Blackstone Mortgage Trust Inc (BXMT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Blackstone Mortgage Trust first quarter 2014 earnings conference call.

At this time, I would like to turn the call over to Mr. Weston Tucker, head of Investor Relations. Please proceed.

Great. Thanks, Derek.

Good morning. And welcome to Blackstone Mortgage Trust's first quarter 2014 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 a presentation of our results, which hopefully you've 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 Factors section of our Form 10-Q.

We not undertake any duty to update forward-looking statements. We will refer to non-GAAP measures on this call. For reconciliations to GAAP, you should refer to the press release and to our Form 10-Q filing.

This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without consent.

A quick recap of our results, before I turn things over to Steve -- we reported core earnings per share of $0.43 for the first quarter, which is up from $0.41 in the fourth quarter, with continued strong growth in our loan origination portfolio, partly offset by the additional shares outstanding from our January equity offering. A few weeks ago, we paid a dividend of $0.48 per share with respect to the first quarter.

If you have any additional questions following today's call, you can reach out to me or Doug directly.

With that, I'll now turn the call over to Steve.

Thank you, Weston. Good morning, everyone.

We've had a terrific start to the year. Since our re-launch last May and the commencement of our origination business, we've maintained a strong pace of loan growth which continued into the first quarter. We closed 10 floating rate senior loans in the quarter, representing total commitments of $892 million. Since quarter end, we've closed another $161 million of loans and have an additional $662 million with agreed terms in the underwriting and closing process. This brings our cumulative total to $4.2 billion, including the loans and closing.

As to the origination environment looking forward -- in the US, there continues to be a high level of commercial real estate-related transaction activity, the ideal market backdrop for our business, as this activity drives borrower demand for our financings.

In Europe, the environment remains opportunistic, yet market activity's increasing, an excellent combination for our origination efforts. Transaction volume is particularly strong in the major markets that we target. In these markets, we are best able to assert the competitive advantages of our Blackstone affiliation. Blackstone Managed Funds own $130 billion of real estate and related operating company platforms and continue to pursue large-scale new acquisitions.

We have loan originators alongside our real estate equity investors in New York, Los Angeles and London, and our best origination opportunities always seem to emanate from these markets. At quarter end, 65% of the properties securing our loans were located in New York, California and the UK. Our market position is very strong, but we do see heightened competition in certain segments of the market, most notably from the reemergence of multi-borrower floating rate CMBS. The impact of this new competition is limited, however, as the CMBS originators are narrowly focused on stabilized properties undergoing little to no transition, which represents a small component of our business.

A big benefit for our origination efforts is our superior ability to source and evaluate properties that are intended to be improved through renovation, additional leasing or other repositioning, and to cut some [craft to] loan with a significant equity cushion to match a sponsor's asset plan.

These loans are best suited for our client base and typically do not work in either CMBS or the bank market. Our approach and reputation for closings agreed have positioned us favorably with our clients. 20 of our 38 loans closed to date are with sponsors that have borrowed two or more times from BXMT.

Even with this substantial growth, our loan portfolio remains secured by a high-quality mix of primarily office, multifamily and hotel assets in strong markets with top sponsors in the US and Europe. The overriding mandate for us is to maintain the risk profile of our investments within what we consider to be traditional senior mortgage risk, as evidenced by a portfolio-wide LTV of 63% as of quarter end.

To fund the growth in our loan portfolio, we continue to expand our debt capitalization. We've closed two new credit facilities in the in the quarter, and our total debt capacity exceeds $2.7 billion as of quarter end.

One of these new facilities is a GBP250 million multi-currency revolver which will support greater levels of activity in Europe. We're working on additional dollar-, euro- and pound-denominated credits.

We believe that our liability structure and economics remain market-leading and are key competitive advantages in generating sustainable core earnings and dividend growth. Our active management of the debt capitalization of our business ensures that we are always addressing the competitive environment from a funding cost standpoint as well.

We expect to reduce our incremental cost of borrowing in order to position us to more aggressively compete while maintaining our net spreads. We also continually annualize the floating rate, CLO and term loan markets in order to be best positioned to tap them when they can deliver even more efficient financing for our balance sheet assets.

Our shareholders have responded favorably to our disciplined growth strategy. We've executed two well-received accretive equity offerings so far this year, generating over $500 million of net proceeds to support further growth in our loan origination business, while increasing book value. Our increased size creates greater liquidity for shareholders, economies of scale with our customer structure, and a stronger and more diversified balance sheet and loan portfolio.

As we approach the first anniversary of our re-launch, I'm pleased with our accomplishments to date but remain focused on the road ahead. We are committed to our strategy of creating shareholder value by originating senior mortgage loans and producing a low-volatility dividend as essentially indexed to LIBOR.

With that, I'll turn the call over to Paul to review our financial results.

Thank you, Steve, and good morning, everyone.

BXMT first quarter results reflected strong growth in our loan portfolio, as all key financial metrics were up more than 30% on an absolute basis versus the fourth quarter. Our loan portfolio grew to $2.7 billion as of quarter end, up 33%.

The weighted average yield on our senior loan portfolio is LIBOR plus 4.8%, and weighted average cost of debt is LIBOR plus 2.4%. These levels are consistent with those we achieved in the fourth quarter, notwithstanding the growth in the portfolio. As a result, net interest margin in our loan origination segment is up 32%.

Q1 core earnings was $16 million, up 36%. And our book value was nearly $1 billion at the end of Q1, a 35% increase. The growth in our loan portfolio drove the increase in earnings as base interest rates remained flat in the period. BXMT earnings would benefit from increasing rates. A 100-basis point increase in LIBOR at quarter end would result in an annual earnings increase of $9.6 million, or $0.25 per share, including the impact of LIBOR floors currently in place.

BXMT's first quarter per-share metrics were also up from the previous quarter, despite the impact of January's equity raise. Core earnings per share was $0.43, up from $0.41. And book value per share was $24.63, up from $24.25. Despite strong demand, we sized our January offering with an eye towards maintaining the upward-sloping trend in core earnings, reinforcing our disciplined approach to raising capital.

We took the same disciplined approach to our recent $255 million equity raise in April. This offering added $0.58 to book value per share, resulting in a pro forma book value of $25.21 post offering.

Our activity in the equity capital markets reflects the confidence and the strength of our loan origination platform that Steve spoke about. The capital we raised gave BXMT the liquidity necessary to move quickly when providing funding to sponsors, with certainly and in scale. From a financial standpoint, these offerings have a temporary dilutive impact on results in the period capital is raised, specifically constraining core earnings per share. We experienced this impact in Q1 due to the January offering and expect a similar impact in the second quarter related to the April offering.

The increased equity has a temporary deleveraging impact on our balance sheet, as we revolve down debt to manage liquidity pending the deployment of the new capital. Our debt-to-equity ratio at quarter end was 1.8 times, despite our target leverage at the asset level of between 3 and 4 times.

We think as our business continues to mature we will stabilize at higher leverage ratios. We are taking active steps to maximize the efficiency of our capital-raising activity. During the first quarter, we implemented our DRIP and DSP programs to raise small amounts of equity capital in the future via dividend reinvestment and direct stock purchases. And we will continue to consider options in the credit markets to achieve higher leverage at the corporate level.

Finally, as BXMT grows, the impact of episodic capital raises will diminish, as working capital needs will remain relatively constant in absolute terms against a larger equity base.

We paid a dividend of $0.48 in Q1, up from $0.45 in Q4, representing a 7.8% yield on book value. As we think about the sizing of the dividend, we do so with reference to core earnings as well as other factors, including the stabilized earnings of BXMT's core loan origination business and the impact of the legacy segment. It is interesting to note that our Q1 core earnings over our pre-January offering share count would've been $0.55 per share.

In terms of the legacy segment, we expect a positive contribution during 2014, despite a $1 million loss in the quarter driven by net markdowns and our CT legacy portfolio investments. The anticipated legacy contribution is driven by CTOPI promote revenue that we expect to begin to realize in the second half of the year. The net value of the CTOPI promote stood at $18.5 million on an unrealized basis at quarter end.

In closing -- our financial performance to kick off 2014 reflects the Blackstone Mortgage Trust business plan to support senior floating rate loan originations with superior execution in the credit and capital markets.

With that, I will ask Derek to open the call to questions.

(Operator Instructions) Steve DeLaney, JMP Securities.

Steven, you commented on the floating rate CMBS market as a source of competition or an increase -- new source of competition. Are you guys getting any closer to looking at that market as a potential source of financing for yourself? I know in the past you've said that your bank term facilities are so attractive that you really weren't in a hurry to do that. I was just curious how you see that market today.

Hi, Steve, it's Doug here.

CLO financing is an interesting option. I would say I think you hit the nail on the head. We have ample leverage capacity with our credit facilities now, and they provide some distinct advantages for us, particularly in terms of our ability to revolve debt balances down and price our borrowings efficiently. And those are very important in our current stage of growth. But as we continue to grow, we will look to supplement those credit facilities from other sources, including A note sales and, indeed, CLO financing.

During 2013, that market wasn't very attractive to us, particularly in terms of structure and pricing. But in recent weeks, that's begun to change. We've seen some interesting executions in the second quarter. And as Steve mentioned, I think we're very well positioned to push the envelope in that market when the time is right.

Okay. Appreciate that. Yes, we saw two smaller deals this week from two of the commercial mortgage REITs.

Yes.

On the deferred carried interest and CTOPI -- keeps moving up a little bit. And I think I calculated it was like $0.38. We've been adjusting that into book value and looking at it as money good. Is there any event pending that would allow you -- so what is the trigger or flashpoint at which time you would consider recognizing that in your book value?

We'll recognize it in the book value when the cash is actually distributed.

Okay.

And there are capital events that will occur in the fund in the second half of this year which we believe will sort of trigger the initiation of those cash distributions. And so we continue to feel good about the performance of the investments in the vehicle and that timing.

Great. So not too far down the road, we should -- that item won't have to be a carried-over kind of adjustment that we might want to make to get to a more economic measure of book. Great.

Thanks for the color.

You're welcome.

Arren Cyganovich, Evercore.

Thanks.

Just on competition -- there was an article in the Journal this morning kind of highlighting the benefits of the nonbank lenders in your space. But there was some discussion about some -- and at least one insurance company looking to increase exposure into transitional assets. What are you seeing more in terms of competition in your niche of commercial real estate?

Yes, I saw the article as well. And I haven't really seen any insurance companies able to compete in this space. They generally don't have the ability to execute, or the risk appetite. So I don't think they'll be a factor.

I do think that our primary competitors are the ones that were noted in the articles, the other mortgage REITs, and the private lenders. We're still able to compete very favorably versus those competitors, given what we believe is lowest cost of capital in the business.

And then, in regards to the competition broadly, what are you seeing in terms of impacts of spreads lately, pricing? It looks like LTVs are still holding pretty firm, in the kind of 65%-ish level.

Yes. I think the pressure we're seeing is really related to -- as I mentioned in my remarks -- to the assets that are more stabilized, the ones that are suitable for the CMBS market.

The floating rate CMBS market for multiple-borrower deals have been relatively dormant since 2007. And now we're seeing the banks begin to aggregate large floating rate loans to securitization. It only impacts a small segment of our business. Because those loans typically need to be on stabilized properties that don't have any significant leasing or renovation plans in the foreseeable future.

In that small segment of our properties and assets, we are seeing that competition. But in general, competitive landscape remains pretty favorable for us.

Great.

Then, lastly -- I'm sorry I missed the quarter-to-date activity that you mentioned. Could you repeat that for me?

We've closed $161 million of loans. We have an additional $662 million of loans with agreed terms that are in the closing process.

Thanks a lot.

You're welcome.

Stephen Laws, Deutsche Bank.

You mentioned in your prepared remarks that you expect similar sequential -- or similar performance in the second quarter as the first, given the timing of the January and April, of offerings. Should we look at that, that given deployment pace, you guys are comfortable with a slight sequential increase in core EPS? Is that how we should read your comments?

Yes. I mean, we don't give guidance, so I wouldn't be comfortable answering that directly. But I think the broader comment that we were making was we will experience an impact to our core EPS in the second quarter, obviously from our April capital raise. So we're mindful that it does -- there is a lag between when we raise capital and we're able to deploy it at our optimal sort of returns on investment.

Great.

And moving over to maybe opportunities in Europe -- can you update us on the status? You added a pounds Sterling-denominated facility, a very expanded one. Can you maybe talk about opportunities, or where you are in the process of that, in a euro-denominated financing facility to open up maybe other regions in Europe to source investments?

Sure. Our initial efforts in Europe have been focused more narrowly on London and the UK. But we are beginning to see opportunities throughout Europe, especially since we have a strong equity team based in London that's active throughout Europe. So we're seeing a lot of interesting opportunities.

We're able to convert one of our -- a pound-denominated facility that we had to be able to fund euro as well. And we do expect to have plenty of credit capacity for our European business as we go forward.

From an origination standpoint, we're seeing an increasing flow from our team in London. We have a seven-person investment team in London. We have of experience in the market, and we have a good footprint there. So it will become an increasingly large percentage of our businesses as we go forward. Pipeline's pretty good today. And I think you'll see more as we move through the year.

Great. And you guys feel comfortable to have the credit capacity or ability to expand that as you continue to grow in Europe?

Yes. We have a lot of activity and interest in expanding our credit capacity in Europe.

Great.

And then, I guess, one follow-up question on Europe, and I'll drop off. But can you maybe talk about the difference or similarities on the return of investments there versus in the US, and then on the competitive environment in Europe versus in the US?

Thanks for taking my questions.

The return profile of the investments has been relatively similar. We've only closed our first few loans. But the pipeline, I would say, is similar to that in the US; tends to be more transitional assets.

We are looking at a couple of larger deals that are less transitional and more opportunistic from our standpoint. The environment overall is less efficient. So we're able to find more things off the run, as less competition [is] more fragmented. There isn't as much transaction activity there as there is here, so we don't see much regular [weigh] activity. But we're seeing plenty of opportunities to invest. And we do expect -- again, our percentage of assets -- Europe will grow through the year.

Don Fandetti, Citigroup.

Steve, you talked about the CLO market. Clearly, it's advantageous in terms of reducing financing risk. But it makes me wonder, could this increase competition from specialty lenders? If you think about the pre-crisis, the bar was not that high for issuers of CLOs who could definitely [get] more companies like yourselves.

And then, secondarily, it seems like the Blackstone effect has given you access to slightly lower cost of debt financing versus some of your peers. And does that get neutralized from CLOs? Or do you expect some type of premium for a Blackstone CLO?

I think -- that's a great question, Don. I do think that we'll be able to maintain our reputational advantage, our economic advantage, when we tap that market relative to our competitors.

The challenge is in differentiating ourselves in the rating process. But in the actual marketing and pricing process, we will able to assert a competitive advantage. The investors will, I think, look more favorably on our sponsorship in a CLO than others.

We also have -- given the scale of our business, we produce more collateral. So we should be able to produce better transactions, greater diversity, which should price better than what our competitors should be able to put together in their efforts.

And do you think that --

Don, I might just add to that. I think from our point of view, CLOs will be one arrow in the quiver. I think some of the new entrants that you're talking about, or potential CLO issuers in the mold from the previous cycle, would be reliant on the CLO market exclusively. And so they wouldn't be able to ultimately use it as efficiently as we'll be able to in combination with our other funding sources.

One last thing, Don, that I would add, is -- in the last cycle, most of the deals that were in the CLO market were sort of backed with purchased originations. So interest and loans were bought from the street and then packaged and securitized by the street. It'll be very difficult for anyone who's not in the business with a meaningful footprint to develop an origination business to try and feed a CLO business to tap into whatever the securitization market opportunity might create. So I think the dynamics are different this time than in the last cycle.

Got it. Thanks.

Jade Rahmani, KBW.

Your presentation noted approximately 90% of the portfolio is first mortgages. Do you expect to increase the allocation to B notes and/or mezzanine loans? And within the subordinate mortgage space, do you have particular views on which structures are preferable? For example, just wondering if you can give a sense of whether you prefer an AB note structure to mezzanine, and if you prefer mezzanine to subordinate mortgage debt.

Also want to get a sense of what you might do to maintain or increase returns, should yields on transitional first mortgages compress.

I think the first part of your question relating to subordinate interest and loans -- I think that even in the assets where we have -- where we end up with a mezzanine loan or a B note position, we're still essentially originating traditional whole owner senior mortgage risk. And rather than financing the senior portion of the loan, it gets sold into the market.

So when we sell an A note, or a senior mortgage component of a financing, we'll do that if we think that it's a superior execution of what we're able to do with our credit facility borrowings. So it relates more to balance sheet management than maximizing the return on our retained equity in any one investment.

And it is not our intension to initiate any kind of a direct mezzanine loan strategy to augment our yields. That's not our business. Our business is the senior mortgage origination business.

As it relates to structure -- it varies a lot from jurisdiction to jurisdiction. In markets where it's difficult to foreclose a mortgage, like New York; or where markets with us have mortgage recording tax, also like New York and Florida; then it may be more beneficial for us to retain a junior interest as a mezzanine loan rather than as a B note and a mortgage. In markets where you can foreclose more easily, the difference is less significant.

And so, it also varies in terms of, when we originate loans, whether we have the ability to originate the loans and split them into two loans or just maintain a single loan. So a lot of it is sort of situation-specific. But for us, it's all around optimizing our equity and our equity returns in terms of what we retain and how we create a senior interest to seller to finance.

And with respect to the portfolio concentration or portfolio mix, do you expect that to migrate more toward AB note financings, or mez subordinate interest?

I think that it'll depend upon how the A note market looks compared to our credit facility options and potentially CLO and term loan options down the road. So when we originate a whole loan, we have -- Doug mentioned the multiple arrows in the quiver in terms of how we finance something -- we have a lot of alternatives in terms of how we look at an asset and how we derive our returns.

So we really individually capitalize every loan that we originate to try and minimize its risk and maximize its return. So those factors and dynamics change, and change over time.

We're very comfortable retaining our risk position in a whole loan or in a B note participation, or in a mezzanine loan, that we can structure our loans to preserve all the control that we need, to the extent that something ever goes awry.

But in general for us today, it's really more a strategy around maximizing our returns based upon the most efficient means of financing our originated loans.

Thanks.

And a follow-up on the CLO question -- beyond pricing and leverage securitization, what do you see as the major drawbacks to issuing a CLO, or even a CMBS structure?

I think what's important for us is that we're able to maintain the leverage in a CLO structure, so that it's accretive financing over a good period of time. So the sequential pay structures are problematic in terms of maintaining our ROI to support our dividend.

And another issue is that when you do go out three, four, five years, you're taking some pricing risk. And the flexibility that we have on our credit facilities to adjust pricing to move with the market is an important advantage for us that we wouldn't see in a CLO market.

And regarding the sequential pay structures, can you just elaborate a bit on the deleveraging effect? I mean, is it that -- as retaining subordinate interest, you wouldn't be receiving principal pay-downs [parry pursue]. So you wouldn't be able to reinvest those proceeds in timing with the cash flows. And that's what makes the dividend support difficult. Is that correct?

I think that's essentially correct.

Great. Thanks for taking the questions.

Dan Altscher, FBR.

I wanted to maybe ask a little bit of a different question. CQ legacy has also been a declining [part] of the portfolio and a [time] part of the story, which I think is probably good overall. But it seems to me you guys have been pretty successful at managing the portfolio down, and fundamentals have been good there. Is there any opportunity now to find some sort of off-market or disposal transaction, to just get it, make it a clean break at this point, and just be done with it?

I think in general, we're managing especially the [CP] opportunity partners of vehicle. I don't know -- it's not necessarily to accelerate the end. But the end is in sight, and we're looking at selling assets in some cases in advance of how they might repay in ordinary course.

I think we're motivated, if all else is equal, to try and accelerate the movement of cash from the legacy portfolio into the origination business. But in the ordinary course, we're going to make a lot of progress toward that end in 2014. So I think by the time we roll into next year, it's going to be a very, very small component of the overall picture.

Okay.

And it feels like to me that you're pretty close towards maybe achieving your targeted dividend yield on book value targets. Yet you seem to be doing it still at a very under-levered balance sheet basis. How do you feel about that? Do you think that's true? Or do you think there's still a substantial way that you need to go in terms of levering the balance sheet before hitting the target?

I would say we don't have necessarily a target leverage level for the balance sheet as a corporate finance matter. We do have the target leverage level of three to four times at the asset level. But that will roll up to the balance sheet differently depending on the structure of the investments and the structure of the financing of those investments.

So as you point out, I think we've done a good job of ramping earnings and the dividend. And I think we'll continue to manage the debt capitalization of the Company as efficiently as possible to support that dividend.

Okay. I guess my comment was it feels like you can start to reach the ramped up dividend level without the need of substantially more leverage. Does that sound about right?

I think that's correct, sort of given the current status of the portfolio. But that will change over time as we continue to structure investments and add exposure to the balance sheet. So it will move around. I think the right metric ultimately to look at is our core earnings per share and our dividend per share.

Okay.

And then, just one final one -- this is, I think, also a very different correction type of question here. But clearly, the balance sheet ramping up in size, the equity base probably starts to ramp up again continually through this year and next year. What point does perhaps moving to an internalized structure make more sense, or is there more scale or efficiency there? Is that just maybe too hard to potentially do with the way the relationship works with Blackstone, big parent Blackstone?

We have no plans to internalize management. And one of the great benefits of being part of the Blackstone platform is sitting alongside the other Blackstone professionals who are managing other investment vehicles.

So we invest this business off of a common platform, which we would lose if we were internalized. We would become more siloed. And the information sharing, and the advantages of being part of this common investment platform, are one of the great things about the Company.

Great. Thank you.

That will conclude our Q&A session.

We will now turn the call back over to Mr. Weston Tucker for any closing remarks.

Great.

Thanks, everybody, for joining us. And again, if you have any questions, please follow up with me directly.