Blackstone Mortgage Trust Inc (BXMT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust full-year and fourth-quarter 2015 conference call. My name is Mark, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Weston Tucker, Head of Investor Relations. Please proceed, sir.

Great. Thanks, Mark. Good morning, and welcome to Blackstone Mortgage Trust's fourth-quarter 2015 conference call.

I'm joined today by Steve Plavin, President and CEO; Paul Quinlan, CFO; Doug Armer, Treasurer and Head of Capital Markets; and Tony Marone, Principal Accounting Officer. Last night we filed our form 10K and issued a press release with a presentation of our results, which hopefully you have all had some time to review. I would 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 results, please see our 10K. We do not take 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 10K, each of which have been posted on our website and have been filed with the SEC. This audiocast is copyrighted material of Blackstone Mortgage Trust, and may not be duplicated without consent.

A quick recap of our results before I turn things over to Steve. We reported core earnings per share of $0.68 for the fourth quarter and $2.36 for the full year, both up of which were up sharply from the prior-year comparable periods. A few weeks ago we paid a dividend of $0.62 per share with respect to the fourth quarter, and that brings us to $2.28 for the full year, up 15% from the prior year. If you have any questions following today's call, please reach out to me.

With that, I will turn things over to Steve.

Thanks Weston, and good morning everyone.

Despite a turbulent and volatile market backdrop, BXMT delivered terrific results in 2015 and enters 2016 in a position of strength. Before I speak about our fourth quarter, I would like to first address the broader capital market environment. We have all seen public equities and high-yield have traded off sharply, and CMBS spreads have significantly widened. Liquidity in the markets has declined, as investors have sold off exposures, either to derisk or to keep pace with their own fund redemptions.

Overall, investor sentiment remains cautious if not negative. The markets seem oversold in many sectors, including ours. We're certainly very disappointed by the impact of these market conditions on our stock, and don't believe that our share price is reflective of our performance or process. We built BXMT to succeed in difficult market conditions with our singular focus on senior loans, sourced and underwritten by Blackstone and backed by major market real estate and top sponsors. We haven't bought high-risk mezzanine loans or preferred equity positions. We don't own any CMBS funds, nor do we have an inventory of loans intended for a CMBS exit. We have not bought operating properties or ancillary businesses.

We have stayed true to senior mortgages, which we continue to believe are clearly the best value proposition for our capital. We have establish a large-scale balance sheet with $10 billion loan portfolio and $2.5 billion of equity, with liquidity of over $600 million. Leverage is moderate at 3.1 times, and our liabilities are low cost and match the expected term of our assets.

Our debt is also currency matched and index matched or hedged. Our bilateral credit facilities are diversified among seven different providers, and at quarter end we had $1.4 billion of unutilized capacity. We do not have capital markets-based margin call provisions in our debt, nor do we use FHLB credit, which is being phased out for mortgage reasons. Most importantly, the credit quality of our portfolio remains sound as we have established a leading reputation as a loan asset manager as well as an originator.

Our average LTV has been stable in the 64% range since our 2013 launch. All of our loans are performing. Our portfolio is diversified by geography and asset class. And we take advantage of Blackstone's extensive global network in managing our investments. We have not compromised our risk profile by reaching for yield at the expense of leverage level or loan structure. We have avoided high-risk property sectors and have very limited energy sector exposure.

Since the BXMT re-IPO, we have successfully grown the scale, liquidity, and earnings power of the Company while building book value by maintaining discipline in our capital raising. In 2015 core earnings grew by 27%. We paid a fourth-quarter dividend of $0.62, which was covered 1.1 times by our core earnings of $0.68.

During the second half of 2015, as we saw more aggressive competition and more volatile environment emerging and our capital already well deployed, we tapped the brakes on originations. We closed $391 million in loans in the fourth quarter, which included new loans in New York, LA, and London. Two of the loans were with a strong repeat borrower.

We have already closed $457 million of loans in the first quarter, and have an active pipeline of additional opportunities. With more volatile and less liquid market conditions, credit spreads and ROIs are trending higher in our pipelines. These market conditions should present improved opportunities for well-capitalized portfolio lenders like BXMT. Going forward, we intend to synch our originations with our repayments. This approach, given current market conditions, will enable us to stay active in the market and service our clients while maintaining deployment of our existing equity capital base within our target range. If repayments slow, we are happy to maintain our existing loans longer and will calibrate our originations accordingly while equity market conditions remain weak.

As for our stock, given current trading levels we have discussed the possibility of a share buyback program with the Board. We continue to assess this option among other investment alternatives, including redeploying our investable capital into new higher-yielding originations and preserving more of it for potential opportunistic purchases from distressed or forced sellers. Our goal is to maximize shareholder returns. And we will pursue what we believe to be the best strategic path to achieve them.

Before I turn the call over to Paul, I would first like to thank him for his service to BXMT as Chief Financial Officer. Paul has been a huge asset to the Company and will continue to be very involved with BXMT in his role as Chief Financial Officer for all of Blackstone Real Estate. Tony Marone, who I have now worked with for seven years, will take the reins from Paul effective March 1. Tony is being promoted from his current role as BXMT's Principal Accounting Officer. He knows our Company as well as anyone, is an accounting guru, and I have complete confidence in his abilities to continue to lead BXMT Finance and Accounting as CFO.

Doug Armer will continue to report to me as the Managing Director of BXMT Capital Markets, responsible for our debt and equity capital raising and strategy. With Doug and Tony, we have the most experienced and best capital markets, finance and accounting leadership and execution in our sector.

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

Good morning, everyone. Thanks, Steve, for your kind comments. I would also like to join you in congratulating Tony on the well-deserved promotion.

Before getting into the quarter, I would like to comment on our full-year 2015 results. It has been a remarkable year for BXMT, and this is reflected in all of our key financial results. Loan originations and acquisitions of $8.8 billion drove our balance sheet to over $9 billion, more than double 2014 levels. We have increased overall financing capacity by $5.7 billion, and stockholders' equity grew 70% to $2.5 billion as we optimized the Company's deployment through increased scale. This drove accretion and core earnings per share to $2.36, up 27% from 2014, supporting dividends of $2.28 per share, up 15%. Book value per share increased to $26.56, up $1.46, or 6% from 2014.

Importantly, as Steve pointed out, this growth did not come at the expense of credit quality or balance sheet stability. Looking at the liability side of our balance sheet, total portfolio leverage declined from 3.3 times to 3.1 times in the quarter, while our use of senior loan syndications has allowed us to maintain a modest debt to equity ratio of 2.5 times. We continue to negotiate market-leading financing terms. And have maintained limited recourse in our credit facilities with no capital markets mark-to-market provisions, a feature we believe will be critically important given current market dynamics.

Lastly, while many market participants are concerned about the potential for interest rate increases coming into 2016, we remain positively correlated to USD and GDP LIBOR, which underpins 74% of our loan portfolio and related financings. We believe that this provides another key differentiator between BXMT and other public REITs and specialty finance companies.

Turning to fourth-quarter results. Net interest income was $82 million, down from $87 million in the third quarter following the expected runoff in the GE portfolio and associated add-on advance financing. Management and incentive fees were $14.4 million, up modestly from 3Q on a higher incentive fee for the quarter. And G&A included in core earnings was $1.7 million for the quarter, down from $1.9 million in 3Q as G&A is returning to more normalized post-GE transaction expense levels. This resulted in $64 million of core earnings, or $0.68 per share.

Excluding the GE portfolio, repayments in our directly originated portfolio exceeded loan fundings by $55 million, representing the first quarter where our loan portfolio added to liquidity. As Steve mentioned, this is indicative of our continued focus on balancing capital deployed with repayments in the face of recent market volatility.

GAAP net income in the quarter was $0.70 per share, as $3.4 million of realized carried interest income from CTOPI, net of compensation expense, added to GAAP earnings. We paid a dividend of $0.62 per share in the quarter, representing a 9.3% yield on book value. We have discussed on previous calls that this dividend was sized to our medium terms, stabilized earnings power following the wind-down of the GE portfolio, assuming no incremental earnings from increases in LIBOR. And so is well supported by our current core earnings and net income.

A few comments looking forward to 2016. The GE portfolio add-on advance financing will be fully paid off before the end of the first quarter. At this point, repayments from both the GE and directly-originated portfolios will provide capital that can be redeployed into new loan originations. We expect this to allow us to effectively manage a continued balance between repayments and originations.

While we expect a modest decline in core earnings towards stabilize levels, the recent volatility in capital markets could provide upside to BXMT earnings in a couple of ways. Repayments may be lower than we previously expected, preserving our in-place higher ROI loans, and reducing the interim liquidity drag from undeployed capital. Also, decreased competition could lead to wider loan spreads on newly originated product and higher ROIs on our loan portfolio as a result. Both of these potential market impacts would translate directly to BXMT's bottom line, providing upside to our stabilized core earnings levels.

In closing, our current dividend is securely covered by our earnings. It is supported by a senior loan portfolio with relatively low risk that is prudently financed with non-capital markets mark-to-market leverage. Yet, today our dividend generates a 10.5% yield on our trading price, which we believe is an exceptional risk-adjusted return. We are proud of our team's execution of the business in 2015, and expect that over time the fundamental results BXMT has generated will translate to outperformance in the market.

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

(Operator Instructions)

Ben Zucker, JMP Securities.

Good morning. Thanks for taking my questions, guys. I was looking at the portfolio summary that gave loan-by-loan information. And I noticed that you are reporting LTVs from when the loan was first originated. I imagine that in your internal review of each loan, you are also looking at changes in the collateral values.

So I was wondering if you maybe had a current LTV figure available, or could speak to the internal review process a little bit? I just thought that this could be helpful information as the credit concerns continue to persist here.

Thanks, Ben, for the question. We report the appraisal values in our disclosure documents. We do review our entire loan portfolio on a quarterly basis. And I'm very involved with that on a loan-by-loan basis. We review each loan, not only for what we think the underlying value is, but for all the risk parameters.

We use a risk rating system, which I would encourage you to look at in terms of how the loans are performing post-closing. And so occasionally loans will migrate from category to category, which will reflect our view in terms of how they are performing relative to underwriting and the ultimate risk of the loan. But in general the portfolio's performing very well, generally at or better than the levels that we anticipated at initial origination.

Okay, that's helpful. Just as a quick follow up. It's more housekeeping. I know the weighted average maximum maturity for the fixed-rate loans is 2.9 years now. I was hoping you could provide me with just the weighted average life, absent any extension offers?

I think on the last conference call you offered up that figure at 1.7 years. And just want to make sure that's still at 1.4, 1.5 years now. And that's it for me. Thanks.

That's right. The passage of time has reduced that number by one quarter, but the terms of the loans haven't changed, So your figures are accurate.

Great.

Don Fandetti, Citi.

Steve, obviously given what has gone on in the market and CMBX pricing, it makes sense what you are essentially telegraphing that you are going to halt growth for a while. I was just trying to get a better sense on how you're thinking about it.

Is that more of a function of work are concerned around commercial real estate pricing, or work concerned around funding? And what would cause you to turn that growth back on or pull it back further and delever? Is that in the cards potentially?

I think that everything is in the cards as we look forward. I think as we see the world today, we are still seeing good opportunities to originate and to make loans. As I mentioned, we are seeing loan spreads and our ROIs trending higher, which obviously is positive for the business.

But most importantly, I think is the concept that we are synching our originations with our repayments. We're deployed -- our equity capital is deployed within our target range now. So what really that means is we are not going to raise new capital at the current share price. What that means is that we will be looking to originate based upon what we see as repaying.

We'll adjust the pace of originations up and down depending on the quality, the opportunity and the risk profile that we see as we look forward. And obviously if things trended downward, we would adjust the risk profile of our loans accordingly, or we would slow down the originations further.

Got it. And then one of the interesting things coming out of the credit crisis has been, as you mentioned, the credit facilities having no capital markets mark-to-market provision. I guess the question is, can that change on your current facilities? Is that up to the bank? And do you see that going away now, as it was just largely a function of how good things were?

Hey, Don. It's Doug. No, that can't change per our existing agreements. So that's hardwired into those agreements and we don't see it going away. It's something that we are committed to and we have set as a standard. So none of our funding, none of our credit has capital markets mark-to-market. And that won't change going forward.

Okay, thank you.

Dan Altscher.

This is actually Cole Allen on for Dan. Real quick, I had a question on your one risk-weighted 4 loan. Is that still the same loan from 3Q 2015? And if so, what is the update on that? And what's the path to resolving that going forward?

Actually, that is the same loan. So I think we reached an agreement with the borrower to extend the term of the loan to February. We are working on a longer-term extension with the borrower now. We reset some of the release pricing in the loan. An asset was sold in the fourth quarter at a slightly better price than what we had expected, which was sort of a positive deal in the loan.

A couple of the other assets in the portfolio are under contract for sale. And if they close, they will meaningfully reduce the balance of the loan further. But we have good constructive dialogue with the client. We continue to believe that the loan will be fully repaid.

It's going to be a serial sale of the assets over time. They're sort of Boston-area office and industrial assets. Most of the assets are in various stages of being marketed for sale.

Awesome. Thanks so much. Secondly, you guys are saying there is still a bunch of opportunities out there. Is there specific markets that you guys are targeting? Are you staying away from a specific market? Where are these areas of opportunity that you guys are seeing right now?

We tend not to red-line anything, but there are certainly areas where we are more cautious, secondary and tertiary markets. We have a strong preference for major markets because there's more liquidity, better quality real estate and typically more institutional sponsors.

Where we are looking for opportunities would be distressed sellers of loans. That would be a different opportunity than what we saw over the last couple years. I mean, perhaps apart from the GE transaction, but people who have aggregated loans for securitization where the securitization no longer makes sense. Banks who are concerned and maybe looking to lighten their balance sheets.

We have seen a couple opportunities in the market, none of which has been super compelling yet. But it's a positive trend. And I do think we will have some new and different opportunities if the current market conditions continue.

But the regular way origination activities continues, primarily with spreads being a little bit wider. And as a result, we should be able to achieve slightly higher ROIs than have been historically achieving. The market conditions are improving.

A little bit of volatility in the market is good for us. It shakes out some of the lower-cost providers and puts us into a much stronger competitive position. Certainty of executions become much more important in the current market, and that's something that we provide much more so than the lenders who require capital markets to exit on their loans. We are enjoying the current market conditions, with the exception of how our stock is being treated.

Yes, I agree. I guess touching on that higher yields right there, are you guys changing your internal models to forecast higher yields with this extra volatility, or are you -- what is your thought process going forward? Is it just a benefit if they go higher, or are you building this in at this point?

I think we are still in the mode of seeing whether the current volatility is temporary or signaling a longer-term shift in market opportunity for us. I don't know that we've changed our model, but we're certainly more focused on trying to generate a little bit of yield when yield opportunities are available in the market.

And when the market gets very, very competitive we obviously always feel good about the risk profile of the loans. But sometimes there is price competition, and the price competition is definitely reduced from where it was, say, in the first half of last year.

Cole, looking at it from a corporate finance perspective, I would say that the upside potential to the yields just provides more support and coverage for the $0.62 dividend. The $0.62 dividend isn't assuming any sort of increase in yield relative to where we were six months ago when we declared the $0.62. An increase in yield there would be upside to core earnings and the dividend, at least in terms of coverage if not in terms of payout if it comes to pass.

Awesome. Thanks so much, guys.

Rick Shane, JPMorgan.

You've really answered my question, but let's just explore this a little bit more deeply. You talked about the virtuous impact of a little bit of extension on loans keeping higher-yielding loans on balance sheet.

Can you just talk about how you manage that from a liquidity perspective? And also, given what we saw, and again not the same type of situation, but the risks associated with extension in 2008 and 2009? How you managed the risks as well?

Rick, it's Doug. I think two key points there, and I think you've put your finger on the issue, which are debt maturities. The sequential pay advance, which is linked to the GE portfolio, part of which we are anticipating perhaps a slightly longer life on, is at this point fully repaid, given that the payoffs we've seen during the first quarter. So there is some liquidity continuing to occur. Even if it does slow down, the short-term component of the debt has been fully repaid.

The remaining portfolio is financed with a seven-year facility, which is in two years in excess of the final maturity on the terms of the loan. So we've got a lot of cushion in terms of our asset liability match, both in our directly-originated portfolio, and in particular in the GE portfolio.

Got it. Thank you very much.

Jade Rahmani, KBW.

Thanks for taking my questions. Regarding 4Q originations, can you comment on the extent to which the lower volume reflected you're being more selective as opposed to a market slowdown? For example, did your pipeline decrease in size?

Our pipeline decreased in size because we raised the economic standard that we were requiring for deals in the fourth quarter because we saw what we thought were the early stages of an opportunity to have loan spreads increase. And spreads have been -- were steadily tightening from when we relaunched in May 2013 until sometime in the second half of this year, sometime late Q3, early Q4. And so when you see the spread widening trend, again we sort of paused to not load up during a period of time where we thought there would be better opportunities forthcoming.

And we are also, as we also mentioned, we are deployed within our target range. So we can afford to be more selective on assets and still generate our earnings. So obviously we are going to be looking for assets that we think are appropriately risk-adjusted and enable us to earn high returns. So we're seeing a better environment now than we saw in Q4. So I think that we were rewarded for that strategic decision.

And can you quantify the extent to which you raised spreads?

I think the sample is too small to generalize, but on our portfolio specifically, but I will say in general we're seeing spreads for the loans that we pursue 25 to 50 basis points wider.

Okay. Are there other terms that you are looking to adjust? Are you looking to advance less proceeds, or are you also looking at potentially lending on stabilized assets?

Great question on stabilized assets. I think that we may have some opportunities in stabilized assets that we haven't previously seen because of the dislocation in the CMBS market. We will see.

Most of what we're doing is still thematically similar transitional assets. We do have a couple of assets that we've looked at that are a little bit less transitional. And I think that is reflective of the slowdown in the bank market and in CMBS.

And in terms of proceeds you would advance?

I think a lot of it will depend upon what the client wants, how we view the risk profile of the loan, and what we think we're getting paid for the incremental dollar as it relates to the return.

If we think the incremental dollars are safe and we're getting paid a high return, then we are okay lending them. If we think that the incremental dollars are at risk, then we won't lend against them, regardless of the return.

In terms of banks extending credit to specialty finance players like yourselves through credit facilities, are you seeing any potential pullback? Any banks looking to reduce exposure, not necessarily to you guys, but to potentially other smaller players?

Let me first speak to our experience, and Doug, you should jump in if I miss anything. But we're actually talking to our lenders about increasing our credit facilities, not reducing them. We have great relationships with our lenders. We benefit from being part of the Blackstone platform.

We are generally our lenders' largest real estate clients, and we get great treatment. The nice thing about an environment like this where capital is less readily available is that we have a greater ability to differentiate ourselves relative to our competitors.

When capital is readily available and available to all, it becomes more challenging for us to, again, to differentiate our cost of capital. In this market, I think we will be able to outperform more significantly on a relative basis.

And how about the market overall?

I have heard a few anecdotal things about potentially repo becoming more difficult. I think for those people who aren't in the market, I think it will be difficult to attract a new facility. I think the repo providers are not nearly as willing to provide facilities to smaller platforms as they may have been 6 months or 12 months ago.

And I think you have to presume the cost of credit will go up. If spreads across the entire market increase, then the repo providers will look for increased spreads as well.

And you mentioned distressed sellers of loans. In the specialty finance sector overall, as some of these stock prices are reflecting huge discounts to book value or net asset value, are there portfolios from publicly traded companies that could be attractive, or could it be attractive to acquire such firms?

I think that that potential exists. We have seen a couple of portfolios that I think would fit that bill. But not wholesale opportunities that we would hope to see reflective of the current distress, or perhaps greater distress that some of these companies that may feel when they are trading at really significant discounts to book value, or maybe are under pressure from shareholders or otherwise.

We think as those pressures and those market forces increase, the chances of seeing portfolios that would be attractively priced increases. We are very particular on credit. So a few of the things that we have seen on the market that were available were not sufficiently credit-worthy for us to proceed. They were priced right, but again, just not consistent with our credit standards. So we didn't further pursue them.

Thanks for taking my questions.

Thanks, Jade.

Ken Bruce, Bank of America.

Thank you and good morning. Could you just clarify your response to the last question in terms what basically was a consolidation question? Were you referencing portfolios or companies that are actively for sale?

Portfolios.

Okay, thank you. I guess a lot of the questions that have been asked kind of get to a similar theme, and that's that you've got a lot of self-referencing that's going on in the market, and it seems to be started in CMBS and percolated into a lot of different asset classes.

But the question that I think I'd like to get your sense or your response to would be, what if nothing changes? What if the market does not change substantially, either in terms of the way that your stock is being valued, which obviously curtails your ability to grow, or the asset prices have essentially repriced and basically stay the same? What do you think you would do in this case?

Well, we certainly hope that does not become the scenario. We have talked a lot about why we don't think our stock -- our current share price isn't reflective of value, and especially when you look at it on a dividend yield basis. But while we are in a period of time where we are -- raising equity capital is unattractive, or just a bad idea, we will originate, again, we'll originate in sync with our repayments to maintain the optimal level of deployment to achieve the highest returns we can for our shareholders.

If our stock stayed below book for a prolonged period of time, we would have to certainly reassess and see if there's anything that we could do in response to how the market was evaluating our Company. But again, we are positive about our prospects.

We think in general the current market works to our benefit. And we are hopeful that we will see some near-term upward movement in our shares as we are able to distinguish our performance from others.

Great. And then to the degree that you get a situation where there are either distressed sellers or you just come across a large opportunity, how do you think about the debt versus equity or alternative sources of capital to fund that? Would you be willing to run leverage higher than the 3 times total leverage that you are running today? How would you go about that in the current market backdrop?

I think we just have to evaluate the opportunity and the decision and our liquidity situation and what we see as the risks of the leverage level at the time. We have delevered a little bit as we said we would post the GE transaction. And I think we are in a comfortable range now on leverage level.

As Doug mentioned, the Wells add-on advance has been repaid. That was sort of the extra leverage we took on in order to buy the GE loans without having to over-issue equity.

We are sort of back now to our run rate leverage level. And if there was another great opportunity to invest in, would we consider on some sort of interim basis increasing our leverage? I think if the opportunity was attractive enough, and we [were] comfortable with the risk associated with that, that we would seriously consider that.

Okay, thanks. Final question. There's obviously a lot of anxiety in the market as to how transitional loans may perform over some period of time. On the front end are you approaching, other than maybe having a higher bar, are you are approaching the underwriting of loans differently in terms of how these business plans would in fact perform over time? Is there any change in terms of how you're thinking about the exit for some of the loans that you are currently underwriting?

I think we've always been cautious in terms of viewing our borrowers' business plans. And I think the perfection, the achievement of the business plan needs to be the risk of the equity and not the debt. Obviously we do underwrite some degree of transition and improvement over time, but there is a large margin for error.

Again, we are lending at, on average, 65% LTV. We have strong sponsors. So I think we are comfortable with the transition risks that we have. And the transitional risks we are willing to take on will be a function of the markets and leasing velocity and supply and demand, all of the factors as we consider when underwriting an asset at the time.

We always underwrote higher exit cap rates than were at current market, higher interest rates as it relates to covers that what we covers in the market. When you're making a five-year loan, you can't rely on a spot valuation. You have to obviously have an underwriting discipline that's going to withstand the test of time. We are confident that our underwriting and loan structures will do so.

As we evaluate new loans we have the same standard. I think it's a dynamic standard in that we look at the world and the loan opportunities based upon how we see things at the time and how we see things evolving. But we feel great about the loans that we've closed and are managing so far. And are excited about the opportunities that we think may come from the current market.

Great. Thank you very much.

Thanks.

I would now like to turn the call over to Weston Tucker for closing remarks. Please proceed.

Great. Thanks everyone for your time today. Please let me know if there is any questions.

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