Blackstone Mortgage Trust Inc (BXMT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Blackstone Mortgage Trust second quarter 2015 earnings conference call. My name is Derrick, 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, Derrick.

Good morning, and welcome to Blackstone Mortgage Trust's second 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 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 most recent Form 10-K and subsequent Form 10-Qs. We do not undertake any duty to update forward-looking statements.

We will refer to certain non-GAAP measures on this call. For reconciliations to GAAP, you should refer to the press release and to our second quarter Form 10-Q, each of which have been posted to our website and have been filed with the SEC. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

So a quick recap of our results before turning things over to Steve -- we reported core earnings per share of $0.38 for the second quarter, which was down versus the prior quarter, as expected, due primarily to transaction expenses related to the GE acquisition, which Paul will discuss in more detail. These expenses were partly offset by greater net interest income from the continued growth of our loan origination portfolio. A few weeks ago, we paid a dividend of $0.52 per share with respect to the second quarter.

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

And with that, I'll now turn things over to Steve.

Thanks, Weston, and good morning, everyone.

Every quarter, I emphasize the competitive advantage of managing BXMT from the Blackstone Real Estate platform. At no time has this been more evident. We really had a great quarter.

During the quarter, we closed a 77-loan $4.9 billion acquisition of the GE loan portfolio. The opportunity to make this investment was proprietary [and off-market], the product of a longstanding relationship and history of successful transactions between GE and Blackstone.

GE knew that Blackstone had the global deal team's access to capital necessary for the deal, as well as a track record of bringing all of its resources to bear to complete large transactions. Blackstone's unique ability to quickly and definitively commit to a $23 billion comprehensive transaction provided BXMT the opportunity to make its acquisition.

We previously announced that we anticipated closing a portion of the GE portfolio in the third quarter. We had loans to acquire in four currencies, and many required third-party consents to the transfer to BXMT. That timing would've made the fourth quarter the first to reflect the full earnings power of the GE transaction.

I am very pleased to report that all of the GE loan acquisitions were completed in Q2, the result of a monumental effort by the entire Blackstone Real Estate Debt Strategies team; and that the Q3 results will benefit from the full impact of the GE deal.

To fund the GE portfolio, we negotiated and closed a $4.2 billion term and currency-match financing with Wells Fargo. The financing included a component that enabled us to fully debt finance the near-term repayments expected in the GE portfolio, reducing the equity required to close the acquisition. The magnitude of that commitment reflects the extraordinary relationship that we have with Wells. They were fantastic partners throughout, and we appreciate it.

In addition to closing and financing the GE portfolio, we directly originated $1.7 billion of loans during the quarter, our highest ever one-quarter total. The new originations included loans in the retail, residential, hotel and office sectors. For our two largest originations, we syndicated senior mortgage interest to banks totaling $754 million, rather than utilizing credit facility capacity.

To fund the equity component of both the GE and our direct origination transactions, we raised $1 billion of equity during the quarter, adding a net $1.60 per share to our book value. We meaningfully increased our percentage of deployed capital and leverage during the quarter, while retaining appropriate liquidity for the existing asset base and go-forward pipeline.

Rounding out our capital markets activity -- post-quarter end, we closed a EUR400 million credit facility that will significantly reduce our European cost of capital. We have seen European loan spreads decline, so resetting our borrowing cost is a critical element of maintaining our competitive positioning in investment ROIs.

The net result of the investment activity in the quarter is that our loan portfolio now exceeds $10 billion, comprised of 138 loans with a great credit profile. We have 54 new borrower relationships to mine and a greater presence in the very stable manufactured housing segment, as well as in Canada, where BREDS will be opening an origination office in Toronto.

Overall, our company is very well positioned for the quarters ahead. We expect to drive substantially increased core earnings and dividends from our greater scale and deployment, yet our credit quality and liability structure remains strong.

I would again like to acknowledge the amazing effort and accomplishments of our team this past quarter. We have built a fantastic company. I'm very excited about the earnings power we have put into place.

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

Thank you, Steve, and good morning, everyone.

Steve outlined in his remarks the superb execution of both the GE portfolio acquisition and our loan origination business in the second quarter. I will highlight how this execution translated into better-than-expected results for the quarter, our expectation for heightened profitability in the second half of the year, and sustainable earnings at the high end of the range we laid out at the time of the GE portfolio acquisition.

Loan fundings totaled $6.1 billion this quarter. This activity was partially funded by $391 million of repayments, resulting in net fundings of $5.7 billion, which more than doubled our loan portfolio to over $10 billion. We financed this activity with the $4.2 billion GE portfolio acquisition facility, our revolving credit facilities, and $754 million of nonconsolidated senior interest; bringing total credit capacity to $10 billion.

We closed the GE portfolio acquisition more quickly than we expected, helping to produce core earnings of $0.38 per share, despite the fact that we issued new equity early in the quarter in advance of the GE loan closings to fund the acquisition.

This quarter's core earnings were also impacted by the recognition of a total of $9 million or $0.11 per share of transaction expenses. These were lower than expected due to tight management of legal and appraisal costs by our origination, legal and asset management teams.

In terms of recurring expenses, management fees were $8.1 million, and core G&A was $1.3 million. Book value increased $1.73 in the quarter, to $26.60 per share, up 7%, driven largely by the two accretive equity offerings. We also recognized an unrealized gain of $0.13 per share through OCI from the re-measurement of our net investments in loans denominated in foreign currencies. We ended the quarter with $517 million of total liquidity.

Now, a bit on BXMT's positioning as we head into the second half of the year. With the acquisition of the portfolio complete and the related equity issuance and transaction expenses behind us, BXMT will experience the full benefit of the deal in the third quarter.

The GE portfolio currently produces higher ROIs than our originated loan portfolio, which results in an increase to our growth portfolio ROI from approximately 13% in the first quarter to a blended 14.4% at quarter end. This increased return translates directly to the bottom line and is driven in large part by the fixed rate component of the portfolio.

In addition, we expect core earnings for the second half of the year to be meaningfully higher than the sustainable earnings accretion of 11% to 13% we indicated at the time of the GE acquisition. This is largely due to the $237 million sequential pay advance facility we used to fund the portfolio acquisition on a more levered basis.

We expect the impact of this facility to diminish over the next 12 months as loan repayments from the GE portfolio go toward repayment of the facility, leading to a deleveraging of our balance sheet and a moderation to a sustainable level of earnings accretion. While the incremental profitability above this sustainable earnings level will be temporary, shareholders will benefit in the interim through increases to book value and/or dividends.

Including the fixed-rate loans we acquired, our total loan portfolio still consists of 79% floating-rate loans. And in this interim period, we will generally remain positively correlated to an increase in floating rates. As the short-duration GE fixed-rate loans pay off, we expect to largely replace them with floating-rate loans, resuming BXMT's focus on floating-rate exposure and positioning the Company for a more dramatic earnings impact, as rates are expected to increase in the medium term.

As we move beyond the next two to three quarters, we expect total leverage to moderate from current levels, leading to a sustainable level of core earnings. When we acquired the GE portfolio in April, we projected 11% to 13% accretion, above Q1 annualized levels, translating to annual core earnings of $2.40 to $2.44 per share. Since then, we have upsized the GE transaction, had a record quarter of loan origination volume, increased book value per share by 7%, and have begun to see the positive impacts from the GE transaction on our core loan origination business. As a result of this increased scale, we expect sustainable core earnings to be at the high end of our previously projected range.

Thank you to our shareholders for your continued support. We are excited for the next several quarters as we expect to generate substantial shareholder value through this earnings and dividend growth.

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

(Operator Instructions) Dan Altscher, FBR Capital.

Paul, I appreciate your comments around the high end of the range of GE on a normalized basis. But both you and Steve made some very distinct comments about core earnings growth, I guess, in the third and fourth quarter being on an elevated basis. And I think we generally all have that in our models. But can you maybe quantify a little bit more as to maybe what you mean, just to kind of make sure we're all kind of crossing the T's and dotting the I's around that?

Dan, hey, it's Doug here.

I think we won't be giving guidance as to what earnings would be in the third and fourth quarter. But what we would draw your attention to is what we've disclosed as to what's in place as of June 30th. So you and shareholders can look at the ROI that we have put in place during the second quarter and draw your own conclusions about the dynamics of those investments playing out over the next several quarters, and how they'll be replaced with new investments from our ongoing direct origination business.

Okay. Thanks, I think that's good.

Maybe just in terms of the originations in the quarter that were outside of GE -- could we get a little color on -- I think Steve mentioned -- just is very diversified across property type. But maybe add a little bit more color as to what they look like, whether it's on an ROI basis or LTV basis; or maybe if anything in particular was maybe construction and development-oriented, or is it all just general, more transitional in nature?

It's actually quite a broad mix of originations during the quarter. We financed one large retail property that was a substantial amount of the total. That was -- there was a construction element to that, but it's primarily a refinancing.

We had a large New York City office building in the mix, a couple of hotels -- one in the DC area, one in Hawaii; one office building that was transitional in the DC area. So I think a broad and representative mix of what we've been originating all along, sort of a focus on larger transactions in major markets.

That works.

I did want to -- since this is kind of the first quarter that we're seeing, maybe on a loan-by-loan basis, some of the details of the GE portfolio that you disclosed -- obviously, we know there's a substantial amount of exposure to manufactured housing. And I think, Steve, in your comments, you talked about being a stable asset group.

Just wondering, though -- are the loans that you have there, again, a little bit more transitional in nature? Are those properties just a little bit more transitional in nature? Or are these actually stabilized properties that are good occupancies, good NOI growth, that maybe [adjusting for] the vintage, maybe being a little bit older, or have maybe higher loan yields on than one might expect?

I think they're primarily stabilized, with higher debt yields than in general the debt yield we have in the balance of our portfolio. There may be a lot of the loans across collateralized pools, some (multiple speakers) diverse pools of facilities. And in some cases, there may be a couple of transitional properties added onto an existing pool of stabilized properties. But in general, the debt yields are high, and the assets are stable.

Got it.

And then, just one last one from me, and I'll jump off -- given the huge amount of activity that was done in the second quarter, again outside of GE -- I'm wondering as we look now into July and to the rest of the quarter, did some of that activity take away from maybe the third quarter funding pipeline of new activity? Or is there just maybe some backfill of future funding commitments that we're going to see in the third quarter? Or just -- is it going to be a little bit more of a slower pace? Clearly, I don't think it can be $1.7 billion [in a reasonable] quarter. But just seasonally, are we going to see a little bit of a maybe lower type of quarter?

Hello. Hey, Dan, are you there?

Yes.

Sorry about that. Looks like we had a little bit of a technical blip there. But please go ahead with your next question.

Oh. Sorry, okay.

I guess what I was saying is -- the second quarter was obviously very strong from the direct origination side outside of GE. But I was wondering if any of that took away from maybe the third quarter pipeline in terms of funding, especially with some seasonality coming in the summer?

Great question. I think the direct -- the second quarter was obviously an unusually active quarter for the direct origination pipeline, which was occurring at the same time we were focused on the GE deal as well. So it was a great quarter in terms of for adding product.

We still have a good go-forward pipeline for Q3 and Q4. Not the equal of Q2, but generally consistent with where we've been on a quarterly basis.

Okay. Thanks so much, guys.

Thanks, Dan.

Thanks, Dan.

Jade Rahmani, KBW.

Steven, I was wondering if you could give your view on the current cycle -- where we are, how competitive it is -- and if you've seen any borrowers or sponsors change how they're viewing the market given the surge in pricing we've seen so far this year.

Thanks for that question, Jade.

I think we're seeing a good competitive market. I think we still feel like we're mid-cycle, so not at a dangerous point, although obviously we're always cautious and looking for signs that maybe we're entering a danger zone. In general, we'll see increased demand for properties almost across the board, in most asset classes and in most markets.

The loan market is getting more competitive. And so we're feeling that a little bit. But in general, we're able to compete quite favorably against our direct competitors in the market.

So I still think we're generally in the sweet spot in the market. But we are moving through the cycle.

Okay. And commercial mortgage REIT stock prices in particular have been volatile, as well as other yield-oriented sectors, including equity REITs. On the lending side, have you seen any spread widening perhaps that occurred late in the quarter or so far in the third quarter?

We've seen a little bit of volatility in the CMBS market, especially the CMBS market for large floating-rate deals. Whenever we see that volatility, we always test our spreads a little bit wider to see if there's an opportunity for us to make a little bit more yield on our [loans].

I think that we benefit from the market volatility especially in the larger loans. I don't think there's been a fundamental shift. But I do think the environment -- a little bit of volatility is good for us. And so I do think that we have the opportunity to maintain or increase our spreads if the current environment continues.

Okay.

I know there's two mezzanine loans which the 10-Q shows were originated in May and June. Not sure if those are in connection with the GE portfolio. But can you give any color on those loans, and also if that's a pool -- or a place where you'd look to allocate capital?

Yes, sure. That really was how we chose to finance two of the very large loans we originated in the quarter. I made a reference to it in my remarks that talked about the syndication of senior mortgage interest in two of the loans that we originated. For some of those very large loans, rather than financing them on our credit facilities, we'll syndicate them in the market. We'll sell senior mortgage interests.

And if we're doing the transactions in areas where there's high mortgage recording tax, like in New York and Florida, for example -- rather than retaining our interest in the loan as a mortgage interest, we retain it as mez. It saves the borrower mortgage recording tax, it gives us a very good lien to defend if we ever need to.

But from a conceptual standpoint, we're still originating loans within the context of senior mortgage interests. In fact, one of the deals where we originated -- where we were holding mezzanine -- the LTV of our position is sub-40%. So I don't think you can -- you shouldn't connect the type of lien that we have with necessarily the LTV or risk profile of the asset. It really just relates to how we chose to finance it.

Okay.

Just a small modeling question -- carried interest -- is there any remaining carried interest that is not currently reflected on the balance sheet?

Yes. The carried interest that is remaining is in the other assets section of our balance sheet. And the total amount there is $7.1 million.

Right. So is there anything in addition to that that's not yet shown on the balance sheet?

No.

That could come through? Okay.

It's possible. That's based on [6/30] marks. But we don't expect it to be substantial at this point.

Okay. Thanks for taking my questions.

Thanks, Jade.

Thanks, Jade.

Steve DeLaney, JMP Securities.

Good morning, everyone. And congratulations on getting GE closed so quickly.

I wanted to switch over and talk a little bit about your capital structure and the balance sheet. Liquidity indicates maybe as much as $2 billion of additional capacity. And that could get you well into the fourth quarter, it would seem. I'm curious, though, as you look at -- given the $1 billion of common equity raise, you really only have one debt issue, your convert, which is only about 5% or 6% of total capitalization.

So I'm curious, as you look forward over the next couple of quarters from capital planning -- would it be possible that some of the incremental capital you may raise over the next year may be in the form of debt versus incremental common equity?

It's Doug here. That's a [good] question.

I think it would be possible. You pointed to the convert as an example. Another example, I think, of debt funding is the sequential pay advance or the add-on advance that Paul talked about. So with the balance sheet as large as it is now and as efficient as it is now, and with our investment activity as strong as it is, we have a lot of options open to us in terms of corporate finance tools and different forms of balance sheet leverage.

And so we will continue to look at all of those options as we capitalize the business going forward. Could be high-yield, could be convert, could be secured debt, could be term loans, could be revolvers. We'll evaluate all of our options going forward and lever the balance sheet as efficiently as possible.

Great. Thanks for that, Doug.

And in the past, when we've asked about the CLO market or floating-rate CMBS, you've generally commented that you've got some extremely attractive bank financing. And obviously, the Wells facility is even at a lower cost, it appears to me, maybe 10 basis points or so cheaper, than your bank facility. So should we still sort of think about the securitization market as still something that would likely be down the road for Blackstone?

Yes, I think you're right. I think the securitization market still comes in sort of a distant second compared to what we've been able to achieve in our bilateral credit facility agreements, in terms of structure and in terms of pricing. So it's something that we keep an eye on. It's a source of capital and leverage that will factor into the model at some point. But it isn't a focus front and center this year.

Got it.

Yes. And I think, Steve, we do now have over 135 loans now. So when we do hit the -- when we do choose to tap the securitization market for our balance sheet financing, we're going to be in a very strong position in terms of providing a diverse pool in any kind of execution that we pursue.

Good point. Yes.

(Multiple speakers) the time being, we have better alternatives. But when that alternative improves, we'll be a very strong issuer.

Thanks for the comments, and congrats on a great quarter.

-- Steve.

Thank you.

Rick Shane, JPMorgan.

It's interesting, we've all spent a lot of time thinking about how this impacts the balance sheet and how that impacts the income statement. I'd love to talk about this a little bit operationally. You've essentially doubled the size of the portfolio and, in terms of the number of loans, actually more than doubled it.

Obviously, with the fee structure, you have the resources -- with Blackstone, you have the resources. I'd love to talk about what additional resources are being committed within the firm to service this portfolio, and how you guys are thinking about that. Because obviously, now that the transaction closed, that's really where the proof in the pudding lies.

Yes. I think that's a great question, Rick.

I think the first and most direct thing that we're doing is we're adding to our asset management team. So we have a few new hires already in place and are in process of attracting some more to continue with the asset management of the increased portfolio.

I mentioned in my remarks that we're opening a BREDS office in Toronto. That's being staffed by a couple of guys that we're hiring from GE who we thought were very strong. We like that market opportunity. There's not a lot of debt like ours available in Canada.

We're adding at least one person in Europe, and we're looking at selectively adding more origination resources in New York as well. So I do think we'll take the opportunity to add people, both offensively and also from a management standpoint, in terms of the new-hire loan count.

Got it. And actually, you bring up an interesting point. There probably are a lot of folks from GE who not only know the portfolio but are probably interested in figuring out what their next opportunity is as well.

That is true.

Okay. Thank you, Steve.

Okay. Thank you, Rick.

Thanks, Rick.

At this time, we have no further questions in queue. I would like to turn the call back over to Mr. Weston Tucker for any closing remarks.

Great. Thanks very much for your time this morning. And just give me a call with any follow-up questions.

Thank you.

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