Blackstone Mortgage Trust Inc (BXMT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Blackstone Mortgage Trust 2013 quarterly earnings results conference call with Weston Tucker. My name is Norig and I will be your operator today.

At this time, all participants are in a listen-only mode. But later we will conduct the question-and-answer session and instructions will follow at that time. As a reminder today's event is being recorded for replay purposes.

But now, I'd like to hand the call over to Western Tucker. Please proceed.

Good morning and welcome to Blackstone Mortgage Trust fourth quarter 2013 conference call. I'm joined today by Steve Plavin, President and CEO; Mike Nash, Executive Chairman; Paul Quinlan, CFO; 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 4Q results, which hopefully you have all had some time to review.

I'd 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 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 $0.41 per share for the fourth quarter, up from $0.28 in the third quarter, which was our first full quarter of operations since our recapitalization last May. The increase was driven by continued strong growth in our loan origination portfolio.

Last month, we paid a dividend of $0.45 with respect to the fourth quarter.

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

Thanks, Weston, and good morning. The fourth quarter caps an exciting and transformative year for BXMT. It's only been nine months since our relaunch last May. We've established BXMT as a market-leading REIT and a floating-rate senior mortgage origination business.

In our 2013 operations as BXMT, we close $2.5 billion of loans, raised $1.9 billion of bank debt and completed two public market capital raises totalling $831 million.

We've ramped up our earnings, paid our first two dividend and significantly increased our liquidity and scale and now have an equity market cap of over $1.1 billion.

But we are still early in the evolution of BMXT. The market opportunity to grow the business is enormous and we have capacity in our platform to address it. We're seeing increased transactional activity and strong borrower demand for our floating rate financing.

Our loans facilitate our client's ability to acquire or refinance transitional assets that may be a renovation or a few weeks is away from achieving optimal performance and our execution is customized and value add not standardized.

Our deal flow, underwriting asset management and capital raising all greatly benefit from our affiliation with Blackstone, the leading real estate investment platform in the world. The competitive advantage of M&A from this market position run through all aspects of BMXT's business. We focus our origination efforts on larger loans and markets to better match our debt business to the Blackstone real estate equity business and maximize these synergies. Because of the emphasis on larger assets and markets at yearend, 61% of the properties underlying our loans were in New York or California.

We were also building our presence in Europe and seeing an expanding opportunity there. This expansion will be greatly facilitated by Blackstone's strong presence from the region. During the quarter, BXMT closed its first European loan backed by office buildings in London. We also closed our first pound denominated credit facility to fund UK loan original originations and are well advanced on closing additional pound and euro denominated credit.

Borrower response to the way we do business continues to be very positive. 15 of our 32 closed loans to date -- our sponsors that have now borrowed two more times from BXMT. This is the strong endorsement of our efficient and definitive analysis in decision making and reputation for closing is agreed.

In the fourth quarter, we closed 11 new floating rate loans representing aggregate commitments of $975 million. At yearend, we had $2 billion of loans outstanding at an average LTV of 65% with office, multi-family and hospitality being the primary asset classes.

Since quarter end, we have closed an another $286 million of loans and now have an additional $666 million of loans with terms agreed in the underwriting and closing process. And the pipeline for additional lines remain very active.

We continue to expand our credit capacity and closed on two more facilities in the quarter, increasing our total bank credit by $287 million to $1.9 billion. We were working own over $1 billion of additional credits that we expect to close in the coming months We believe the bank credit is market [lead] in terms of both economics and stability, which enables us to generate a higher dividend yield with less volatility.

We also sold senior interest in two of the financings that we originated during the quarter. These sales create additional credit capacities to support our loan origination business. We also received additional capital for our core origination business from successful resolution in the legacy portfolio. These resolutions have occurred more quickly than we anticipated at levels exceeding our initial expectations. They helped support the dividend as we continue to ramp up our activity, which Paul will discuss in a minute in more detail.

We believe our investors appreciate the discipline we've demonstrated in accessing the capital markets and we intend to maintain this, as we grow the business. Ultimately, both our investment program and our capital market strategy are focused on providing our shareholders with an attractive dividend yields that will increase with LIBOR.

We've accomplished a lot in the past nine months but there's much more to come. And with that, I'd like to turn the call over to Paul to review our financial results.

Thank you, Steve, and good morning, everyone. My comments today will largely focus on fourth quarter results and quarter-over-quarter comparisons rather than annual ones, given the May 2013 relaunch of BXMT.

BXMT's financial results in the fourth quarter reflected the continued sharp growth in our loan origination portfolio. Core earnings were $0.41 per share, up 46% versus the third quarter. This was driven by a 37% sequential increase in net interest income to $16 million, as our loan origination portfolio grew by 56%. The nearly $1 billion of fourth quarter originations closed on average about halfway through the quarter, providing additional embedded earnings growth moving into 2014.

A few statistics on the financial drivers behind core earnings. The weighted average portfolio yield was 5.3% over one month LIBOR as of 12/13 and the cost of our credit facilities was 2.6% over one month LIBOR. Our levered ROEs, assuming full leverages at the investment level were 12% and are also I think indexed to LIBOR.

Given our floating rate lending and secured financial model, our net income will increase with a rise in short-term interest rates. At year end, a 100 basis point increase in LIBOR would have created incremental net income of $8 million per year.

In addition to our loan originations program, we continued to drive positive resolutions in the wind down of our CT Legacy portfolio. The CT Legacy portfolio is not included in core earnings, however it does generate taxable income and therefore contributes to dividends, essentially supplementing our yield as core earnings continue to ramp.

Our focus in the legacy portfolio is less on GAAP earnings, which are volatile and more on capital events, which will allow us to effectively shift capital from the legacy portfolio to our core business.

During the quarter, we experienced two such capital events, collecting $28 million of net capital distributions from CT Legacy Partners and a $9 million tax advance distribution from [Setapi]. These proceeds are now available for deployment in our loan origination business.

On a consolidated basis, GAAP net income for the quarter was $0.24 per share. The delta between core earnings and GAAP income was driven primarily by the CT Legacy portfolio, as the $28 million distribution in CD legacy partners triggered $4 million or $0.14 per share of accelerated interest expense and incentive compensation expenses. In large part due to these factors, the excess of our fourth quarter dividend over GAAP earnings led to a modest reduction in book value per share in the quarter to $24.25.

A final item of note on the CT Legacy portfolio. As of yearend, there was $18 million of unearned net revenue associated with [Setapi]-carried interest. This will begin to flow into BXMT earnings and book value once [Setapi] exceeds its promote hurdle on a realized basis, which we believe may commence later this year.

We have been very active in the capital markets with two successful recent offerings. We completed a $173 million convertible notes offering in the fourth quarter that will be accretive to our equity returns and on a converted basis to our book value.

It represented an opportunistic way to expand our investment capacity, given the strength of the convert market relative to the market for our common equity at the time. It will also enable us to keep our leverage ratios at target levels for the overall business, given the working capital we maintain for the loan origination business in addition to asset level financings.

In January, after a positive move in the stock, helped in part by the success of the convertible offering, we completed a highly oversubscribed common stock offering of nearly 10 million shares at a meaningful premium to book value. The offering generated $256 million in net proceeds and will add $0.49 to book value in the first quarter of 2014.

In closing, BXMT strategy yielded strong growth in assets, profits, and dividend in the fourth quarter and we have been active but prudent in raising accretive capital to support this growth. We expect to she is these trends persist in 2013 as the business continues to mature.

And with that, I will ask the operator to open the call to questions.

Thank you. (Operator Instructions) And please stand by for your first question. And we have our first question and it comes rom the line of Don Fandetti from Citi. Please proceed.

Yes, good morning. Steve, two quick questions. One, I was wondering if you could talk about the general spread environment if you're seeing any signs of compression. It's hard to tell just given -- you know there's not a tremendous amount of actual loans being originated here. They are larger obviously. And then secondly, can you talk a little bit about loan two in terms of, you know, how you got that deal and what some of the risks are and the ability to finance that asset given that it looks like it's sort of like a higher yielding B note?

Sure, Don. Let me take -- your first question about spreads. You can see during the quarter, you know we essentially maintained our yields that we've established during the period of operations since we've been originating loans in May and the quarter and it also continued I think increase the pace origination. So we haven't really seen any spread compression in our business. You know, the business has become more competitive, but also -- we're seeing a greater flow of opportunities.

So I think in general, we're seeing more tunes to lend than we see at any point in time since we started the business. They do expect us to maintain our spreads, at least for the time being, given the competitive environment that we see.

As it relates to loan number three. Loan number three was a junior participation that we acquired in the market. We had a unique access to the deal, given our special servicing activities and so we saw an opportunity to make this investment in a way that wasn't wildly marketed or available to others.

The risk profile of this investment is consistent with the risk profile of the first mortgage loans that we're making and that the LTV and basis of the investment is well within the parameters we're running our business.

We didn't finance this asset in a traditional way since it is subordinated. We did sell a senior interest in it, which acted in some regard, as financing for it. But the overall yield of the investment on what we've retained is consistent with the equity returns that we make on our finance first mortgage loans.

We didn't finance this asset in a traditional way since it is subordinated. We did sell a senior interest in it, which acted in some regard, as financing for it. But the overall yield of the investment on what we've retained is consistent with the equity returns that we make on our finance first mortgage loans.

Thank you.

Okay, thank you. And our next question comes from the line of Steven DeLaney from JMP Securities. Please proceed.

Thank you. Good morning, everyone and congratulations on a strong quarter. The first thing I have is really a housekeeping item so I apologize for that. But just looking at your book value per share calculation, we can't get to the [24, 25] using the reported shares outstanding of $28.8 million, which was flat versus September 30. We looked at restricted shares and that was about $101. That didn't get us there. So could you help me just understand we're using the reported common equity of $717.9 million and taking your [24, 25] reported book value. We're just trying to understand the share count. Thank you.

Yes, Steve, I'd point you to page 58 in the 10-K where we have that full reconciliation. There are -- in addition to the numbers you just mentioned --there's restricted class A common stock of 700,000 shares, which were the LTIP shares issued during the fourth quarter.

Okay, great, and that helps me. They were issued in the fourth quarter because I was trying to reconcile from [24, 68] to [24, 25] in your excess of the div over the GAAP. EPS was [21] of that but the share count answering that Paul, so thank you very much.

And lastly more strategic, I mean given the $400 million plus capital that we've seen come in late 4Q and now in January, and the run rate Steve described $280 million closed and another [$600 million], you seem to be on process to stay within that range of $500 million to $1 billion per quarter. Would it be realistic to think that we're looking at a new target portfolio in the neighborhood of $3.5 billion and that we would possibly get there by middle of 2014? Thanks.

Yes, I think the size of the portfolio obviously depend upon continuing the origination pace that we see and also the timing of any repayments that may come in. We don't expect to see a steady flow of repayments until later this year and into next year.

So I do think that your arithmetic is generally accurate and that we do expect to continue to originate in that $500 million to $1 billion dollar pace and that will get us into the mid $3 billion at midyear

And Steve, regarding your comment about prepays, was there something -- you had about $180 million in the fourth quarter. Was that anything unusual about that? You're indicating maybe you wouldn't expect a lot of prepays in the next quarter or two?

I don't think it -- in one case it was expected that we made it one of our loans. We did it -- it was a portfolio loan and the strategy of the borrow was to sell individual buildings from the portfolio over time and repay us steadily over a so that was consistent with the expectation.

We had one other loan where there was also a portfolio loan where there was a property release, which wasn't expected fully. But we did -- and we did ultimately make the loan to the buyer of the assets that were sold out of the portfolio so we were actually able to maintain the collateral in the loan just in the form of a new loan as opposed to the existing loan that we have.

Got it. Okay. Listen, thanks for the comments. Appreciate it.

Okay, thank you. And our next question comes from the made of Jade Rahmani from KBW. Please proceed

Thank you for taking the question. Just a follow-up to Steve's question. With respect to capital issuance and with the stock trading at a healthy premium, Paul said against the equity you just raced and your available capacity. Can you just talk about how you think about potential capital issuance?

Yes, I think that capital issuance will again depend upon market conditions and our pace of origination and any repayments that we receive that we netted from that. And I think we feel like we have appropriate capital to get us into sort of the general middle of the year. It's hard to be more specific than that, given the uncertainties of the origination market.

But you know we have -- capital remains is of course from the capital we raced in the fourth quarter and the first quarter and we have also a lot -- and we also remaining credit capacity. So we're good for now but we will clearly need to access the market at some point during the middle of the year.

Great. I think those comments are helpful. Regarding originations, you know typically some peers of yours have cited some seasonality in the first quarter. Do you think that the pickup that you've cited in activity is strong enough to likely offset that, or do you at this point the timing of loan closings with respect to your pipeline could result in seasonality?

That's a really good question and typically we do see seasonality in the first quarter. You know, it's a combination of I think the holiday season and also some industry conferences that take place in early January. It seems to push the first quarter closes out and we've had a very strong origination quarter in Q1. I think encouraging in that it usually is a slower quarter.

In terms of the timing of closings, I think they will be more than back ended in terms of the quarter than maybe they would be in a typical quarter. But in general, the origination nation activity is very encouraging.

Okay, great. And then the participation interest you sold, which I think shows up in the balance sheet around $90 million. Do you -- is there an effective interest cost that you could disclose?

Jade, it's Doug here. You know, there's a five handle on that participation also that's relative to the all-in yield of over 9% in loan number three that Steve referred to and, you know, the math there gets you to the ROE in line with the ROEs in our business generally for that loan.

Great. Thanks very much.

Thank you. (Operator Instructions) And we do have another question and this comes from the line of [Gabe Kim] from [Whittington Management]. Please proceed

Good morning. Can you just remind me, what is a good rate of prepayment that we should expect or repayment on origination?

I think the ultimate repayments will depend upon, you know, market activity as the call protection of our loans expires over time. So we do produce information regarding the specific maturities and the call protection relates to those maturities. It's typically 18 months to two years from the origination date of the loans. So we don't expect to see significant repayment from the loans -- from its initial generation of loans till the fourth quarter of this year and again the pace will depend upon, you know, market conditions at that time.

Okay. And then once you pass sort of the two years, what's kind of a -- what sort of repayment assumptions are you -- would be sort of normal?

I think a normal repayment assumption would be to assume that the generic loans would repay in sort a two to three-year window, as we have market conditions like those that exist today.

Two to thee-year window. Okay, super. Great job. Thank you.

You're welcome.

Okay. Thank you. And we have another question and it's from [Aaron Bigonovich] from [Esicol]. Please proceed

Thanks. The structured deal that you did from the quarter, do you have a target in the portfolio to offer for those types of mezzanine or B note type of loans in your portfolio as opposed to -- (multiple speakers)

We don't. And you know I think they're -- and that's certainly not the norm. I mean we will certainly remain opportunistic in how we originate and the overriding concern for us is maintaining the risk profile of our investments and what we consider to be traditional senior mortgage risk. We see other opportunities to earn sort of extraordinary rates of interest on things that might not be senior mortgaged but are they risk equivalent, then we'll look to add those to the portfolio. But we would -- I don't expect a lot of that business but certainly nice when we see it.

Okay, thanks. And then the commercial property index has been rising particularly in the major markets to I guess it's around precrisis peak now. What gives you confidence financing properties now that they've kind of gotten back to the peak levels of pricing?

You know, in our underwriting, we are really underwriting what we think is sort of sustainable value and perhaps value at the end of a business plan if the asset's transitional. So as long as we see an environment where those values can be realized, then we're confident in our lending. And remember we're typically lending it 65% to 75% of value. We have a lot of room. We have a lot of equity cushions in our loans for there to be slight deviations of value, either specific to individual properties in the market.

So I think now given where markets are and trends in the market that we see, they're very favorable for our business.

Great, thanks. And then just lastly, just to verify the numbers. You said you had closed $286 million quarter-to-date and what was the amount that was in closing?

The amount in closing is $666 million.

Great. Okay. Thank you very much.

You're welcome.

Okay, thank you and our next question comes from the line of Joel Houck from Wells Fargo. Please proceed.

Good morning. I guess a couple of strategy questions.

One, can you talk about the European strategy that relates to geography and where you see it going and also where I guess potentially how big Europe would get as a size of the total portfolio? And then the second strategy question revolve around the securitization business to some other companies are heavy in this business. I'm just curious what your thoughts and how that would fit into the BXMT profile if at all?

Sure. We're going to take your first question first. As it relates to Europe, you know, certainly a more opportunistic environment there as the markets are earlier stage of recovery. Our initial focus has been in the UK and I think more specifically London. Our office is based there. We're seeing a particularly good deal flow from London. It's an area of focus for the equity side of Blackstone's real estate business as well so it is very synergistic.

The initial credit facility that we established to address that opportunity is pound based so that initially limit us UK although we're very far advanced in additional pound and euro denominated credit.

I think initially we'll -- the activity is going to be in London and in the UK but over time I have see us branching out to the rest of Europe. And I think from a percentage of our portfolio standpoint, I think it could grow to be, you know, anywhere from 15% to 30% of our portfolio, depending about how things unfold there and here.

As it relates to the conduit securitization situation, we have no plans to initiate conduit activities. They are not particularly well suited to a REIT. I mean you have to do them in a taxable affiliate and right now we're remaining singularly focused on our floating rate senior mortgage strategy, which is a balance sheet strategy and not a gain on sale business.

All right, great, thank you very much. Appreciate the answers.

Sure.

Okay, thank you. And now, ladies and gentlemen, I'd like to hand back to Weston Tucker for closing remarks.

Great, thanks everybody for joining the call this morning and again if you have any questions, please let us know after the call.

Thank you, ladies and gentlemen that conclude the conference call for today. Thank you for joining us. You may now all disconnect. Thank you.