Blackstone Mortgage Trust Inc (BXMT) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust first-quarter 2016 investor conference call. My name is Derek, 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 Mr. Weston Tucker, Head of Investor Relations. Please proceed.

Great. Thanks, Derek. Good morning and welcome to Blackstone Mortgage Trust's first-quarter conference call.

I'm joined today by Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; and Doug Armer, Treasurer and Head of Capital Markets. 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 would like to remind everybody that today's call may include forward-looking statements which 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 the Risk Factors section of our most recent Form 10-K. We do not undertake any duty to update forward-looking statements.

We will refer to certain non-GAAP measures on this call and for reconciliations to GAAP you should refer to the press release and our 10-Q, which are 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 our consent.

So, a quick recap of our results before I turn things over to Steve. We reported core earnings per share of $0.65 for the first quarter. That's up 25% versus the prior-year first quarter, with an increase due to greater net interest income from the continued growth in our loan origination portfolio, as well as the positive impact from the GE portfolio acquisition. A few weeks ago we paid a dividend of $0.62 per share with respect to the first quarter, equating to an attractive dividend yield of over 9% based on the most recent stock price.

If you have any questions following today's call, please give me a call.

And with that, I will turn things over to Steve.

Thanks, Weston, and good morning, everyone.

Amid highly volatile market conditions, BXMT delivered excellent first-quarter performance. Even with CMBS spreads blown out and the CRE securitization market barely functioning, we produced strong results because of our singular focus on originating senior mortgage loans for our own portfolio, efficiently financed to maximize ROI.

Our originations are sourced and underwritten by Blackstone and backed by major market real estate with top sponsors. Our business model insulates us from CMBS market volatility, as our core earnings are entirely driven by net interest income derived from our loan portfolio. Our earnings are not predicated upon trading or securitization activities. We've not bought CMBS, IRS mezzanine loans, preferred equity positions, or otherwise moved out on the credit curve.

We've utilized Blackstone's strong, longstanding banking relationships to develop expansive bilateral term credit from a diverse group of lenders that provides greater financial flexibility. At BXMT we have stayed true to senior mortgages because we continue to believe that they're the best value proposition for our capital.

During the quarter we originated $861 million of loans in a choppy, but ultimately favorable, environment for BXMT, with wider spreads and diminished competition. Market volatility slowed new transaction activity early in the quarter, but during March it became clear that this period of highest volatility was behind us, at least for now, and our pipeline grew as prospective borrowers moved off the sidelines.

Since quarter end, we've already closed, or have in the closing process, another $625 million of loans and have an active pipeline of additional potential opportunities. The more volatile, less liquid conditions slowed overall market activity but played to our strengths, as Blackstone managed direct originator with a reputation for quick and reliable execution.

100% of the new loans closed during the quarter are senior floating rate and in the same coastal major markets where our direct origination portfolio is concentrated. Two of the loans are with repeat borrowers, high quality sponsors that we know well and that like our customized client-centric approach. We feel great about the credit quality of our new originations and our loan portfolio overall, with its 63% appraised LTV and 100% performing status.

In Q1 we also demonstrated our consistent ability to efficiently capitalize our business, even during a challenging period when market liquidity was contracting. All of the quarter's originations are financed with the existing credit providers.

During the quarter we extended an existing $750 million credit facility to a fresh five-year term. Post quarter end we finalized the increase of another credit facility by $300 million to $1 billion, and extended its final maturity to 2022. We also closed a new $125 million committed credit facility which we intend to grow over time that provides us with increased flexibility in the term funding or syndication of our loans.

We have other upsizes and new facilities in process to further expand our credit capacity and improve our access to liquidity. At quarter end we had liquidity of over $575 million, which translates to $2 billion of loan capacity. We expect that capacity and increased repayment activity in our portfolio to fund our new originations during the coming quarters. If repayment's slow, we are happy to maintain our existing loans longer and will calibrate our originations accordingly while equity market conditions remain weak.

In closing, despite what was a truly tough quarter for the public and CRE capital markets and leveraged lending strategies in general, BXMT flourished. We were able to leverage the reputation we've built over the past three years as a reliable counterparty and capital provider to move the business forward on all fronts.

Blackstone and its employees are the largest stockholder of BXMT and we see great value in the shares. We love the high cash dividends generated by our low volatility, floating rate, senior mortgage business, especially in this yield-challenged environment.

And, with that, I'll turn it over to Tony.

Thank you, Steve, and good morning, everyone.

As Steve mentioned, BXMT stayed true to its core business during the first quarter and we continued to generate strong returns for our stockholders while protecting their capital from market volatility.

We originated six new loans during the quarter for a total of $861 million and an average loan size of

$142 million, reflecting our continued focus on large loans. The loans that we originated in 1Q have an average coupon of LIBOR plus 4.4%, almost 50 basis points wider than our existing floating-rate portfolio and reflecting the market conditions Steve mentioned earlier.

Importantly, however, the average LTV of these originations, at 61%, is in line with our existing portfolio, so we have not simply traded additional credit risk for higher returns.

Total loan fundings during the quarter of $619 million outpaced repayments of $375 million, increasing total assets on our balance sheet to $9.6 billion as of quarter end.

We continue to have no defaulted or impaired loans in our portfolio, and our overall portfolio LTV of 63% and risk rating of 2.2 on a scale of 1 to 5 is consistent with prior quarters, demonstrating the strong credit profile of our loan book. During the quarter we collected a par repayment of over 50% of the only 4-rated loan in our portfolio, reducing its balance to $54 million.

Before leaving our loan portfolio, I would like to highlight some additional loan-by-loan disclosure we have included in our earnings release and 10-Q beginning this quarter. Specifically, we have added disclosure of our loan per square foot per unit or per key, reflecting our basis in the collateral property, a metric we focus on at Blackstone when evaluating each potential investment.

We believe this additional information furthers our goal of providing best-in-class disclosure to our stockholders and can be used in conjunction with origination LTV and risk rating to get a fulsome picture of each loan in our portfolio.

We financed our 1Q originations primarily using our existing revolving credit facilities, which had an all-in cost of LIBOR plus 2.03% at quarter end. As Steve mentioned, we are in active dialogue with our lenders to extend and expand our access to credit under both existing and new facilities.

During the quarter we fully repaid our GE portfolio add-on advance financing, fully satisfying this obligation prior to its maturity and reducing our balance sheet leverage as expected following repayment of the shorter-term GE loans. At 3/31 our debt-to-equity ratio of 2.6 times and the cost of our revolving credit facilities of LIBOR plus 2.03% are both consistent with where we began the quarter, and within the range we expect to maintain for the foreseeable future.

Turning to our operating results, we generated core earnings of $0.65 per share and declared a dividend of $0.62, up 25% and 19%, respectively, from the first quarter of last year and reflective of the dramatic growth we experienced in 2015.

GAAP net income of $0.61 per share is up 33% year over year after adjusting for $0.14 of nonrecurring income in 1Q 2015 related to our CT legacy portfolio, which was substantially resolved in 2015 and is no longer a material contributor to our financial results.

Quarter over quarter core earnings have continued to trend toward our expected run rate of $0.62 per share, reflecting the impact of balance sheet deleveraging resulting from the repayment of the shorter-term loans in the GE portfolio I mentioned earlier.

Our core earnings of $0.65 covered our $0.62 dividend by 105% and retained earnings during the quarter contributed to our book value of $26.53, which was essentially flat relative to $26.56 at 12/31.

The stability in our book value during a quarter marked by capital markets volatility highlights our focus on stability on both the left- and right-hand sides of the balance sheet. Our earnings are entirely driven by the net interest income produced by our loan portfolio. Our loans are held for long-term investment with no impairments in the portfolio and are not subject to mark to market accounting associated with securitization or other short-term business models.

We did not experience any margin calls on our credit facilities during the quarter, maintaining our portfolio leverage and reflecting the stability of these facilities. As we have discussed previously, none of our credit facilities have capital-markets-based margin call provisions.

Our portfolio remains highly correlated to increases in US LIBOR, with an increase of 50 basis points generating approximately $0.04 of additional core earnings on an annual basis. Although recent signals from the Fed and others have been mixed, we believe rate increases are inevitable and we are positioned to benefit from any future increases when they occur, something we believe is a key differentiator from other mortgage REITS and specialty finance companies.

In closing, we believe that our business produces exceptional value for our stockholders, with a high [turn] return generated by a stable portfolio with superior sponsorship by Blackstone. And we look forward to continued positive results in future quarters.

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

(Operator Instructions) Sam Cho; Credit Suisse.

I'm filling in for Doug Harter today. So, given that you've seen a reduction in the risk-rated 4 loans this quarter, I just wanted to revisit your thoughts on managing the risk profile of the loan portfolio. Specifically is there a certain sweet spot you're looking for when balancing the higher risk-rated loans?

I think in general, we don't have a barbelled approach in terms of for credit. So we don't originate a combination of higher LTV and lower LTV loans to average 63%. In general our LTVs are pretty close to that average.

The one 4-rated loan was a loan that we acquired from GE, not one that we originated. We're well along the way towards resolving that loan. But it's not reflective of any other loan in our portfolio. And so, the 2- and 3-rated loans which dominate our portfolio risk ratings are loans consistent with the average credit profile of our deals.

And, again, we're typically originating loans on major market assets with top sponsors that have some degree of transition, so maybe an office building that's lost a tenant or a hotel that needs a renovation. And it's a consistent profile.

So you're more focused on keeping the average consistent over time. Fair to say?

Yes. We're not trying to step out on risk. And they'll be no 4-rated loans by design.

Got it. So my second question -- I know this is largely dependent on market conditions, but do you have a general sense of -- do you have, like, a target range for capital deployment this year?

I think that in general, given where our shares are trading, that we're going to keep our capital deployment generally consistent with where it is today. And so that means that we think that our originations and the repayments in our portfolio will remain in sync.

We have some additional capacity as well, which you talked about, in terms of our overall liquidity. But we've been able to maintain a very strong level of deployment for us in terms of our existing capital base. And with the capacity and with the repayments that we foresee we think that we can maintain that through the year. Given, it will vary in any one quarter, the swing of a loan repaying or a loan originating and we can't keep them in exactly in sync on a quarterly basis. But in general over a couple of quarters we think we can.

Got it. Thank you.

Jessica Ribner; FBR Capital Markets.

Just a couple of questions here. Your new swing-line credit facility, could that speed up the rate of originations since you're originating a little bit more? Or is it more dependent on really what you've had in the pipeline and how you like those kind of loan characteristics?

That's a great question, Jessica. It doesn't relate to the types of loans we're going to be originating. We're going to continue to originate the senior floating rate loan strategy that we've been originating thus far.

I think it will facilitate originations for us a little bit more efficiently than it would be without it. So it's a liquidity management tool for us. It enables us to coordinate our originations and term financing executions more efficiently. And it's a step towards a more efficient balance sheet. By providing additional liquidity it does give us a little bit of optionality in terms of our capital markets alternatives. But it doesn't affect our origination strategy.

Okay, great. And then I just wanted to clarify. You said you've already closed $625 million of loans in the quarter?

No. The $625 million in the second quarter, that's the combination of loans that are already closed and loans where we have agreed terms and are in the closing process.

Okay.

That's sort of the things that -- and our success rate on converting those to -- on converting what's -- in closing deals to closed deals is very high.

All right, perfect. I think that's all for me. I think the credit disclosures that you've given and the loan level disclosures are very helpful. So thank you very much for that.

Jade Rahmani; KBW.

Can you comment on what drove the stark decline in loan repayments and if you have seen a resumption in repayment activity?

Yes, sure. I think that the quirks, the unique nature of our loan portfolio to some extent, where we just had a low repayment quarter. But it was also definitely impacted by the volatility in the markets and especially in January and February. In order for our loans to get repaid, a new loan has to be closed.

And in general, given where the CMBS market was, a lot of lenders retrenched or revised terms on loans to their borrowers, which caused transaction activity to get cancelled or delayed. We had a couple of loans we thought were going to repay that didn't because of either buyers getting cold feet or lenders changing loan terms.

We have seen a resumption of more regular [lag] activity in the market and expect that debt repayment activity will increase during the year, starting in this quarter.

And can you say whether that's sort of back to the previous levels that we saw, for example, in the last quarter, just as an annualized repayment rate or as a percentage of your portfolio? Or is it still below what you would have otherwise expected, absent the volatility?

I think it's very hard to predict, with floating-rate loans, when they get repaid. The fixed-rate loans are much easier. They tend to go to maturity or near maturity because of the prepayment protection that lenders get on those loans.

But for the floaters, they get repaid when an asset is sold or a borrower has an opportunity to borrow on a more accretive basis. And it isn't tied to the maturity of the loan, so it's really predicting the behavior of a borrower, what he's going to do.

I think if we look at that across our portfolio, I do expect that we'll see a return to more normalized levels of repayment. I can't say that it will exactly match to the Q3 or Q4 of last year, but I do think that Q1 of this year was an anomaly, was an especially low repayment quarter.

Just with regards to your current liquidity position, which is close to what it was last quarter, but slightly lower, do you anticipate any near-term need to raise equity? And what would drive your decision to raise equity at the current valuation level?

We don't at this moment see any near-term need to raise equity. We talked about $2 billion worth of loan capacity, plus the repayments that we expect over the coming quarters. And if you match that to what our originations have traditionally been, so say $700 million to $1 billion plus, you can sort of see that we have plenty of capacity for our loan origination program.

Okay. And just with respect to the liability structure, what are your thoughts on potentially diversifying the liability structure by, for example, issuing unsecured debt, which one of your commercial mortgage rate peers recently did? How do you feel about unsecured debt which, although at a higher cost, could be viewed as safer than credit facilities?

Jade, it's Doug. It's an interesting point. We have our eye on the high-yield market. I think high-yield debt is a potential alternative for us. There has been some positive activity in the market recently for companies similar to ours. We don't have a public rating, and so that's one of the things that we think about when we're looking at the high-yield market.

But high yield as a capital markets alternative for us is definitely interesting. So are convertible notes, for example. But we're basically happy with the way the Company is capitalized now in terms of the asset level leverage that we have and where leverage is on the balance sheet. High yield, that would be a way for us to tick that up a little bit, maybe half a turn. So it's something that we think about.

And, lastly, you guys have done a nice job expanding and upsizing credit facilities, including in the past quarter. We have gotten some investor questions about how credit facilities would perform in a downturn, or a hypothetical stress environment. Would you care to comment on whether you have any concerns about how these repo facilities could perform in a downturn scenario, for example? What events could trigger a margin call and what level of margin call could you experience on, say, a 65% LTV loan?

Sure. I think the thing to keep in mind is that our credit facilities are different from the 1.0 generation or what's out there in the market today. People tend to focus on economics, but the real difference is in the structure. Our credit facilities are term matched or long term. They're currency and index matched, limited recourse, and we have no capital-markets-based mark to market provisions.

You mentioned potential for nonperformance or sort of credit-based marks. In our facilities, collateral nonperformance is not a repurchase event. Our lenders look to the relevant real estate fundamentals and have to make a judgment about the collectability of the loan according to a commercially reasonable standard. So keep in mind what commercially reasonable means in the context of a cross-collateralized pool of 63% LTV mortgages. It's a relatively high bar, we think, for a potential margin call.

So we don't believe there's any scope for material deleveraging in any realistic scenario in our portfolio. And I'd just underscore, again, that during the last quarter, which was a quarter where there was some stress in the market -- for sure we didn't have credit stress in our portfolio, but there was stress in the market generally -- we extended and upsized almost $2 billion of credit. And I think that's the best indication of the stability in our facilities and the strength of our relationships with our credit providers.

That's very helpful. Thanks for the color.

Don Fandetti; Citigroup.

Steve, your simple strategy of originating senior loans seemed to play out pretty well with the volatility that we saw in Q1. As you come out of that, do you think to yourself: You know what? There's been some distress out there. I could possibly get into different businesses. Or do you say: I'm glad that we kept things simple and we're going to stay on that track.

We're certainly glad that we kept things simple and we had this strategy which we think among the alternatives fared the best. And you raised an interesting point, because obviously those activities which are highly volatile will cycle up as well as cycling down. And it's certainly easier to talk about not participating when they cycle down.

But I think that ultimately in a vehicle like ours stability is hugely important. And I do think that REITs as yield vehicles work best when they produce low volatility, reliable income, so people can get visibility on core earnings and dividends and feel good about the safety of those.

So we always look at potential new opportunities and new business lines. We're always evaluating things that could create additional shareholder value. And if there are activities out there that we think would fit that mold, we would do them -- but not if they're high-volatility activities.

Got it. Thanks.

Joel Houck; Wells Fargo.

So the spread widening we saw in CMBS in the first quarter did not -- I don't think it was expected to, but it certainly didn't really extend into kind of the senior loan market, as evidenced by you've still got L plus 4.40, which is pretty close to what the overall yield is.

I guess the question is, is there some point where dislocation or distress in capital markets, particularly CMBS, could result in you getting wider spreads on new originations? Or so you see it more as your segment is more insulated and the selloff we're seeing away from you guys is more technical in nature?

I think the selloff that we're seeing is more technical and not fundamental. So I think the spread widening isn't reflective of bad quality credit, but just unique market factors that are impacting us, CMBS, perhaps more heavily than other like securities.

In our market, because the participants are not exiting their loans through the capital markets, it's a less volatile activity. And so we did not see, nor did we expect to see, spreads increase nearly to the extent they did in CMBS-related loans.

They did trend a little bit wider, so I would sort of 25 to 50 wider. And we've seen as volatility diminishes, I think we've seen those spreads sort of stabilize. I don't think they're going to get any wider from here. So I think it's unlikely we're going to see an environment of higher spreads.

Our market is still pretty competitive and as long as we can maintain the very efficient financing that we have been able to thus far, then we see a stable to positive trend in our ROIs. Because I always think we'll be able to finance a little bit better than most of our competitors and originate a little bit better. And so it gives us a nice trend line on our deals, but not anything that's going to really deviate from the pattern that we've seen over the quarter since we started up in 2013.

All right, great. Thank you.

Final question, Ben Zucker; JMP Securities.

I was going to ask about the strategy, matching originations with repayments, but it sounds like you kind of touched on that.

I wanted to look at the fixed-rate portfolio really quickly. When that GE portfolio first closed it added something like $2.1 billion, $2.2 billion in fixed-rate loans and those were always highlighted as very short duration at the time. We might have even started to talk about this last quarter, but as we sit here now the portfolio's nearly $2 billion in size and I saw the commentary in the Q mentioning the percentage that are subject to early repayment and not.

I was just wondering, based off your updated conversations with borrowers, specifically the 36% that have the eligibility to repay, what your feeling is, or understanding, on how this fixed-rate portfolio that has kind of not really shrunk as much as we might have thought, how that might play out during the year.

I do think that we'll see some significant reduction in the fixed-rate loans, especially in the manufactured housing sector across our portfolio. The loans that we have in that property category are very stable, strong performing loans and there is now a very strong agency bid for those loans. Fannie and Freddie are very active in the sector. And the loans that we have in general are stabilized enough where they work in that model.

So as we progress through the year and we get to the point where those loans can be economically prepaid, I think you'll see a lot of movement in the fixed-rate loans in that sector and on our balance sheet sort of out to Fannie and Freddie.

Okay. That's very helpful. And then just lastly, and this is maybe a little technical. I just wanted to ask about the target leverage. I feel like I've always been kind of hearing the term that you're comfortable running this up to a 3. But we kind of here these, like, different leverage ratios. I think previously you were including the nonconsolidated senior interests. And this quarter I heard you reference a 2.6 figure, which I calculate for myself also, which kind of includes your senior converts as equity capital.

When I'm thinking about the 3 times leverage level to run this business, just in what element should I be thinking about that, in the context of the 2.6 that you called out, or including those nonconsolidated senior interest that you include in your marketing deck when you list the leverage?

Ben , it's Doug. I think that's a great question. The difference between the two numbers is exactly what you're referring to. The 2.6 is the debt-to-equity ratio, so the actual credit facilities that we have. The 3.2 takes into account the senior loan participation, some of which are on balance sheet as loan participations sold and some of which are off balance sheet in the form of mortgage mezzanine splits, essentially.

So if you think about the portfolio as a portfolio of 100% senior mortgages that are financed in a couple of different ways, then the right way to look at it is 3.2 times levered. If you're thinking about our debt-to-equity ratio with regard to the sort of leverage level and thinking about debt maturities and that sort of thing, then the 2.6 times ratio applies.

So from a modeling point of view, I would look at the 3 times leverage level, and think about that being carried forward and that being our sort of stabilized leverage level. And from a sort of credit point of view, I would think about the debt-to-equity ratio, because that's the amount of debt that we actually have maturities on.

Right. Okay. That's very helpful. Appreciate your comments, guys. Thanks again for taking my questions.

At this time I would like to turn the conference back over to Mr. Weston Tucker for any closing remarks.

Great. Thanks, everyone, for your time today and please reach out with any questions.

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