a particularly high-yielding loan that we were able to acquire. It is on a project in New York that should be -- where construction is expected to start in 2014. It is the site of a multifamily property. From a risk standpoint we are very comfortable with that risk in the fact that the land was permitted and approved and a unique opportunity for us and also very high-yielding relative to its risk. The other loan that you referenced was really one that we were able to capture because we were able to close quickly. We provided a bridge loan to someone who had posted hard money and tried to acquire a property off-market.

I think we will see more of those opportunities going forward. We do have a great ability to make assessments quickly and close in a short period of time. One of the great things about our lending platform versus that of a bank, is we are really able to make those lending decisions quickly and decisively. And it is nice to get paid when you close quickly and execute well, as opposed to having to take additional risk. I do think we will see more of those opportunities. It is hard to forecast what they will be because they tend to come on a one-off of basis. I think we periodically see opportunities to earn extraordinary returns on loans that we are outsourcing.

And do those shorter duration -- or with maturities in 2014 -- do those a carry prepayment penalties with those, as we think about modeling a blended yield on the portfolio going forward? Will there be prepayment penalties associated if they prepay early, causing a lower yield than we expect after the prepayment?

I would say in general most of our -- I will answer the question generally and specifically. In general, most of our loans do have early repayment penalties, so that if they get repaid in the first 12 to 18 months, we receive either an exit fee or some sort of a yield maintenance call protection type additional income component. We also, in that scenario, accelerate the portion of the upfront fee that we haven't already taken into earnings, so it does have a one-time impact in terms of creating more earnings. And it is by design, because -- it is justified for us to get paid more for loans that only sit on our balance sheet for a short period of time.

Congratulations on last quarter.

The all-in yields that you see on the portfolio table, those exclude exit fees in the impact of early repayments, so the yields, the LIBOR plus 488 yields, will be higher if we get repayments early in the term of the loans that we've made.

Ken Bruce, Bank of America Merrill Lynch.

You spoke to this both in your prepared remarks as well as on some of the questions. Obviously momentum in the business is quite good, and you are seeing increasing opportunities both here and abroad. That is all very encouraging. I guess when we think about some of the governors on the business capitals, one of them and we'll come back to that, as you look at your platform, what do you believe is the right flow of -- and you can dimensionalize this any way you want to but -- either in terms of amount of business or number of loans, what do you think the BXMT platform can essentially generate on any given quarter?

On any given quarter I think -- if you look at our last two quarters, we have been at this $700 million pace. I think in any given quarter it can be $1 billion or more. Our goal is to make this platform, this business, very very big. We have a lot of capacity in the platform, and we have a unique advantage competitively that the source loans are able to build a very large company and a very large loan portfolio. I expect that all these numbers, the pace, the size of our portfolio, our quarterly originations, will all grow over time.

Understood. Is there a way to think about what the capacity is today in terms of -- you mentioned you are looking at larger loans where the dollar volume can be a little misleading -- but in terms of what the actual capacity is on the current platform? And then what you would expect to grow it at? And I realize you don't want to get too far in front of providing guidance, but I just want to try to understand how the business can grow over the next year, year and a half, two years, whatever time frame you want to basically dimensionalize that.

I think, again, I think the business can grow from a pace and a momentum standpoint, from what we have established so far. So again, we have been at this $500 million to $1 billion range. I do expect us to trend to the top of that range and ultimately exceed it as we move forward. We are obviously going to need more capital to realize that kind of growth in our portfolio. We are mindful of that and we will look to source additional capital in the next few months.

Thank you. That's a good segue. In terms of the -- capping the capital market, is this something that you would envision as being essentially just-in-time type, from a capital raising standpoint? Or do you envision doing something larger, just as maybe initially out of the box in order to have enough of a war chest to develop the business over a reasonable horizon, how are you thinking about the capital formation in terms of -- sizing, I guess, is maybe one way to frame it?

Again, when I think of our capital raising, I look at in the context of the opportunities that are available to us, which at this point are great. I think we will be restrained in terms of how much capital we raise at any one time. I think programmatically we will be looking to invest over a one- to two-quarter time frame, any capital that we raise in a single offering. We want to continue along the dividend ramp, so we don't want to set ourselves back. I think that is the right amount of capital to raise for our business.

One little clarification, just in terms of the accounting around the $20 million distribution from CT Legacy Partners, is that going to have a [penal] impact or how are we going to see that come through in the quarter?

This is Tony. The fourth quarter will have a little bit of noise in it from the Legacy Portfolio on the accounting side. The $20 million distribution is net, so there will be some items that are netted off of a gross distribution of about $35 million. I think what it's important to be mindful of is that those adjustments will be added back to core earnings, so they won't impact the core earnings of the business, which is our key metric. But you will have some GAAP noise in the fourth quarter because of it.

Thank you. Good quarter, gentlemen.

Joel Houck, Wells Fargo.

On the distribution, just to clarify, will the $20 million, will that be a reduction in the equity value of the Legacy book in the fourth quarter as well?

Yes. It will be a reduction in the equity value of the Legacy book, and it's also therefore an increase in equity value of the loan origination book. But so the way we look at that is that is $20 million that is now liquid capital available for us to invest in our loan origination business, and available to begin contributing to the dividend on a per-share basis.

An so the remaining portion would work the same way over time as you get all of that back as that business is liquidated?

Exactly. I think the one difference is on the [Satapi] promote number, which is not currently in the book value. Rather than being a preservation of book value or a shift, that would represent income which would either increase book value or be distributable.

Switching gears, you talked about the exit fees and prepayment fees, obviously the portfolio is relatively new but we do see full repayment. How should we think about modeling repayment, say, over more broader one, two year time frame or is it still too early to predict that, they'll just come in when they come in?

The repayments are difficult to predict. When the market improves, the duration of our loans tends to be shorter. The call protection that we have in place is a very effective means of discouraging early term repayment. When we model our business, I think we presume that the average life of the loans in the current environment will be two, 2.5 years on average.

Okay, 2.5 year life. Lastly, I wonder if -- obviously the GSEs have reduced the amount of capital they are putting into multi-family, and they haven't announced the 2014 program plan yet, but I'm wondering is that having a positive effect in terms of -- obviously that market's fairly robust as people need somewhere to live. Are you seeing positive effect from that or is it too small to notice?

I do not know if it is from the GSEs retrenchment, but we have seen a very good flow of multifamily loan opportunities in BXMT, I think more than what we originally expected. As you can see, multifamily's become a pretty big component of our business and a relatively high percentage of our asset classes. I do expect to see more of that going forward, in part, because of the retrenchment of Fannie and Freddie.

Do you have any comment specifically on the multifamily pipeline you just mentioned, that it was -- the actual fundings are probably greater than you thought initially. Is that [conferred] in terms of the pipeline you are seeing?

I think it is reflected in the pipeline in our existing loan portfolio. We like the multifamily asset class. It tends to be more stable than the other asset classes. It is performing exceedingly well. We are avoiding situations where we foresee a lot of additions to supply in some markets. Multifamily is one of the few markets where there is new construction. In general, the multifamily deal flow that we're seeing is great and real positive to our loan portfolio.

Thanks for the color and good job on a good start this year.

Rick Shane, JPMorgan.

Actually Joel addressed a great deal of it. Just wanted to dive in a little bit deeper into the portfolio. When we compared the portfolio as of September 30 versus June 30, I think the things we were looking at is the cash coupon trend. It doesn't actually look, frankly, like there was a lot of pricing pressure. If you could comment on that, you guys have discussed the shift, there was a lot of multifamily origination in the quarter, that was the second trend. And then the third trend was that the originations during the quarter seemed to be smaller than most of the portfolio. Is that just a function of the portfolio was a little bit more concentrated prior to, to deploy the capital from the original offering? And should we expect increased granularity going forward?

As it relates to your loan side question, in general we are trying to maintain loans, a minimum low size of $50 million or higher. We go lower in loan size to support client relationships that we carry about. A lot of the smaller loans you will see us make at once with clients that where we want to account for as much of their business as we possibly can. The additional benefit of smaller loans is it does create a little more granularity, and if we think about the CLO market, having those additional data points will be beneficial in achieving better terms as we leverage our portfolio in that way. I would say in general, we look to do larger.

Do you want to comment at all, I didn't see any patterns in terms of coupon. The blended rate came down a little bit just because that 8% loan becomes less meaningful in the portfolio, but it didn't look like there was any real trend, versus the portfolio previously in terms of where coupons were coming in.

I would agree with that assessment. We haven't seen a fundamental change in the risk and return profile of our business. The metrics that we put into place still hold true and that we are able to originate now like we were able to in April and May and achieve the similar target returns. I think it is very encouraging that we haven't seen the impact of competition or spread compression in our business yet.

Steve, do think that is just a function of capital constraint in the industry? Again I would have thought we might have seen of the more pricing pressure but is this just a function of not enough supply of capital to meet the demand?

I think that is part of it. I think we are in a lending segment where there isn't a lot of competition. We're generally not competing with the banks. We are typically a little bit beyond where the banks want to go in terms of loan to value, or we're nonrecourse, where the banks require a guarantee, so we're not seeing a lot of bank competition. There's not very many public companies with the business strategy similar to ours, so I think the competitive landscape is good. As a result, we are not seeing a lot of competition. Also, borrower demand is good as well. Again there is more and more opportunities. With the -- there's a lot of loan maturities coming down the pipe in 2014, 2015 and 2016. There should be even a greater supply of loans. As the yield curve steepens, we think more of those loans will go to the floating rate market. It is pretty encouraging that so many people are borrowing at floating rate, given where fixed rates are now, notwithstanding a little bit higher than they were in the spring. I think all of these factors bode well for the business, and so far that is bearing out.

Don Fandetti, Citigroup.

Steve, two quick questions. One, seems like there's typically heavy seasonality in the lending -- serial lending business as you get towards year end. Is that what you are expecting to see? And then secondarily, your strategy has been to be clean, simple and first mortgages. Would you expect to maintain that strategy or do you have -- or see some sense that you might look at other different areas as some of your peers have?

From the seasonality, I'll take the seasonality question first. Typically the fourth quarter is the busiest quarter for us, for real estate lender. Inevitably there are transactions that need to get done by year end, and we expect to have a busy fourth quarter as it relates to closings and originations. As it relates to where our lending strategy is going to go, I think we evaluate every lending opportunities that we see, and compare it to what we're doing in terms of the first mortgage business. We don't intend to change the first mortgage risk profile of our business. If we can achieve higher returns in loans that maybe aren't first mortgages but have similar risk profiles and similar term profiles, we will consider those very seriously. Right now, we are able to deploy our capital very rapidly in this first mortgage strategy and we are sticking with it.

You will see a little bit -- as we hit the A note market, you will see our financials will begin to look a little bit different, reflecting A note sales versus the leveraging of our portfolio with the repos, but the risk profile of what we retain is similar and it is essentially the same in both circumstances. We are fortunate that we have a lot of good origination opportunities available to us in a lot of different ways, that we can achieve our yield to the financing market, and we will see how it goes going forward. No plans to change the risk profile of what we are doing.

With that, ladies and gentlemen, we would like to thank you so much for your participation in today's broadcast. This does conclude the presentation and you may now disconnect. Have a great day.