Blackstone Mortgage Trust Inc (BXMT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust first quarter 2015 conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Weston Tucker, Head of Investor Relations. Please proceed, sir.

Great. Thanks, Chantele. Good morning and welcome to Blackstone Mortgage Trust's first quarter 2015 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 form 10-Q and issued a press release with the 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 and our Form 10-Q for the first quarter of 2015. 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, you should refer to the press release and to our Form 10-Q, 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 our consent.

So a quick recap of our results before I turn things over to Steve. We reported core earnings per share of $0.54 for the first quarter, up 26% versus the prior year first quarter, due to greater net interest income from continued growth in our loan origination portfolio.

A few weeks ago, we paid a dividend of $0.52 per share, with respect to the first quarter. If you have any questions following today's call, you can reach out to me or to Doug directly. With that, I will now turn the call over to Steve.

Thanks, Weston, and good morning, everyone. In the first quarter, BXMT continued on its path of strong organic growth with $937 million in originations and core earnings of $0.54 per share. We also added $1.1 billion to our financing capacity, a key element of our ability to grow and drive returns. We increased total assets by 11% in the quarter, funding an incremental $570 million net of repayments. We now have an additional $1 billion of directly originated loans with agreed terms that we expect to close over the coming months.

In an increasingly competitive direct origination market, we continue to (inaudible) strong deal flow with stable ROIs while maintaining the conservative credit portfolio of our senior mortgage business. Our organic deal flow will soon be turbo charged from the $4.6 billion, [82] loan GE Capital portfolio acquisition that we announced post-quarter end. We're thrilled about this opportunity to expand our senior loan business and deliver the benefits of greater scale and deployment to BXMT and its shareholders.

Paul will go into more detail on the earnings power of this transaction in a moment. I'd like to focus on the great strategic benefits for our business. The GE loans are all senior mortgages and remarkably similar to our directly originated portfolio and LPV and credit spread. The 82 loans bring 54 new sponsor relationships to BXMT, which is particularly significant given the success we've had mining existing borrower relationships, more than half of our directly originated loan balances with sponsors that have borrowed from BXMT two or more times. These new borrower relationships will lead to a broadening of our origination pipeline, an additional value from our acquisition.

In a similar vein, the GE portfolio expands our presence in the US and Europe, and also establishes a very strong position for BXMT in Canada, a market we like with $667 million of loans. In addition to further diversifying our portfolio geographically, we achieved greater asset class diversification and added $1.4 billion with very attractive manufactured housing segment, s stable, strong performing sector in which GE has a leadership position.

We look forward to leveraging these market leading geographic and asset class positions to drive future originations for BXMT. A key factor in circling the GE transaction is our fantastic partnership with Wells Fargo and the $4 billion customized financing commitment Wells provide to facilitate the BXMT acquisition. The Wells currency and term match financing provides the stable liability structure necessary to hold the acquired loans to their maturities and helps generate an attractive equity return from BXMT.

This facility with Wells Fargo is an expansion of our existing credit relationship and further demonstrates our ability to grow our financing capacity on market leading terms.

The addition of the GEO portfolio pushed the scale of our balance sheet forward several steps in a single transaction. The larger scale balance sheet means increased operating leverage in terms of our fixed costs, and also in terms of the working capital that we need to maintain to fund our ongoing originations. The increased scale will also lead to a more efficient cost of capital and moderately higher leverage, both of which will be accretive to core earnings.

The opportunity to buy the GE loans was proprietary in our market and we utilized the extensive resources and relationships at Blackstone to source, underwrite, and finance this extraordinary transaction. We have spoken frequently about BXMT's Blackstone affiliation and our superior access to transactions and ability to leverage key relationships that comes from being part of the leading real estate platform in the world. It remains our single biggest competitive advantage.

We're very pleased that our Blackstone affiliation led to this transformational acquisition and the opportunity to generate incremental core earnings and shareholder value from BXMT.

As a final note, I would like to acknowledge the amazing efforts of our investment, asset management, capital markets, finance, and legal teams in evaluating and negotiating all aspects of our transaction with GE and Wells Fargo. This work is still ongoing as we proceed to our first scheduled closing to late May, but the talent, integrity, and commitment level of our people is truly outstanding.

And with that, I'd like to turn the call over to Paul.

Thank you, Steve, and good morning, everyone. I'll begin my remarks by touching on first quarter highlights and then provide some additional financial context in connection with the GE Capital Portfolio acquisition and related equity offering that we just completed. Core earnings in 1Q were $0.54 per share as our loan portfolio reached nearly $5 billion. During the quarter, BXMT funded $903 million of loans, including $118 million under previously existing commitments. This was partially offset by $333 million of repayments, resulting in net fundings of $570 million.

Net loan fundings were capitalized using available liquidity under our revolving repurchase facilities and $355 million of asset specific financings. At quarter end, we had total financing capacity of $5.4 billion, $1.8 billion of which remains available for new fundings. A 12% increase in our loan portfolio generated net interest income of $39 million, up 7% versus 4Q. On the expense side, management fees were roughly flat as $5.5 million.

Core G&A was $1.5 million, up from $1.1 million in 4Q, primarily due to several onetime expenses incurred during the quarter. Core earnings were up 4% from the fourth quarter and exceeded the incentive fee threshold on a four-quarter look back basis, resulting in incentive fees of $1.2 million. Book value ended the quarter at $24.87 per share, down from $25.10 per share in 4Q, due in part to the remeasurement of our net investment in loans denominated in euros and pounds, which although unrealized is recognized through OCI on our consolidated balance sheet. This was partially offset by gains in our CT legacy portfolio, which generated $8.4 million of GAAP income or $0.14 per share, contributing to $0.60 per share of GAAP net income for the quarter. The CT legacy income was related to the fair value mark to market of an asset under contract for sale, as well as recognition of previously deferred [SITOPI] promote revenue on its realization.

Note that beginning this quarter, we are no longer presenting CT legacy as a separate segment in our financial reporting given the successful wind down of the portfolio. Moving on from 1Q, Steve spoke earlier about the significant positive impacts the GE transaction will have on BXMT. I would like to touch on some of the expected financial impacts of the acquisition and the steps we've taken to capitalize the Company for it.

Steve mentioned the $4 billion customized secured financing provided by Wells Fargo to fund the acquisition. This financing includes a $222 million add on feature, which together with the 80% advance essentially fully debt funds the portion of the GE portfolio we expect to repay in the near term. In the aggregate, this results in a day one funding of the GE portfolio with 85% leverage, which we expect will decline to 80% over approximately 12 months, as proceeds from the early loan repayments are used to sequentially pay down the Wells financing, after which point the facility is pro rata pay.

The balance of the acquisition financing will come from the net proceeds from our April 17 stock issuance launched after the announcement of the GE acquisition. The offering was well received by the market and we issued 23 million shares of BXMT stock, which generated $682 million of net proceeds to the Company. The additional proceeds remaining after funding the GE acquisition will be used to fund our ongoing direct origination business.

The offering added approximately $1.35 to book value per share upon their issuance, but with the shares issued early in the quarter and the GE portfolio acquisition closing in stages, beginning later in the quarter, there will be a period during which the new capital is not optimally deployed. Therefore, we expect core earnings per share will be lower in 2Q. The specific factors to consider are as follows. First, the additional share count, which increases our shares outstanding to 81.6 million and which we expect will result in 77.6 million shares outstanding on a weighted average basis for 2Q. We have initially used the $682 million of proceeds to revolve down debt, thereby reducing interest expense. We will incur management fees of 1.5% per annum applied to the incremental net equity raised pro rata based on the time it is outstanding.

We expect to recognize transaction expenses in connection with the GE acquisition. GAAP requires us to run the majority of these expenses through the income statement as incurred rather than amortize them over the life of the loan as we go with our originated loans. We are still in the process of incurring expenses related to the GE acquisition, but our best estimate is a total expense in the $10 million to $15 million range. As a clarification, these expenses will be included in core earnings when recognized under GAAP.

There's likely to be some income generated from loans that closed in the second half of the quarter, but we do not have a precise estimate for the timing or quantum of loans to be closed in the quarter. We are fully mobilized to close the loans as quickly as possible, with a first closing targeted for late May. Any loans closed in the quarter would be additive to core earnings in 2Q and of course, would significantly increase our earnings in 3Q and onward.

As an illustrative example, if we closed 50% of the portfolio on May 31st, we would expect to add approximately $3 million to $3.5 million to 2Q net interest income. Overall, when the dust settles at the end of 2Q, we would expect to end up with book value per share more than $1 higher than Q1 levels and to have a significantly larger, more efficiently levered and more profitable senior loan portfolio.

A few comments on interest rates and currencies. The acquired portfolio is 50% fixed rate with an average fixed rate coupon of 5.3% and average duration of 2.1 years. Our combined post acquisition portfolio will still have a modest positive correlation to increases in US dollar LIBOR, but the acquired fixed rate loans and loans with LIBOR floors significantly dampen this correlation in the near term.

We are currently evaluating whether to enter into interest rate hedges for our fixed rate portfolio to mitigate potential negative impacts to earnings resulting from increases in interest rates, in particular for our non-US dollar fixed rate portfolios. Overall, however, we consider the fixed rate portion of the acquired portfolio to be an opportunistic benefit as we short duration higher coupon fixed rate loans will generate additional revenue in the near term, but are expected to largely repay for material increases in floating rate indices are likely to occur.

The acquired portfolio is 32% denominated in foreign currencies. As we have noted, our committed financing is currency matched, substantially mitigating this CapEx exposure. And we also intend to hedge our incremental net investment in Canadian dollars, pounds, and euros using the rolling forward strategy. The earnings impact associated with these hedging strategies are incorporated into our stabilized pro forma earnings estimates, which I will summarize in more detail.

In the medium term, we believe that with the GE portfolio and associated financing added to our growing direct origination business, the balance sheet will stabilize at a leverage ratio of approximately three times debt to equity. At this stabilized level, we believe core EPS will increase by $0.24 to $0.28 per annum or 11% to 13% from Q1 annualized levels. The main driver of this accretion is the benefit of scale. We expect to maintain a similar level of liquidity to fund our origination business as we have historically and the increase in the ratio of deployed capital to both working capital and other fixed costs is essentially the financial basis for the accretion that will be generated by the GE portfolio acquisition.

In closing, we think the financial accretion from the GE transaction, coupled with the ongoing strategic benefit Steve outlined, emanate from our affiliation with Blackstone Real Estate. While this transaction has been a uniquely prominent example of the benefits of Blackstone's sponsorship, we see its impact on the ground every day, in ways large and small, and are confident in its enduring benefit to BXMT.

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

(Operator Instructions) Your first question will be from the line of Dan Altscher of SBR. Please proceed.

I was wondering if you could talk a little bit about the GE transaction. One of the, I think, major questions and things that folks have been wondering about is really kind of the credit quality of the GE portfolio. And I know, Steve, I think you mentioned in terms of spread and LTVs it looks very similar to the existing portfolio, which seems to be true. But I was wondering if you could just talk a little bit about that credit quality, where maybe it falls within your internal [FRISK] ratings. That might be a helpful kind of a metric.

Sure Dan. I think that the quality of the portfolio, as I mentioned, is in line with our directly originated portfolio. The loans are a little bit more seasoned than the loans that we've originated. Our originated loans only date back to May of 2013. Several of the GE loans were originated in the periods before that. So in terms of the transitional properties they've financed, a lot of them are further advanced in their leasing and cash flow. But I would say in general, their loans have higher debt yields than our loans. They are more diverse. They tend to do larger portfolios of smaller loans, cross collateralized portfolios.

So I think they're a very nice complement to our sort of bigger, more core urban loans that we have (inaudible) in the recent quarters in BXMT. So I think it's a good mix and again, I think consistent overall in quality to the loans that we've originated.

Okay, I guess just sticking with that point as well, I think it was maybe reported that I think maybe a third or so of the portfolio was maybe pre-2011, which certainly would be consistent with your comment that they're more seasoned. For those loans that are pre-2011, is this (inaudible) there's substantial call protection at this point, that those haven't been able to refinance as opposed to borrowers not maybe being on track with whatever plans they might have?

GE has a strategy of really trying to maintain their loans long-term and they have a great history in doing so. It's especially true in the manufactured housing segment, but their originators were highly incented to maintain loans and obviously, there's less effort to extend and maintain than it is to originate a new one. So philosophically that was their objective and they were generally successful in doing that. And nicely sort of developed their relationships they had with those borrowers where in addition to extending the existing and older loans, they had the dialogue to add new ones as well.

Okay. I see. Got it. Something that I thought was maybe missed by a lot of folks was the add on feature that I think was referenced in the script. Can we talk a little bit more about that, the nuances around that, really the benefit of that, really the place it holds with funding the deal.

Yes, hey Dan. It's Doug. That's a great question. The add on feature to the Wells financing was very important for us because it enabled us to fully debt fund the portion of the loans that we expect to repay in the very near term. And so those $220 odd million that the additional 5% advance, the 80% to 85% represents, it can really be thought of as the full haircut on 20% to 25% of the total portfolio. So say $1.1 billion, $1.2 billion of loans are actually 100% debt funded and the remaining loans are 80% debt funded.

And so that means we didn't need to raise equity in order to fund that portion of the portfolio and instead, we'll have a slightly more levered balance sheet around that particularly opportunistic piece of the investment.

Okay, that's perfect. Appreciate that. And then maybe just one more from me and then I'll let others take a crack. Just also with the GE portfolio, I think it was shown in the 8-K that there's maybe roughly 45% of the portfolio is either eligible or scheduled to mature over the next year or so. What maybe is your expectations of what could actually repay? Because I think a lot of those were just eligible as opposed to scheduled.

Yes, I think when we look at the portfolio, I think Doug talked about, annually structured the add-on. We looked at sort of in the $1 billion to $2 billion, sort of repaying in the first 12 to 18 months. And so it's very difficult to predict when the rest of the (inaudible) loans will repay. A meaningful portion of the portfolio is fixed rate with sort of traditional fixed rate like yield maintenance or swap breakage provisions, which provides a little bit more protection for -- with some of the loans that have a longer duration than that.

But it's a pretty even mix over sort of the one to three year timeframe in terms of how we see the loans repay.

Okay, great. I'll drop back in the queue. Thanks so much.

Your next question will be from the line of Don Fandetti of Citigroup. Please proceed.

Steve, I was wondering if you could talk a little bit about spread compression. I guess there's been a little bit of that. What is your expectation on a going forward basis and do you think that will eventually push you into looking at some other areas? And then how is the pipeline outside of the GE Capital deal in terms of targeted new investments?

Well, as it relates to spread compression, the market continues to be very competitive. I think as it relates to our -- the finance companies, mortgage REITs and people we compete with on a one for one basis, I think we continue to win more than our fair share of that business. The challenge from the competitive environment is banks reaching in risk. We're still not seeing a lot of that And they're still sort of facing the regulatory challenges of taking greater risk in the real estate lending. But in some instances, it just takes one or two banks in a competitive situation to decide that they want to lend 5% or 10% more, or they want to take a leasing risk that they might not ordinarily take.

And so that's what we feel occasionally as sort of the greatest competitive influence in our business. Interestingly enough, the single biggest competitor in our business over the last year or so had been GE. So that's sort of another additional benefit of this transaction is that it does take one of our biggest competitors out of the market.

Pipeline is -- pipeline, we have, obviously, have a good forward pipeline as we said today. I noted that we have $1 billion of loans that we have with agreed terms that are in the closing process. And the forward pipeline has been building pretty well. We have been very -- spending a huge amount of time, everybody on the staff, in terms of working this GE transaction. So we're still originating and I think we'll still build additional direct origination opportunities for Q3 and Q4. But definitely the focus has been on taking these new 82 GE loans and making sure that we're completely on top of them, integrating them into our loan portfolio.

Thank you.

Your next question comes from the line of Rick Shane of JPMorgan. Please proceed.

I really just want to talk a little bit about potential operating leverage and in context of your long-term ROE objectives. What you guys have basically said historically is LIBOR plus 8% sort of the target. Does the GE acquisition and effectively doubling the portfolio change that in any meaningful way at this point?

I think it does, Rick. It's Doug here. We talked about the accretion that we expect to experience as a result of the increased scale, which is really what's at the root of the increased operating leverage that you're referring to. And in just really round numbers, we talked about $0.25 on a per annum basis in terms of accretion, and that works out to roughly a point in terms of the yield on book value, which is in the same range.

So I think the 8% target, which translates to a low $0.50 per quarter yield is probably closer to a $0.60 target given that increased operating leverage.

Got it. Okay, great. Thank you guys.

Your next question comes from the line of Tony Gleason of Neuberger. Please proceed.

Thanks for the call and the clarification on the GE deal. Just wanted to sort of put some time horizons on some of the things that you were talking about. Can you refresh me as to what percent of the asset set will be fixed pro forma, the GE acquisition? How long or what timeframe do you have in your own forecast for getting sort of them back to all floating portfolio, one? And then two, what sort of timeframe should we be expecting to get that debt to equity back down to the three level that you had mentioned? Just trying to get a little time horizon there and -- very happy to see you guys step up and buy some more stock, both Steve and Mike, by the way.

The portfolio is, on a pro forma basis, combined is 23% fixed. As Paul mentioned, there are also some floating rate loans with LIBOR floors, which factor into the correlation with US dollar LIBOR in the near term. But talking about the fixed rate loans, they've got an average duration of 2.1 years. They also have an average coupon of 5.3%. So they're relatively high yielding. But that two year time horizon is really, I think, the right benchmark with regard to the fixed rate portfolio.

And on the leverage question, we think that we'll move towards the three times leverage pro forma stabilized level really over the course of the next year or so, which is the term for the add on advance from Wells. And so the next 12 to 18 months is when we expect to sort of return to our sort of target leverage level after the turbocharged component from the add on burns off.

Okay, thank you. That's very helpful. Appreciate it.

Your final question comes from the line of Jade Rahmani of KBW. Please proceed.

Hi, thanks for taking the questions. Just a clarification on the ROE because I think the term you used is core earnings, which historically the definition has included the add back of the incentive fee. So I want to just confirm or clarify that the accretion you expect from the GE deal is after the incentive fee.

We're talking in terms of core earnings, which you're right, is before the incentive fee. I think we expect that core earnings and the dividend will continue to move in step. I think the relationship between the two will be different over time as we move through the ramp period into a more stabilized, full scale business model. But the accretion we expect to be, that we're discussing is in terms of core earnings, which is before the incentive fee.

So to put it in another way, do you expect a similar level of accretion to the dividend?

Well, we don't give guidance about the dividend specifically, but I think we expect a similar level of accretion. I think our priorities are obviously to maintain book value and so we don't expect to pay out more -- to pay out book value in our dividends outside of the ramp phase of the Company. And so there could be, as I say, at a different stage of the Company beyond the ramp stage, there could be a slightly different relationship between core earnings and the dividend. We want to make sure that the dividend is sustainable, predictable, and always increasing, never decreasing. So it may not be right on top of or ahead of core earnings outside of the ramp phase, but it will be in line. It'll be higher post the GE transaction than it would be before it.

Okay. So the payout ratio is likely to moderate on a stabilized basis. Okay.

Yes.

Just a couple of other items. Can you just describe the due diligence and underwriting process on the GE loans given how quick the entire process was? And then secondly, can you clarify expansion plans for headcount at the [breadth] platform.

Sure, on the underwriting side, we're acquiring 82 loans and although it is an enormous amount of work, we have really great resources to evaluate the loans and the new collateral. You think about it in terms of the CMBS deal, a current market CMBS deal might have 100 loans and a [BP Fire] we would look at buying that in sort of a similar timetable. So yeah, it was compressed. So we did an enormous amount of work in a very short period of time, but we certainly felt like we had adequate time to fully evaluate the loans and the collateral that we were acquiring before we entered into our agreement with GE and with Wells.

As it relates to people, we do plan to expand the platform, I think most significantly in asset management, but we'll look to add in all areas. We have various discussions ongoing. Too early to say exactly what the final result of that will be, but we certainly hope to add to our platform as far as capabilities as another sort of benefit of this transaction.

And is there a process underway to preserve the existing relationships with all of the new many borrowers that you're gaining access too?

Yes.

From an originations and new business perspective.

Yes, we've had a coordinated process with GE to reach out and meet the borrowers, and make sure there's dialogue prior to the closing of the loan sale. So we've had a great relationship with GE in terms of coordinating that process and that's sort of ongoing as we sort of have the count out over the next couple weeks, until we begin closings. But yes, we've reached out and had a dialogue with almost all of the significant clients.

Okay, and just with respect to ongoing originations, you cited the $1 billion of loans that are in the process of closing. Can you just clarify what time period you expect that to take place? And also, I think your broader comments were that we should expect somewhat of a pause in the pace of originations as the focus shifts to absorbing this large portfolio.

Looking at this sort of $1 billion worth of loans, I think the -- our expectation is that they will close in Q2. There's one larger loan that could possibly roll into Q3, but I think our expectations, as we stated, is they'll all close later this quarter. We still have -- we do have some good deal flow. We're getting some deal flow benefit from this transaction. Our pipeline transactions and some of the new relationships that we'll be inheriting. So that will be additive to our pipeline, but all of our resources have been dedicated over the last sort of three or four weeks to getting in a position to close the GE deal as quickly as we can.

Okay, and just lastly an investment question I got from an investor. Can you clarify what drove the sequential decline in book value per share?

Yes, sure. Hi, Jade. It's Paul. The sequential decline in book value per share was really driven by the OCI impact of the remeasurement of our net investment in euros and pounds, which are presently unhedged. So that is an unrealized loss that flows through OCI. That was partially offset by the gains that we experienced in our CT legacy portfolio.

Okay, thanks very much.

And we do have a follow-up question from the line of Dan Altscher of SBR. Please proceed.

Hey, guys. Thanks for taking my question. Sorry to extend the call a little bit longer, but had a specific question related to CT legacy. I think if I read correctly there was a deal that Blackstone did with Paulson because it was referenced in the Q, the three pack and JV. So I think I understand that's the unrealized gain that was what was in the quarter. But do you have a sense as to the timing of when that might close and is that capital that actually comes back to you, that can then just be redeployed into the loan segment or the loan business?

That transaction is expected to close in mid-May and the large non-refundable deposit has been posted. And yes, the cash will come back to and will be available to be redeployed.

Okay, that's great. And then just one other quickie. On the residential side, between a lot of mortgage REITs gain access to the FHLB, even with this moratorium in place, which is interesting. I suspect you guys may have been in the process of also exploring FHLB a couple quarters ago. Any update on that side, where we might currently stand?

Hey, Dan. It's Paul. I would say no update at the time being. We are monitoring the ongoing dialogue as it relates to mortgage REIT access to the FHLB and keeping a close eye on it, but no update at this point.

Okay. Thanks so much.

At this time, there are no additional questions in the queue and I would like to turn the call back over to Weston Tucker for closing remarks. Please proceed.

Great. Thank you and thanks everyone for joining the call this morning.