Blackstone Mortgage Trust Inc (BXMT) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Blackstone Mortgage Trust third quarter 2015 conference call. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. Weston Tucker, Head of Investor Relations. Please proceed, sir.

Thanks, Lauren.

Good morning, and welcome to Blackstone Mortgage Trust's third quarter 2015 conference call. I'm joined today by Steve Plavin, President and CEO; Mike Nash, Executive Chairman; Paul Quinlan, Chief Financial Officer; 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 the call. For reconciliations to GAAP, you should refer to the press release and to our third 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 I turn things over to Steve -- we reported core earnings per share of $0.72 for the quarter, which was a record, and which was up sharply versus the prior quarter and prior year. A few weeks ago, we paid a dividend of $0.62 per share with respect to the third quarter, which was a 19% increase from the prior quarter.

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

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

Thanks, Weston, and good morning, everyone.

During the third quarter, we experienced the full impact of the GE portfolio acquisition, which closed late in the second quarter. The transaction helped drive the substantial growth in core earnings and less than a 19% increase in our dividend that we announced during the quarter. Our dividend reflects the benefits of greater scale in deployment that we expect to sustain long term.

An element of the accretion to core earnings we experienced in the third quarter, the impact from the fixed rate GE loans, as well as with the add-on advance from Wells, which essentially fully financed the expected near-term repayment in the GE portfolio, will diminish as loans are repaid. However, the redeployment of capital from repayments will be the major source of funding for new senior floating rate loans. They'll also increase our positive correlation to LIBOR over time.

BXMT, with its larger asset base, now has 132 loans with 93 sponsors, managed by the Blackstone Loan Asset Management team. The credit profile of our loan portfolio remains conservative, with overall LTV of 64%. We are well diversified by region and asset class.

During the quarter, our asset managers increased or extended 10 loans with a total balance of $824 million. A great example of our asset management activity is the modification upsize of the [lump on] Plaza loan that we acquired from GE.

It's secured by a DC office and retail property and has December 2015 maturity. Post quarter end, we modified the loan, extending the term to October 2020, increasing the principal amount by $17.5 million, and buying out a $66 million participant. We essentially negotiated a new $229 million loan with a top sponsor, while BXMT avoided a repayment and committed $84 million of new money.

On a direct origination front, we closed $887 million of loans during the quarter. The new loans included residential office and leisure assets in the US and in Europe. Our largest loan of the quarter was a directly originated seven-year GBP367 million secured by a long-term lease from Merlin, the world's second-largest theme park operator behind Disney and a former Blackstone portfolio company. So we were uniquely positioned to evaluate the credit. This loan is fixed rate, and we syndicated the senior interest to a UK life company on an index term and currency-matched basis.

Our ROI, though fixed, is 12% and call-protected for almost the entire seven-year term. And our net currency exposure is hedged. Although we like this locked-in long-information profile, and we will continue to be opportunistic, we do expect that our direct origination activity will continue to be predominantly floating rate, further enhancing our value as a hedge to increasing LIBOR.

We expanded our credit capacity by $1 billion during the quarter and again demonstrated our syndication capability with Merlin and one other US loan, accounting for $534 million of senior leverage. These nonconsolidated senior interests preserve our credit facility capacity while locking in attractive ROIs.

We also closed a previously announced $400 million [euro] multicurrency facility that meaningfully reduces our cost of European credit. European loan spreads have declined, so resetting our borrowing cost is a critical element of maintaining our competitive positioning.

Market conditions remain competitive for our product. Volatility in the floating rate CMBS and CLO markets is in active spreads on the margin. But the transitional loans that we target are generally being pursued by portfolio lenders that are less capital market-centric and have not retrenched.

Although we believe that property and market conditions are generally favorable and should remain so for the intermediate term, we are holding the line on credit and structure as we go deeper into the cycle.

With our floating rate senior loan investment strategy, we continue to position BXMT to capitalize on fed rate increases that could occur in tandem with improving demand that we see in most property sectors.

Looking forward, I'm excited about the market opportunities for BXMT. Our company is very well positioned with a strong global origination platform, market-leading liabilities, and significant competitive advantages from our Blackstone affiliation. We look forward to continuing to generate strong returns for our shareholders.

With that, I'll turn it over to Paul.

Thank you, Steve, and good morning, everyone.

Our headline results this quarter, declaring a 62% per-share dividend and reporting $0.72 of core earnings, reflect the powerful accretion of the GE portfolio acquisition. This increased dividend was sized relative to our expected stabilized earnings power following the GE acquisition and does not include the incremental earnings accretion that drove an additional $0.10 per share of core earnings this quarter.

As I discuss our results, I will outline how this accretion resulted in heightened profitability this quarter, which we expect to continue as we trend towards a more stabilized earnings level in 2016.

Loan closings totaled $886 million, and loan fundings totaled $868 million, including $85 million of fundings under previously originated loans. We financed this activity primarily with two senior syndication financings totaling $534 million. GAAP does not consolidate these senior loan interests, contributing to a decline in the size of the loan portfolio reflected on our balance sheet. However, considering the growth originations of $886 million relative to the $497 million of repayments we received in our directly originated portfolio, our net origination portfolio grew by $389 million.

In addition, we received $537 million of loan repayments from the seasoned GE portfolio. It is important to distinguish these repayments from those in our directly originated portfolio, as we expected this level of repayments in our underwriting and sized our add-on sequential advance financing from Wells Fargo to cover expected repayments in the first few quarters post acquisition.

This financing allowed us to effectively fund this portion of the portfolio with 100% debt, avoiding incremental need for equity financing. As a result, these repayments do not generate increased liquidity available for redeployment until the add-on sequential advance is fully repaid.

Looking at our platform as a whole -- we ended the quarter with $555 million of available liquidity, providing for $2 billion of potential loan originations and fundings. The GE acquisition, coupled with the record level of originations in the second quarter, led to $0.72 of core earnings in the third quarter, up nearly 40% from $0.52 in the quarter preceding the GE transaction, as net interest income has almost doubled.

One note on our core earnings presentation -- we have revised our presentation this quarter to report this metric after incentive fee expense, which was $0.05 per share in the third quarter. We think this revised presentation is a better indication of adjusted earnings and dividend capacity and maintains our best-in-class reporting and transparency.

Now, a bit on our expected earnings profile for the next several quarters. We expect loan repayments in the GE portfolio to continue in coming quarters, resulting in full repayment of the add-on sequential advance financing, a modest decline in balance sheet leverage, and a tapering of the current boost in core earnings.

Over a slightly longer period of time, we will also experience the impact of repayments in the GE fixed rate portfolio, which has a gross ROI of approximately 20%. As we redeploy the substantial majority of capital into floating rate loans, we expect portfolio gross ROIs to converge towards the 13% in our floating rate book, which translates to our expected stabilized core earnings level. Importantly, we also expect to resume our dollar-for-dollar positive correlation of floating rates and will benefit with incremental core earnings from rate increases in the medium term.

As I mentioned earlier, we looked to our stabilized earnings level when sizing our 3Q dividend to $0.62. This dividend represents a 9.3% yield on book value and an 8.9% yield on our trading price. We continue to think this is an exceptional risk-adjusted value for shareholders, given the senior mortgage risk embedded in our portfolio, which carries a 64% LTV and very strong earnings coverage of the dividend.

Looking at this another way -- we are trading at approximately the same level as before the GE transaction. This quarter, we delivered a 19% dividend increase and nearly 40% increase in core earnings. We believe over time we will be rewarded for the strong performance.

Thank you for your continued support. And with that, I will ask Lauren to open the call to questions.

Dan Altscher.

Appreciate you taking my questions. And looks like a really nice beat for all of us for third quarter.

Really simple question -- we've talked about stabilized earnings profile. And I think, Paul, in your (inaudible) mentioned a more stabilized earnings profile has moved through 2016. Can you just really help us get a sense of when stabilization kind of finally or fully occurs? The $0.62 dividend being stabilized -- what's kind of the right timeframe to actually kind of getting there and kind of finality?

Dan, hey, it's Doug. I think the timeframe is a little bit TBD. I think sometime during 2016 is a good assumption. What it relates to is essentially the timing of the repayments in the GE portfolio and the deleveraging that comes from paying down the add-on advance. And it also relates to how the GE fixed rate loans play out. They have a 1.7-year weighted average life. And that assumes all else equal, right, that we continue to generate the LIBOR plus 12-plus returns in the floating rate portfolio and maintain deployment that we've seen over the last two or three quarters.

So with those assumptions, I think the idea that through 2016 we'll trend towards that stabilized level is the right timeframe to be thinking about.

Okay. That works.

And then speaking about the add-on advance -- can you (inaudible) how much of that was repaid during the quarter, and how much is left?

Absolutely. I think roughly half of it was paid during the quarter. A touch of that may've been actually at the end of the second quarter. And so there's -- at the beginning of this quarter, about half of it is left. So $125 million of $227 million was repaid by the end of the third quarter.

Got it. Okay, great.

One other quick one -- Steve, you mentioned in your prepared remarks one of the extensions or modifications that you made to an existing loan increasing -- or extending out term, increasing size. Did that come at the expense of pricing or yield?

There was a slight adjustment to the yield on the loan, but still well above our sort of threshold hurdle. And so the yield on the floating rate GE loans is not dissimilar from the yield on the directly originated BXMT floating rate loans. So as we modify and extend those loans, I don't expect there'll be a meaningful economic impact.

Got it.

And then, one other one, and I'll drop off -- between the repayments that are coming along, the pretty strong liquidity position that's in place at the end of the quarter -- and I think the news and the remarks tried to get at this -- it generally feels like, from a capital front, that you're in a pretty good self-funding position for quite a while. Can you just provide any other color or thoughts around that?

Yes, Dan, I think you raise a good point. I think what we saw this quarter, if you sort of step back and look at the really big picture, was that the pace of originations and the pace of repayments are roughly coming into balance. And as we enter the third year of the business model, and you think about sort of typical three-year lives on these loans, you would expect to see that as a general dynamic or coming closer into balance than during the sort of ramp phase.

Now, if originations accelerate -- that you could see sort of net growth. Again, it's chunky quarter to quarter, so you can't read too much in any individual quarter. But I think you do see that trend of them coming closer into balance as we enter the third year of the business.

Yes. It certainly seems like that.

Okay, great. Thanks so much.

Thanks.

Steven DeLaney, JMP Securities.

So wanted to just ask about the -- you did a lot larger amount of these non-consolidated senior interest this quarter, a lot of the funding of the new loans. And is there a simple explanation between the difference between structuring something as this NCSI versus the traditional A note? Could you just help us kind of understand why some things are A notes and some things are the NCSI structure. Thank you.

Sure. Typically, the difference between the A note and the non-consolidated structure is -- when we take our originated loan, and we divide it within a mortgage loan, senior and junior -- then you have the A note/B note construct. Sometimes we originate the whole loans. We divide them -- instead of A note/B note, mortgage and mez. And so sometimes we prefer (multiple speakers) --

Got it.

-- collateral be in a mezzanine position. And that's what dictates the different accounting treatments. Very similar impact, but it looks a little bit different in our GAAP statements.

Obviously, yes. So you're saying economics -- Steven, economic is very much the same; just GAAP rules require that cosmetically the A note structure looks more like a financing, whereas the NCSI structure just -- you only record on your balance sheet your mez piece.

Yes, it looks a little bit more like a loan sale than a financing. Bu the reality is the impact and effect of the two are very similar. And we look at it case by case and optimize the individual situation.

Got it. Okay, thanks for that.

And then, the thing that I noticed right off the bat in looking at your release -- the volume of loans pretty much -- we've come to expect something close to $1 billion a quarter. But I was struck by the fact that essentially four large loans with balances averaging over $200 million -- obviously the portfolio is composed of much smaller loans, more like a $70 million average. Can you comment on that? Is there anything specific about the large loan market that looks particularly attractive now? Or is this more just coincidental that this particular quarter had these big chunky [loans]? Thank you.

Well, I think we definitely tend to target larger loans in larger markets. They have greater liquidity, better sponsorship. They're more consistent with what Blackstone owns in its equity business.

Right.

So you'll always see a bias to us in terms of looking for the larger loans. It's also -- the competitive landscape for those is better, because a lot of the smaller players can't handle the larger size.

But on the other hand, this quarter was unusual in that we didn't have more of the smaller and medium-sized loans which we typically mix in with the larger loans.

Right.

So it was unique in that regard. But our focus is still always on larger dealers, major markets, top sponsors.

Okay. Thanks for the comments.

Sure.

Jade Rahmani, KBW.

Hey, Jade, are you there?

Yes, thanks for taking the questions. Can you hear me?

Yes, we can hear you.

Okay, great.

Just a modeling question to start off -- if I took your average portfolio and just annualized the interest income, I think it implies a higher yield than the 4.87% weighted average. So can you just discuss maybe timing of repayments, the impact of prepayment income, and what you might expect? Just going forward, if I take your period-end portfolio and use that 4.87% yield, that would imply about $114 million of interest income versus the $138 million you reported in the quarter.

Yes, two points there, Jade. One is that 4.87% is the average yield of our whole loans, so it excludes the loans that are financed with non-consolidated senior interest. And that -- you need to adjust for that in sort of relating the interest income to the average balance.

And second point -- as a matter of fact, the repayments were fairly back-ended in the quarter. So the average balance in the quarter was actually closer to the June 30th balance and the 9/30 balance. I think that would also skew that calculation if you take a simple average.

So we think the best thing to do in terms of modeling is to really look at -- in the 10-Q to look at the rates that are in place as of 9/30, and then make assumptions about repayment speeds going forward.

There was relatively little impact from accelerations during the quarter. I think something like one to two pennies may've come from accelerations due to repayments in the quarter. And so you can factor that in as well.

I would say that we do generally have some accelerations -- income from prepayments each quarter. So it's likely that that'll continue sporadically going forward.

Okay. That's actually really helpful. So effectively, the yield on your retained interest is much higher than the 4.87%?

That's right. It's, of course, in line with the 12 -- LIBOR plus 12%, for example, that we have when you look at the ROI. I would say those yields are comparable to the ROIs, as opposed to the asset yields, which is why we exclude them from that average.

And then, just regarding the current earnings level of $0.72, which was after the incentive fee, versus the $0.62 dividend and your expectations about a normalization -- over what timeframe do you think that is likely to occur? Do you think -- 4Q, I believe, you previously said was also going to be elevated. Is that going to be similar to 3Q, or do you expect sequentially lower earnings? And just over what kind of timeframe should this process take place?

It's a good question. Paul addressed it a bit in his remarks. We talked about it with Dan.

Essentially, over 2016, we expect the effect of those additionally accretive factors to burn off. It relates to the repayment of the short-term loans in the GE portfolio and the related repayments of the add-on (inaudible) that additional deployment. And it also relates to the tapering or the runoff of the GE's fixed rate loans, which have a weighted average life of 1.7 years. So it'll be some time over the coming several quarters that we trend from the $0.72 to $0.62, all other things being equal. And of course, all other things won't necessarily be equal as we go forward.

So not by way of guidance, but by way of just understanding those dynamics over the course of the next year or so, we expect those to trend back to $0.62.

Thanks for that.

Just some bigger questions -- Steve, I think it'd be helpful to hear your view on how you think about investing in the current environment -- if your plan is to just stick with the core investment strategy -- large loans, transitional real estate, major MSAs -- or if you increasingly look to add additional business lines, and even if you would consider branching into perhaps real estate equity.

Well, I think that we still believe that our senior mortgage floating rate strategy is the best strategy that's out there. And it's worked very well for us and for our shareholders. That continues to be our focus and the foundation of the Company.

We will, however, continue to look opportunistically at all other elements and adjacencies that make sense for us to think about adding into the mix. And that's sort of just part of the ongoing strategic thinking of the management team and (inaudible) deal shop. So we look at new opportunities and new, interesting things all the time.

So maybe at some point we'll find something that we think is additive and accretive to shareholders. It's definitely part of the ongoing effort. But again, we love the core business. And I think that has a lot of legs to it.

Thank you.

And switching to credit, and also perhaps the real estate cycle -- just bigger picture, can you discuss credit surveillance of the overall portfolio? And can you also give some color on the one maturity default that was experienced in the quarter? And overall, if there's any issues in the portfolio, any loans that expand out, or perhaps geographies, property types, as [concern]?

I think overall the portfolio is performing very well. I think in general, the risk rating trend overall is favorable. So our risk ratings on balance are improving as a portfolio.

The loan that was in default at quarter end was just one where we were -- it had an expiration near the end of the quarter. It's a client that we know very well, and we're working with them on a longer-term extension.

I think from a surveillance standpoint, we have a great asset management team, highly experienced, very hands-on. I think we're all over all of the loans now. I think we've fully integrated the GE loans. And so I think we're as up to speed on those as we are in the directly originated portfolio.

And trend-wise, as we mentioned -- I think the trend is still basically positive in the portfolio. We're incredibly mindful of any signals or signs that something is up in any one of our loans or in the portfolio. But right now, the trend is positive.

And regarding the maturity default, you would expect essentially that loan to be extended and the borrower to continue to be able to make payments?

Yes.

Okay. And can you just say what type of property that is, and where it is?

It's an office portfolio, concentrated primarily in and around Boston.

Great. Thanks very much.

Thanks, Jade.

Rick Shane, JPMorgan.

One sort of conceptual, and then one is just a housekeeping question -- in terms of -- you made the comment up front that there's a disconnect potentially between your borrowers and what goes on in the capital markets, because they tend not to be sensitive to capital markets activity. That said, there's been an enormous amount of volatility. And we've seen the impact in terms of how deal terms are changing.

Ultimately, there is a pretty strong nexus, even if there's a lag between the types of loans you make and what goes on in the capital markets. Can you talk about, longer term, what you think the impacts will be? Is it positive, is it negative?

And then, the housekeeping question is -- just so we can all sort of get trued up on our NIM calculations -- what were the average loan balances for the quarter using your methodology?

You want to take the NIM question first?

Sure.

I think with regards to the NIM question is that really, the best way to model going forward is to look at what's in place at 9/30. The fact of the matter is that the average balance was much closer to the June 30th starting balance than the 9/30 ending balance. So I think if you want to use that June 30th number as the average to sort of back into the calculations, that's probably the best way to go.

Got it, great. Thank you.

Now the harder question.

Yes. As it relates to the capital markets -- and my comment was not about borrowers not being capital market-sensitive. It was related more to the difference between portfolio lenders and capital markets lenders. And I'd certainly agree with the overall comment that the capital markets are certainly a great indicator of the world at large. And of course, our business is impacted by changes in the capital markets.

We're not seeing, on a short-term basis, the opportunity for our business changing. Because again, most of the portfolio lenders with whom we compete are not necessarily raising the money in the capital markets or selling their loans into the capital markets. They're [a lot] more private equity funds that have a transitional loan strategy. In some cases, it's commercial banks that still are pursuing growth and earnings in the real estate businesses.

But overall, if there continues to be volatility in the world, it'll certainly impact real estate and the loans in our business. I think everything is ultimately connected. And whenever we see the volatility that we've been experiencing in CMBS and in other markets, we look for the opportunities that might emanate uniquely from that volatility.

So we look for situations where someone is borrowing on a capital markets basis, and maybe the loan got re-priced, or essentially where the commitment went away. And we have an opportunity to quickly step in. We test the loans that we originate a little bit wider in spread to see if wider spreads in the capital markets could translate into wider spreads at our business.

So we're very focused on what's going on in the world at large. And it does create opportunity for us. And I think you're right in terms of keeping a careful eye on what's going on with real estate capital markets overall as a long-term indicator as to what will happen with businesses like ours.

Got it.

And if I can reframe the question slightly -- do you think what we're seeing in the CMBS markets is technical or fundamental? Because I think that ultimately impacts your approach. If you think it's fundamental, then maybe it means tapping the brakes a little bit. If you see it as technical, it means maybe putting your foot on the gas a little bit more.

I think we see it primarily -- based upon, I think, your question, I think we see it as more technical rather than fundamental. [But] a lot of CMBS supply -- I think a lot of the volatility has sort of challenged the confidence of some of the bond buyers. So not all the supply is making its way through the market as cleanly as it otherwise might.

The market participant (inaudible) increasing supply coming, because of the uptick in maturities in 2016 and 2017. So we're getting near year end, and people are trying to think what next year and the year after will hold.

But we think that fundamentally we're still mid-cycle, and that property performance is good and in most cases getting better. And it's a good time, as we can see opportunities emanating from the capital markets, to quickly step in and take advantage.

Great. That's very helpful. Thank you.

Sure.

Charles Nabhan, Wells Fargo.

Most of my questions have been asked, but just had a couple of quick, high-level questions.

First, I was hoping to get your comments on capital flows, particularly into gateway cities where global deflation and lower commodity prices may or may not have had an impact on investment activity.

And secondly, you've touched on volatility in your previous comments. And wanted to get an idea of whether you anticipate any potential opportunities -- perhaps not to the same scale as GE Capital -- but do you envision any asset sales either in Europe or in the US that you could potentially capitalize on?

Well, we're always hopeful there'll be more asset sales. And that's a market that we actively pursue. The big platform here is ideally constructed to handle larger loans. And so we're looking here and in Europe. And I think that portfolio opportunities are as likely to occur there as they are here. And the banks in Europe are not as far along in the disposition of their real estate loans that sort of are remnant from the last cycle.

And so we do think that there could be more to do in Europe. But it's difficult to predict when one of those larger deals will come down the pike. So we're -- we look, we hope. And then if something happens, we'll be all over it.

Okay.

And just a quick [bottling] question, if I could sneak it in -- looking at the G&A base, there's a small amount of GE transaction cost, which I imagine will go away. But that aside, if we look at the operating costs, should we think about it as a run rate? Or will that potentially decline over time as some of the expenses associated with GE go away as the portfolio pays down?

Hi, Chuck. I think you could look at that as a run rate. If you look at the detail on G&A we put in the 10-Q, we've got the three categories split out, including GE transaction costs, which we would characterize as being nonrecurring. But the other two categories, professional services and operating and other costs, totaling about $1.6 million -- I think that's a pretty good level to look at.

Okay.

I also got to answer one of your questions from earlier. So as it relates to capital allocations in the gateway cities, we still see very significant capital flows into the major markets and in general believe they'll be the last markets to lose liquidity in the first (inaudible) for liquidity to return.

So you also sort of mentioned sort of natural resource economies. And there are some markets, like Houston or Western Canada, that were active, that are business -- that we're active in. We're not particularly active in either one. But they are part of our market territory.

And so we're incredibly mindful of avoiding economies that have sort of single employer, are sharply cyclical; or things where we think the market conditions create a lack of liquidity for our loans and our business. We have very, very little exposure in all of those areas. But we are very focused in the major market gateway cities and will continue to be as we go forward.

Great. Thank you very much.

I will now turn the call over to Weston Tucker for any closing remarks.

Great, terrific. Thanks, everyone, for joining us this morning. If you have any questions, please just give me a call.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.