Blackstone Mortgage Trust Inc (BXMT) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust third quarter 2014 investor call. My name is Derek and I'll be your operator for today. (Operator Instructions) I would now like to turn the conference over to Mr. Weston Tucker, Head of Investor Relations. Please proceed.

Great. Thanks, Derek. Good morning and welcome to Blackstone Mortgage Trust's third 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 factor section of our Form 10-K. 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 filing, each of which have been posted on our website and have been filed with the SEC. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without consent.

So a quick recap of our results before I turn things over to Steve. We reported core earnings per share of $0.50 for the third quarter, which was up 16% versus the second quarter, due to greater net interest income from continued strong growth in our loan origination portfolio.

A few weeks ago, we paid a dividend, also $0.50 per share, with respect to the third quarter. If you have any additional questions following today's call, you can reach out to me or Doug directly. And with that, I will turn things over to Steve.

Thanks, Weston, and good morning, everyone. In the third quarter, we achieved an important milestone in the continued ramp up of BXMT. As Weston indicated, core earnings per share increased to $0.50 and fully covered our third quarter dividend. The drivers for this significant performance benchmark in the evolution of BXMT, strong loan origination activity, disciplined capital raising, and efficient credit, were all evident in the third quarter.

During the third quarter, we closed eight loans representing total commitments of $656 million, and subsequent to quarter end, we have an additional $1 billion of loan related activity, $145 million of loans have closed, and another $865 million are in the closing process, our biggest forward closing pipeline since the restart of our business last year.

Including our loans in closing, we have now exceeded $6 billion of gross originations as BXMT. We are still seeing high levels of borrowed demand for our senior mortgage loans. Our increased capital base and expanded footprint facilitate the origination of larger loans in the US and in Europe. The bigger loans are secured by larger individual properties and portfolios, incorporating better institutional quality sponsorship and real estate that is more synergistic with properties that Blackstone acquires in its equity real estate business.

The $1 billion of loans closed or in closing post-quarter end comprised a $168 million average size versus the $86 million average of our existing portfolio. There is less competition for the larger loans that we target, as many of the competing platforms don't have the requisite scale or the financing capacity that we have developed. While we have significantly grown our loan portfolio, we have remained true to our portfolio strategy of maintaining floating rate senior manager equivalent risk. Our average LTV at the end of the quarter was 64%, in line with prior quarters.

The portfolio overall is diversified across collateral types, including office, hotel, and multi-family rental and condominium loans, and remains concentrated in major markets, New York, California, and the UK.

In Europe, we continue to expand our origination footprint given the favorable market dynamics and credit conditions that exist there, as well as Blackstone's strong presence and track record in the region in equity real estate. In terms of the competitive environment, we're seeing high levels of competition in certain segments of our market, primarily for loans of more stable properties that can be executed in the bank or CMBS markets. However, market conditions remain favorable for the transitional assets that we target, especially for loans in excess of $150 million or that require quick and definitive execution.

Also, our deep financing capacity and superior term bolster our ability to effectively compete. We've seen only a modest amount of pressure on our assets yields over time, which combined with our ability to actively manage our liability costs and structure has resulted in the stable asset level ROI. To support our growing origination activity, we've further expanded our financing capacity. Subsequent to quarter end, we upsized one of our credit facilities by $500 million, which brought out total financing capacity to $4.3 billion. We are working on developing additional dollar, pound, and euro denominated credit while maintaining our market leading cost of capital and liability structure.

In September, we completed our third accretive follow-on common equity issuance since our re-IPO, generating net proceeds of $253 million. The timing was important as our forward pipeline was continuing to build. We used the proceeds to pay down revolving debt so we deployed the capital in new loans. Our capital structure efficiency is key to the core earnings and dividends that we produce, and exemplifies our disciplined approach to the business.

We evaluate all available capital markets options to fund our growth, with the goal of maximizing shareholder value. We've already seen the benefits of our increased equity base, the ability to execute larger loans, finance our assets more efficiently, grow book value, and provide greater liquidity and stability for our shareholders.

BXMT is unique in its pure focus on directly originated senior mortgage risk, 100% of floating rate asset base, and affiliation with Blackstone, the most active real estate investor in the world. We ramped this business while remaining highly disciplined in our credit culture and capital raising. Our success emanates from the great work of the BXMT team, commitment by Blackstone to the Company, which has become a leader in the commercial real estate manager market.

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

Thank you, Steve, and good morning, everyone. BXMT's third quarter financial results reflected the continued profitable scaling of our loan origination business. Core earnings were $25 million or $0.50 per share, up 21% overall and 16% on a per share basis versus the second quarter, driven by net interest income of $30 million.

Since day one, we've remained laser focused on delivering compelling risk adjusted returns to shareholders and generating strong core earnings to support an attractive, growing dividend is among our highest priorities.

Steve commented already on the growing power of our origination platform. To provide some context, in the first nine months of the year, we have nearly doubled our loan portfolio, climbing to $3.9 billion, which drove a commensurate rise in net interest income. During the quarter, the loan portfolio grew 12% as $557 million of loan fundings, including $68 million from previously originated commitments, outpaced $109 million of repayments.

Moving to the right hand side of the balance sheet, most of the quarterly activity relates to the revolving repurchase facilities we use as the mainstay of our financing structure and operating liquidity. Relative to the growth in our loan portfolio, borrowings under these facilities increased by only $146 million, as we used the proceeds from our late September equity offering to revolve down debt. This resulted in a temporal debt to equity ratio of 1.7 times on September 30, down slightly from 1.9 times on June 30. Absent the impact of our offering, leverage would have been approximately half a turn higher. Importantly, these undrawn credit facilities give us significant potential loan origination capacity moving into an active fourth quarter, $1.9 billion of dry powder at quarter end.

Despite our rapid growth and an evolving market landscape, we have maintained the net ROIs that drive net interest income. At quarter end, our loan portfolio had a weighted average all in yield of LIBOR plus 4.97%. While this represents a slight decrease from 5.02% in the second quarter, we have also driven down the weighted average cost of our secured credit facilities, the LIBOR plus 2.14%, and increased asset level leverage to maintain a stable gross ROI.

On the expense front, management and incentive fees were $5.4 million for the quarter, up from $4.4 million, resulting from an incentive fee earned by Blackstone under our management agreement. Blackstone earns a 20% incentive fee on core earnings above a 7% yield with no catch-up. This fee structure provides further alignment with shareholders and reinforces our focus on maximizing core earnings per share while prudently growing the business over time. Other G&A was roughly flat at $1.1 million in the quarter.

Effectively, 100% of BXMT's net income was driven by the loan origination segment and 98% of our equity is dedicated to this core operation. In our CT legacy segment, a loan repayment led to a $7 million net distribution to BXMT, which we have redeployed into the loan origination business. At quarter end, BXMT's share of unrealized net CTOPI promote increased to $8 million. We expect a portion of this promote to be realized in the fourth quarter and the balance to be realized by the end of 2016.

Our book value per share at quarter end was $25.57, up from $25.51, as accretion from our September offering was partially offset by unrealized losses on the remeasurement of pound and euro denominated assets net of gains on currency-matched liabilities. These unrealized losses or gains, as was the case in the second quarter, flow through OCI and do not impact GAAP net income or core earnings.

Our quarterly dividend of $0.50 represented a 7.8% annualized yield on book value, a return that we generated with virtually no contribution from LIBOR. As we have said in the past, our dividend is indexed to one month LIBOR and we expect it will increase in lockstep with the rise in short-term interest rates. This bears repeating as the broader market still, from time to time, associates the potential negative impact of higher rates on the REIT market with BXMT's stock. This seems to have been the case recently. However, we think investors should anticipate greater earnings and dividends from BXMT with any future increases in LIBOR.

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

(Operator Instructions) Your first question will be from the line of Rick Shane, JPMorgan.

Thanks, guys and good morning. You provided good color into your pipeline for the fourth quarter and as the portfolio starts to mature a little bit in terms of originations of the de novo vehicle. One of the things we'll expect is repayments to start to pick up. Can you provide a little bit of outlook, what you're anticipating in the fourth quarter and sort of when we should start to see some of the originations that you guys started with last year really start to run through? I assume that's a two to three year process.

Yes, hey Rick. This is Steve. The -- our portfolio, the first ones we originated are still only about 18 months old. And typically, we get call portion in our loans sort of one to two years out. So we'll begin to see increasing repayments as we roll into 2015. They'll start -- we'll have some in the fourth quarter. We had about $100 million in the third quarter. They will become an increasing component of our quarterly results and will be a source of funding our new loan portfolio.

We don't get a lot of forward color in terms of those repayments. We're anticipating what we think we'll receive based upon our portfolio management dialogue with our sponsors. But typically, the notice provisions on those are only about 30 days out. So it's very hard to sort of accurately predict them in a specific timeframe. But I think we still see sort of a favorable picture for repayments for the next couple of quarters until our initial loans are a little bit more seasoned.

Steve, one follow-up to that. Historically, there's a lot of seasonality pickup in business into the fourth quarter. We're certainly seeing that in terms of the pipeline you guys are describing right now. Could we see a little bit of surge of repayments into the fourth quarter this year?

It's possible. It's certainly possible. It is a time where people tend to refinance and lenders are most aggressive. We do expect an increase, again, we expect an increasing pace of repayments, but I don't think it's something that we're overly concerned about yet at this stage. We do -- the origination business is seasonal and the fourth quarter typically is a big quarter for us. As we've increased our loan size, the closing timeframe of any one loan has a greater influence than it did when the average loan size was much smaller in 2013.

So our originations will get, I think, lumpier as we go forward depending upon the timing of any one or two closings. But we're seeing a very good base for originations, especially on the larger loans we're targeting.

Got it. Great. Thank you very much.

Your next question will be from the line of Steve DeLaney, JMP Securities.

Good morning, everyone. Thanks for taking my question. Steve, you commented on the shift to the larger loan size. We noted the -- while it was a good quarter certainly earnings wise, the originations of $650 million, that was the smallest amount that you -- quarterly amount that you've booked in closing since your recap. And I was just curious, is -- does that reflect in part this transition to focus on maybe a different segment of the market, these larger loans? Or should we just view that as a combination of seasonality and maybe the lumpiness coming from the larger loans? Thanks.

I think, Steve, it's really more a combination of the larger loans and the lumpiness. When you think about an average loan size of $168 million, which is sort of reflective of our closing pipeline now, the movement of one or two loans from quarter-to-quarter has a very large impact on our closings in a given quarter. So the third quarter typically is a slower quarter for originations, but we were very active during the quarter. We just had a couple of deals we thought would close in Q3 roll into Q4, and the larger loans do sometimes take longer to close. So sometimes, they have a longer lead-time than the smaller deals.

Right. Okay, that's great. It's just a question, I guess, Steve, some people may have noticed and I did, sometimes you can be a victim of your own prior success, right. And but we totally get that it's going to be lumpy quarter-to-quarter. We'll try not to focus too much on the quarter-to-quarter shifts like this.

I guess more importantly and strategically, and Paul again reiterated this, the sensitivity of your earnings to the positive sensitivity to rising LIBOR rates. I'm just curious as, because as this year as you've scaled up, not as a function of rising LIBOR, but just more operating efficiency, funding efficiency, you've steadily kind of increased core EPS. And following that, you've stair stepped your dividend. I think you've had two increases this year. So as we look out the next year or so, we may get some rising LIBOR and you probably have a little more scale.

So is it reasonable for us to expect that as core EPS plateaus maybe at a higher level that we could expect another stair step, or one or two, or so, in the dividend? Or I guess the flipside of that is, at some point here, are you going to shift the focus from sort of a near 100% payout? Is there any consideration of thinking about lowering the dividend payout regardless of the direction of core EPS? Thanks.

I think stability is sort of the watchword for us in terms of the dividend from here forward for the near term. You're right; the vectors of growth are primarily in terms of increased scale and efficiency on the balance sheet, plus potential increases in LIBOR. And on top of that, the origination profile, how we're able to develop ROIs is another potential vector for growth in the dividend.

But obviously, the initial 18 months period of the Company represented the sort of steepest portion of the ramp and from here on out, I think we're going to be focused on maintaining stability and sort of disciplined growth in terms of core earnings, the dividend, and the equity capital base going forward.

Okay, that was Doug, right?

Yes.

Thanks for the color. Appreciate the time, guys.

Your next question is from the line of Arren Cyganovich, Evercore.

Thanks. Looking at the loan pricing on some of the new loans that you've added recently, obviously it seems to be coming down, which makes sense from when you placed your original loans 18 months ago. But what are you seeing in terms of the pricing environment and are there any other ways to help offset that yield pressure that you're experiencing on these new senior loans you're adding?

I think, Arren, this is Steve, I think what we're -- I think what you should really focus on is the net ROIs in our loans. The rate of any one loan is reflective of its risk and of its risk, its LTV, the competitive environment. And if we have a -- if we're pursuing loans that are lower than LTV or more secure, we're obviously going to go lower in rate. But we're able to finance those loans much more efficiently than the ones that are higher in LTV or higher in risk.

So we do -- we are able to achieve a relatively consistent ROI across our -- the entire landscape of loans we originate, from the lowest risk, lowest LTV loans that we closed on to the higher risk and higher LTV loans. We haven't seen, again, we haven't seen a lot of movement, a lot of downward pressure in ROI. There is a lot of competitive pressure in the loan origination business, but we're still able to effectively compete. And our rates, again, in any one quarter are really reflective of the profile of the loans we closed in that quarter. The stuff that's really getting really low LTV will have lower rates, but again, we'll always be looking to achieve that sort of same consistent target ROI across the whole portfolio.

Thanks. That's helpful. And then in terms of the pipeline and activity, transaction activity has been very strong throughout the past couple of years. Is there anything you could talk about in terms of the drivers of the sustainability of underlying transaction activity in the transitional space, and capital formation, et cetera that's helping to sustain the strong origination environment for you?

I think we're really in the sweet spot of the cycle. I think asset values are stable yet still increasing. Capital markets are improving, liquidity is improving. So I think the prognosis for transaction activity is -- it remains very favorable. And again, we're a product of transaction activity because that's really what drives the borrower demand for our loans. So as we look forward, we see a very favorable landscape for the business. We don't see anything out there that would cause that to change, although we're obviously always looking forward to see what we can do to best position the Company.

Great, thanks a lot.

Your next question will be from the line of Jade Rahmani, KBW.

Yes, hi. Thanks for taking the question. Regarding the current environment, have you seen any spread widening on the loans that you're targeting?

We haven't really seen spreads widening, although we would love to. Whenever we see any sort of market volatility or changes in the marketplace, we'll always test our loans a little bit wider to see if we can get a little bit more gross return. We haven't seen that many opportunities to achieve that in the current market. There just hasn't been enough instability even in the choppy markets to create a lot of excess spread or opportunity to achieve express spread in our loans.

It does help in terms of, especially with the CMBS bid, because the CMBS lenders tend to quickly retreat if there's any market volatility. So again, for the more stable properties that we pursue where we're competing with that execution, that's where we see this is as a gain in market volatility. The banks and the other private equity platforms and mortgage REITs like us don't react as quickly and as directly to the volatility as the CMBS lenders do.

Okay. Thanks. The competitive set on the large loans that you're targeting, I mean can you give us a sense for how many other credible players there are on a given transaction?

It really varies depending upon where it is and the nature of the -- and the nature of the transaction, and how large it is. Only the largest mortgage REITs and maybe some of the banks have the ability to do the very large loans. The banks as a group tend to not be comfortable holding large positions in those loans. So a lot of times their execution is predicated upon a syndication strategy, which I think impacts their ability to definitely compete with us. So that's why we sort of moved to this larger loan size where we have the confidence in our ability to underwrite and quickly execute on those kinds of transactions. It's a real distinguishing quality that we have that others don't.

I wish we had the space entirely to ourselves. We don't. But the competitive dynamics on the larger loans are very favorable for us right now and I think that's why you've seen our average loan size increase over the quarter relative to where it was in the prior quarters.

Okay. Thanks. I was wondering if you could also comment on whether you view B-notes or even Mezzanine as increasingly attractive book to introduce higher yielding loans in the portfolio. And also, I think there's a large subordinate mortgage maturing in April, how you might offset that.

As it relates to B-notes and Mezzanine loans, we'll incorporate B-notes and Mezzanine loans into our portfolio as long as we believe that the risk associated with those loans is within what we view as a senior mortgage equivalent risk. So we have no problem with the Mezzanine or B-notes structure. It's really just the risk of the portion of the loan that we'll be maintaining on our balance sheet. And if we feel it's equity like or very high in LTV, we will not -- we won't pursue it. So we remain very vigilant in terms of trying to preserve the credit quality of our portfolio.

So we typically haven't been reaching for yield if it involved really changing the risk profile of our business. I don't think that will change. But we will have the willingness. You will see Mezzanine loans and B notes, but again just as a structure, as a means of achieving equity deployment with the same risk profile that our senior mortgage loans have.

Jade, it's Doug. With regard to the B-note that's maturing in Q1, that position is levered about one to one times and it generates an ROI that's right in line with our 12% to 13% ROI on our entire portfolio. So while that loan rolling off and sort of an outlier in terms of the asset yields. In terms of the equity that we have deployed into the loan origination business, it's right in line. So we'll replace that position with another 12% to 13% position. We may very well get there by levering that a little harder. So there could be a higher topline number. Maybe it gets replaced with $300 million of assets or some number along those lines, but it doesn't represent an outlier in terms of the driver of our return on equity and our core earnings.

Great. And one last one just on securitization. It looks like the (inaudible) market continues to develop, and I know capital trusts a strong issuer. Even wondering if you have any thoughts on whether you guys might be pursuing a securitization in 2015?

It will depend upon the terms available to us in the securitization market relative to alternative options as it relates to the financing of our balance sheet assets. We do have a lot of experience in the CLO market. We actively monitor it. We're talking to bankers all the time and looking at deals, and talking to investors. And we do believe that at some point, we will execute a CLO as a means of financing our balance sheet assets. But for the time being, it -- the options that we have, that we presently employ, which is primarily bank financing is superior to what's available in the CLO market. And one of the reasons why we have been so successful originating is because we do maintain a cost of capital advantage relative to our competitors, including competitors who utilize the CLO market for the financing.

Great. Thank you for answering the question.

Your next question is from the line of Donald Fandetti, Citigroup.

Yes, Steve, I was wondering if you could provide a little perspective on what will happen to your deal flow let's say when the Feds are raising the rates. How does a transitional property buyer think going into that and after Fed rate hikes, do you -- do they see one less floating rate debt, therefore your deal flow slows? Can you talk about how that will play out?

Well, I think, Don, it would depend upon the economic environment associated with the Fed action. Our belief is that it will come with increase in improving economic activity, which will be again -- which should be a favorable environment for our business. Our loans in this market are built to sustain a much higher LIBOR than what's currently in place and we welcome higher LIBOR, obviously, because it will increase the yields for -- on our loans and our dividend yields.

So I -- but I think that a lot of the borrowers that we -- that represent our strongest sponsors will utilize floating rate debt just as a matter of their business practice. They're transitional holders of real estate. They buy assets that maybe aren't fully leased or fully renovated and they complete the leasing and the renovation, and they sell them. And during that transitional period, our financing represents the best available option to them. And they don't really have an opportunity to finance their assets in the fixed rate market, or in another market that is more efficient or represents a better alternative than what we're able to provide.

So I think we're pretty well protected in that scenario.

So you don't really think that there would be a slowdown in floating rate origination volumes around higher rates, just to clarify that?

No, I don't.

Okay, thanks.

Your next question will be from the line of Dan Altscher, FBR Capital Markets.

Thanks. Good morning, everyone. Appreciate the ability to ask the question. Steve, I thought your comments in the press release from last night regarding the $0.50 dividend being earned with core earnings was really important. I know you don't really like to give tons of guidance but is it maybe a fair way to think about that we kind of hit the dividend now and there's kind of like no looking back, that we're going to be able to keep $0.50 plus or $0.50 even like hitting the dividend on go-forward basis, even with some maybe timing issues around equity raises and closing of loans?

Listen, our goal has been and our strategy has been to have a positive slope to our core earnings and our dividends. As it relates to the activities of any one quarter is difficult to look ahead and try to exactly describe what the shape of that line will be. But we've been disciplined in terms of how much capital we raised and how we've deployed it. And clearly, it is our goal to maintain a stable dividend that we hope to increase over time.

Okay. I was wondering a little bit on the balance sheet level and on the leverage level. Certainly, doing a good job of managing that leverage number pretty, pretty low. But when we think about maybe the run rate to maybe three to four times. It seems like we're still a little bit away from there. Is there any expectations to start really leveraging that balance sheet more now as opposed to maybe keeping it kind of around that same twoish times level with the help of permanent equity capital?

Hey, Dan, it's Doug. I think there is. I mean a couple of numbers might be helpful here. At quarter end, debt to equity is 1.75 times or so. Excluding the effect of the equity issuance, it would have been 2.3 times. So that implies, as you suggested, an average for the quarter of about 2.2 times. So right in that two to three times range. If you add the billing and dollars subsequent to quarter end origination pipeline into the picture, the ratio goes to 2.4 times and that leaves $900 million or so of origination capacity in the tank. Giving effect to that would imply a ratio of three times. So there's your sort of book end at the three times level.

I think the key to increasing leverage on the balance sheet really is increased scale because the larger the invested capital base is, the smaller the proportion of un-deployed working capital is and therefore the less the deleveraging affect is. And so I think you'll see that range tighten up as we get larger. I think we saw that a little bit in Q3. Although we did see a short-term point-to-point dip in terms of leverage, in the medium term, on a period basis, we see an increase in the leverage right into that two to three times range. And that's of course reflected in the third quarter core earnings number of $0.50.

And we take great comfort in that we've generated the core earnings and the dividends that we have to date without significantly leveraging the balance sheet. That should give everybody comfort that -- in terms of the quality of the earnings and the dividends that we've produced to date.

Yes, I would also add that increased scale, a bigger, stronger balance sheet also does give us increased options in terms of corporate level leverage, including, for example, convertible debt, potentially high yield unsecured corporate revolvers and those sorts of things. So going forward, being a bigger company with a stronger balance sheet will also incline us towards a higher leverage level than in our very earliest phase.

Okay. No, that's a really helpful commentary. Just a thought on the loan that was made in Spain. I guess Spain has always been thought, or recently been thought as being a little more of an opportunistic country. What gives you the confidence that Spain is maybe the place to be? Or is this kind of just a one-off where it's like hey, we looked at the asset level metric. We looked at the cash flow. Like it was just a really good loan regardless of the broader macro?

We're very active across most of Europe in our equity business and with Blackstone. And so -- and we definitely have been actively looking at loan opportunities in Spain and other countries in Europe. And the opportunities that the Spanish loan provided to us was these are two shopping centers, they're 97% leased, has a debt yield of 11%. So a highly stable asset. The larger assets was in suburban Madrid, very strong. So by going to Spain with this west liquidity we got, we were able to attract a very high quality asset, a strong US financial sponsor, and a loan that on a standalone basis is an extremely high quality loan for us.

Okay, and then I just have a quick one. It's kind of a little bit of a timely question. There was an article in the Wall Street Journal either last night or this morning just regarding Peter joining Richard Mack. I know he left Blackstone a couple months ago, but I was just wondering have there been any -- or have you seen any impact from that on the origination side? Or has there been a deep (inaudible) to the back sale, his absence?

We have a great origination team and the origination pace that we've had in the last -- of the last two or three quarters has been the strongest that we've had in the -- since the Company was formed. So we have a great team. We have originators not only in New York, but in LA and in London. And we feel like we see all the opportunities that are available in the market, and we feel great about the origination team and our origination prospects going forward.

Okay. Thanks for the commentary, Steve. Appreciate it.

Your final question is from the line of Charles Nabhan, Wells Fargo.

Good morning. Most of my questions have been asked but as a follow-up to Dan's, I wanted to get some color on the competitive environment in Europe and how you weight that allocation towards your core US business.

Well, I guess first let me take this to the back end of your question and there is no allocation. We're originating as many loans as we can in the US and in Europe, and the mix is just a function of how the total originations in those regions compare. We're still seeing great opportunities in Europe. In Europe, the competition is primarily banks and platforms like ours. There's almost no insurance company or CMBS competition. So the landscape of competitors is more favorable.

Our equity business there is so significant that we see virtually every transaction in the market, if not as a lender than as an owner, and we have great access to that sourcing platform to give us the head start in looking at loans anywhere we're active in Europe, which accounts for almost everywhere we want to be a lender.

So Europe has been great thus far. I mean we closed our first loan only a year ago and it's already 15% of our total portfolio. Pipelines there is great. The team there is fully engaged and we think it will be a huge part of our business going forward. But we certainly hope to have a lot of growth in the US as well.

Okay, great. And as a quick follow-up, and I apologize if you touched on this, as the portfolio migrates towards larger dollar loans, despite the room on the -- in your capital structure on the leverage side, is it fair to expect greater participation activity, increased activity in sales going forward as that average loan size gets larger?

Yes, I think as the average loan size gets larger that we'll continue to employ all the options that we have to achieve the highest ROI in the portions of the loans that we retain. We do that now even on the smaller loans, but we have more options on the larger loans as it relates to the selling A-notes or other kinds of -- or other syndication strategies that might increase our yield on our retained portion.

So I think that's a reasonable expectation, but because we have very strong relationships in the bank market as well as great financing capacity, the larger loans really work well for us and provide us with meaningful competitive advantage over a lot of the other platforms that don't have the capabilities that we have.

Okay, great. I appreciate the color guys, thank you.

And at this time, I would like to turn the call back over to Mr. Weston Tucker for any closing remarks.

Okay, great. Thanks everybody for their time this morning.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.