Blackstone Mortgage Trust Inc (BXMT) 2016 Q3 法說會逐字稿

Thank you for your patience. Your conference call will begin momentarily. Again, thank you for your patience, and please continue to stand by.

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust third quarter 2016 investor call. My name is Shelly, and I will be your operator for today. (Operator instructions.) I would now like to turn the conference over to your host for today, Mr. Weston Tucker, head of investor relations. Please proceed.

Great. Thanks, Shelly. Good morning, and welcome to Blackstone Mortgage Trust's third quarter conference call. I'm joined today by Mike Nash, Executive Chairman; Steve Plavin, President and CEO, Tony Marone, Chief Financial Officer, and Doug Armer, Head of Capital Markets.

Last night, we filed our 10-Q and issued a press release with the presentation of our results, which are available on our website. I'd like to remind everyone 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 sections of our most recent 10-K and subsequent 10-Qs. 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, 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 audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

So a quick recap of our results before I turn things over to Steve. We reported GAAP net income per share of $0.69 for the third quarter. We reported quarter earnings per share of $0.71, which was up from $0.67 in the second quarter. A few weeks ago, we paid a dividend of $0.62 per share, which equates to an attractive annualized yield of 8.3%, using the current stock price.

If you have any questions following today's call, please let me know. And with that, I'll turn things over to Steve.

Thanks, Weston, and good morning everyone. BXMT delivered excellent results in the third quarter, highlighted by increased originations, new financing capacity, and 100% credit performance. Core earnings per share of $0.71, boosted by yield maintenance from prepayments in the GE fixed rate loan portfolio, provided very strong coverage of our $0.62 dividend.

The market environment for our business continues to improve, following a very volatile start to the year. Value-added opportunistic investors, the primary generators of lending opportunities for BXMT, ramped up their activity with new acquisitions, and we expect this trend to continue. We are also seeing more refinance opportunities on properties where sponsors are looking to recapitalize and extend hold periods.

The expanding impact of new regulations for banks and CMBS lenders has improved the competitiveness of non-bank portfolio lenders like BXMT. Banks and CMBS originators are operating less efficiently and at lower volumes, which helps to keep the larger transitional loans that we pursue out of those markets. Most of our competition comes from private debt funds and other mortgage REITs, and we were able to compete very effectively against this group, given our access to efficiently priced debt, track record, and other platform benefits as part of Blackstone Real Estate.

Demand for space and property NOI has improved in the coastal markets, where we focus our lending, providing a healthy fundamental backdrop. And the impact of new supply in most sectors of these markets remains calm, which bodes well for the continuation of the current balanced state of the credit cycle. We do not see danger signs from the property and capital markets. Cap rates should remain low, as the global pursuit of yield and safety has increased demand for major market US real estate. And the floating rate CMBS market, where the most aggressive large loan pre-crisis lending took place, is barely a factor in the lending landscape.

We originated $957 million of loans in the third quarter, and already have another $804 million of loans that closed post quarter-end, or are now in closing. Our Q3 originations reflect our focus on major markets, where property and sponsor quality is highest, and we realize our greatest advantages from our affiliation with Blackstone's real estate ownership platforms. 80% of the new Q3 loan exposure is secured by office properties located in New York and California. Our new loans have an average size of $154 million, and all are senior and floating rate.

Our third quarter also had an extraordinary amount of repayments, $1.6 billion. The repayment spike was primarily attributable to $865 million of loans to a single sponsor, repaid in a corporate recap. The GE loan portfolio, the source of most of the repayment activity, initially included $1.4 billion of primarily fixed rate loans backed by manufactured housing communities, a sector now coveted by Fannie Mae and Freddie Mac. We like this sector as well, but can't compete with the agencies to the MAC portfolio refinancings, so we expected the MAC loans to roll off as the yield maintenance prepayment penalties reduced over time.

During the quarter, $969 million of MAC loans were repaid, including the $865 million loan to the single sponsor that repaid us with agency financing, in conjunction with their recap. These repayments generated $5.1 million of additional income in the quarter, essentially accelerating interest that would have been earned in future periods into the third quarter. The repayments significantly reduced our fixed rate loan exposure, improving our potential earnings benefit from higher LIBOR. MAC exposure was reduced from 12% to 3% of our portfolio, so most of these repayments are now behind us. We will recycle that capital over the coming quarters into new floating rate loan originations across the primary property sectors that we target.

We added another new lender to our lineup of credit providers during the quarter, and we expect that relationship to grow. While we expanded capacity, we have not compromised on structure, and our new credit continues to be longer-term, match funded, and without capital markets market to market provisions.

Now, moving through our fourth quarter after the relaunch, BXMT continues to successfully execute on a simple, focused, first mortgage strategy, a model that's designed to generate a predictable and growing dividend through the cycle, and we've now delivered on that for over three years, with current core earnings coverage of 109% for the year-to-date period. We have and will continue to benefit from the unparalleled benefits of Blackstone sponsorship, which strongly differentiates us from the market. And for our stakeholders, an investment in BXMT stock has delivered a total return of more than 40% since our re-IPO, outperforming peers in the relevant indices. Even with this performance, our stock is trading at 8.3% dividend yield, a very attractive level in this low rate environment.

I'd like to thank our stockholders for their ongoing support, and we look forward to continuing to drive great value for our investors. And with that, I'll turn it over to Tony.

Thank you, Steve, and good morning everyone. This quarter, BXMT delivered strong, headliner results, with core earnings of $0.71 per share, a $0.07 increase in book value, and loan originations of almost $1 billion. We originated six new floating rate loans and upsized four loans during the quarter, for a total origination volume of $957 million, with an average loan size of $154 million for new loans. The loans we originated this quarter have an average yield of LIBOR plus 4.5%, with an average LTV of 64%, in line with our existing portfolio.

Repayments of $1.6 billion during the quarter outpaced loan fundings of $926 million, driven by $865 million of repayments received from the four related manufactured housing loans we acquired from GE that Steve highlighted earlier. Absent these loans, our portfolio repayments of $756 million were consistent with our general expectation of typical quarterly transaction volume, and below 2Q repayments of $966 million.

As we have noted on previous calls, although the amount of originations and repayments will generally be in line over the medium term, the exact amount and timing of originations and repayments will vary somewhat from quarter to quarter. These 3Q repayments contributed to three quarter-over-quarter changes in our loan portfolio attributes. First, the amount of loans collateralized by manufactured housing decreased to 3% from 12%, a trend that as Steve noted, we expect will continue. Second, the fixed rate component of our loan portfolio decreased to 14% from 22%, further increasing the correlation of our earnings results to increases in floating rate indices. And third, our portfolio weighted average risk rating increased to 2.5 from 2.3 on our five-point scale, following the repayments of several 1 and 2 rated loans during the quarter. This increase was not driven by credit issues in our portfolio or risk rating increases. Overall, our portfolio continues to have no defaulted or impaired loans, and we do not have any 4 or 5 risk rated loans. Our overall portfolio LTV of 60% provides a healthy equity cushion against potential future collateral value declines and demonstrates the overall strong credit profile of our loan book.

We financed our 3Q originations, primarily using our existing revolving credit facilities, which had an all-in cost of LIBOR plus 2.01 percent at quarter-end. We continue to broaden and strengthen our banking relationships, adding a $207 million asset specific financing with a new counterparty, and extending maturities of $1 billion of our existing revolving credit facilities during the quarter. We closed the quarter with a debt-to-equity ratio of only 2.2 times, down from 2.5 times at June 30th, as the loan repayments I referred to earlier allowed us to pay down our revolving credit facilities and efficiently manage our balance sheet. Including cash and revolving credit capacity, we enter the fourth quarter with $760 million of liquidity, or approximately $3 billion of potential loan origination capacity.

Turning to our operating results, we generated core earnings of $0.71 per share, up $0.04 from 2Q, driven by prepayments and yield maintenance fees received during the quarter in connection with the $1.6 billion of loan repayments. Although we typically collect some amount of such fees in a given quarter, in 3Q we received $7.1 million of fees related to repayments of fixed rate loans in the GE portfolio that could be considered outside of our typical results. We would not ordinarily expect to see such a large amount of prepayment fees in a given quarter. These prepayment fees effectively shifted earnings into 3Q that would have otherwise been generated by the repaid loans in the coming quarters, by converting future coupon payments into fees collected and recognized upon repayment. These additional repayments bring us into 4Q with levels of liquidity on our balance sheet somewhat higher than we typically would have, and therefore will temper earnings over the coming quarters, as we redeploy capital into new loan originations.

Accordingly, we maintained our quarterly dividend at $0.62 per share, which is an amount that we believe is sustainable and supportable for our business. GAAP net income of $0.69 per share increased less than core earnings, up $0.02 from the second quarter, with the incremental prepayment fees received offset by a decline in GAAP net income related to our CT legacy portfolio, which recorded some non-recurring market-to-market income in 2Q and continues to liquidate in the ordinary course. Lastly, our book value increased to $26.61, from $26.54 at 6-30, representing $0.11 of incremental retained earnings during the quarter, offset by $0.04 of unrealized foreign currency markdowns reported through OCI.

To close, I would like to highlight some key thematic differentiators of BXMT that continue to be reflected in our 3Q results and in our overall $9 billion senior lending business. We remain highly correlated to increases in US dollar LIBOR, with an increase of 100 basis points generating approximately $0.19 of core earnings on an annual basis. Our core earnings are driven entirely by the income generated by our balance sheet loan portfolio, without reliance on the securitization or other transactional markets. We generate returns for our stockholders by making fundamentally low risk senior loans and financing them prudently with best-in-class credit facilities, free of capital markets-based margin call provisions. And lastly, BXMT is uniquely positioned among mortgage REITs and other specialty finance companies as a component of Blackstone's real estate platform, providing us with expertise and market insights that drive every facet of our business.

Thank you for your support, and with that, I will turn the operator to open the call for questions.

Thanks. Shelly, if you could, open it up for questions.

(Operator Instructions). Your first question, it comes from the line of Jade Rahmani with KBW. Please proceed.

Thanks for taking my questions. Just on the lending market, can you comment on what trends you're seeing in loan spreads? The cash coupons looked fairly stable sequentially, and I just wanted to get your sense of whether you think we're in a compressing environment in terms of where spreads are, or if there's enough lenders pulling back or being a little bit more cautious on their underwriting that we're in basically a stable spread environment.

I think, Jade, we're in a stable spread environment. I think we're sort of in the sweet spot of the lending cycle now, and so there are a lot of opportunities to lend in the market. There are lenders. There's competition. But we're winning a lot of that competition because of our lower cost of capital. And so, we expect our spreads, our returns, to stay in the historic range that we've established since the re-launch, and it's really a good level for our business.

In terms of competition, are you seeing banks compete on transitional loans? I was at a conference yesterday, and HSBC, for example, mentioned transitional lending as an area of target for them.

We occasionally see banks on the smaller opportunities, but generally, for the larger stuff that we target, the banks aren't really able to compete. Even the banks that are active in transitional lending tend not to view it as a syndicated loan activity. And most of the loans that we like are too large for any one bank to hold, so they do fall into that syndicated loan bucket, and then they begin to get impacted by the challenges of the bank market execution in the current sort of regulatory environment. So I don't see banks as a big competitive factor for us, again, except for on the smaller loans that we occasionally pursue.

In terms of the portfolio diversification, can you comment on the UK exposure and what trends you're seeing in those loans, as well as on the condo exposure?

Sure. The UK exposure, I would say, is similar to what we discussed on our last call. We have a relatively small percentage of our UK portfolio in the London office, which is the one area that we think requires the most focus. In general, though, the assets are performing as we expected, and the LTVs of that portfolio are very low. And one of the office assets actually signed a very large lease since we last reported, and the leasing level of that one asset has gone from about 30% to about 70%, and it's changed its profile. So it's sort of proceeding along the lines of its business plan that anticipated even prior to Brexit. So we are not overly concerned about our UK exposure. It's really they're high quality loans with low LTVs and strong sponsors.

We are seeing an improved approved environment in terms of new opportunities there. The banks are taking a step back. We hadn't originated a lot of new loans coming into Brexit, only about, in the prior nine months, no new loans in the UK. And that was primarily a function of the banks being super-competitive and us just not being able to get good risk-adjusted returns. Now we're seeing the environment improve as it relates to sort of opportunistic chances to deploy our capital. Obviously, we're being cautious, given some of the uncertainties surrounding the economy in the UK, but we are hopeful to see some higher quality opportunities that maybe we wouldn't have seen, had the market not been disrupted.

Can you also comment on the condo exposure?

Yes. Our condo exposure is very light. We don't have any significant New York City high-end condo. We haven't done any condo construction loans. Most of our condo exposure are really properties that operate as rentals, but where the sponsor has incorporated into the loan the flexibility to do unit-by-unit sales as a means of repaying our loan. So, no concerns. And we're really not exposed to the headlines that you might read about in the New York City condo market. We're just not a participant in the high end of that market.

Thanks for taking my questions.

You're welcome.

Your next question, it comes from the line of Jessica Ribner with FBR. Please proceed.

Good morning, guys. Thanks so much for taking my questions. In terms of a dividend, I know that you touched on this quite a bit during the call, but how do we think about it if your core earnings continue to more than cover the dividend? Is there any, you know, eye towards a dividend increase, or how do you think about that?

Hey, Jessica, it's Doug. I mean, I think the way to think about it -- and you're right, Tony did touch on it in the call. I think when we look at the upcoming quarters, we focus on the amount of liquidity we have and the reinvestment of the capital that's come back in this past quarter. And so, I think the implication for the dividend is one of stability, and that's really the way that we think about it.

Okay. And then in terms of what kind of market opportunities you're seeing, are there any that you're shying away from right now, or any new geographies that you like, or don't like, just as the banks are stepping back and there's a little bit more opportunities, as Steve noted earlier?

Jess, I think in general, we try and avoid the markets and the sectors that are most exposed to new supply that have the least barriers to competition and builders starting new properties. One of the nice things about the markets that we focus is they tend to be supply constrained. They tend to have a very high cost of new development, and generally, we're lending at very significant discounts to replacement costs, so we're insulated from a lot of those factors.

We've been very cautious on hotels, very cautious on suburban real estate, and really focused on core real estate in major markets that have dynamic demand for space, and we think that the highest quality assets generally have better sponsors, better real estate, and more liquidity through cycles. So it's really just been the overall real estate philosophy of Blackstone, and one that serves us very well.

All right, thank you so much.

You're welcome.

Your next question, it comes from the line of Doug Harter with Credit Suisse. Please proceed.

Thanks. You guys mentioned that this quarter is off to a strong start in terms of originations. How should we think about how the quarter typically plays out as you get closer to year-end in terms of volumes, and how your pipeline looks as far as opportunities beyond the ones that are already closed or in the process of closing?

It's a great question, Doug, and there's usually one or two opportunities that come later in the quarter that need to close by year-end that tend to be really extraordinary opportunities. And so, there's certainly still time left in the quarter for new originations to close this quarter. You know, our pipeline is very active. It?s really picked up from early in the year, and the trends are positive, so we feel very good about continuing to build on the pipeline. And we certainly have a goal to close more loans through the quarter than what would have already been identified thus far, and move into Q1 with a very strong forward pipeline.

Great. Thank you.

You're welcome.

And your next question, it comes from the line of Steve Delaney with JMP Securities. Please proceed.

Good morning, and thanks for taking the question. I'd like to switch a little bit and talk a little bit about life after GE. Obviously, that's been a great transaction, but the volume of payoffs that you're seeing certainly constrains your portfolio growth, despite your strong originations. So, if you could, I'm looking at page 13, trying to get a sense for what's left in GE. It looks like in terms of that purchase discount of a little over $9 million, looks like $7.4 million has been accreted to date, which would imply approximately 80% of the portfolio. So, if we were to think 20% remaining, would we be in the ballpark there, as far as the GE portfolio?

Do we have that stat with us?

I'm not sure whether we have the stat with regard to the accretion of the discount. Another way to look at it, Steve -- it's Doug here -- would be to look at the outstanding balance of the GE loans. I think the GE loans have -- I want to say about 60% or 65% of the portfolio is repaid, so we can point you to that detail in the 10-Q. I think that's probably the right way to look at the continuing impact of the GE portfolio.

And, Steve, I would say that the GE deal, in general, has gone as we predicted. Its impact on earnings, again, consistent with what our expectations were. I mean, we obviously aren't able to predict the precise quarters in which loans would get repaid, but in general, we knew that the high coupon, fixed rate loans were going to get repaid when it became economic for borrowers to do so, and that accounts for a lot of the repayments. And they were loans and borrowers that made sense for GE type of capital, didn't make sense for ours, so we expected those to get repaid, as well. We have had some success with a number of the GE sponsors extending maturities increasing loans and pursuing new loans, which is also something that we hoped would occur, and has. And so I do think that going forward, we'll be redeploying loans, fixed rate loans and the floating rate loans, the MHC loans in the other property sectors. We're very confident that originations over time will keep pace with and ultimately exceed the repayments in our portfolio, and we'll continue to grow our deployment and our earnings.

Steve, I would just add to that that thinking about it from a sort of business model point of view, I think life after the GE portfolio will look a lot like life during the GE portfolio period, right? Because we've sized the company so that we could maintain the deployment that we generated with the GE portfolio in one step, on an ongoing basis, and our originations for the previous three years have backed up that ability to deploy that capital. And so, as we continue to originate LIBOR plus 12% to 13% ROIs, you know, in a business of our scale, with our model, we're going to continue to pay the dividend and grow the dividend the way we had during the ramp up to the GE portfolio. And that's not an accident. That's the way that we capitalized that transaction, and that's the way that we've been managing that portfolio.

Got it. So, I mean, it wouldn't be unrealistic to think that $10 billion, I think, was sort of where you peaked out in the portfolio right after GE, and we've come down, obviously, with payoffs. But it seems it would be reasonable, with your volume of originations, that -- you know, $1 billion a quarter -- that you would have -- in a more stable prepay environment, you should be able to get back to that $10 billion kind of target portfolio level.

Absolutely. I think you put your finger right on it.

Okay, great. And just one follow-up to that. You know, your leverage obviously, your leverage looks very conservative. I think, you know, we could argue whether it's the 2.2 or the 2.7. But even if we were to take the 2.7, I'm trying to reconcile that against the 4% assumed leverage that you use in your projecting your $3 billion of capability. I doubt we'll ever see you push it all the way up to 4.0, but is it possible that over time, that 2.7, regardless of whether you're doing actual financial or structural leverage. Is it reasonable to think that that could move higher to 3, 3.5, something in that ballpark over the next year, year-and-a-half?

Steve, hey, it's Doug again. You know, it is reasonable to think that could move higher. You know, very quickly, on the difference between asset level leveraged on the 4 times that you're referring to and our balance sheet leverage is really twofold. You know, one is some of that leverage is in the form of structural leverage, as opposed to debt-to-equity, so that's part of the difference between the 2.2 times and the 4 times. And the other is the fact that we maintain working capital, right, and we manage our cash efficiently, we revolve down our debt. And so, the 4 times leverage is on our deployed capital. When you factor in our working capital, you end up with a 3 times leverage level on the balance sheet overall. So that's the walk from the 2.2 to the 4.0 at the asset level leverage.

Yeah, and some of that --

That's helpful.

Some of the de-levering is temporary and just the impact of the magnitude of repayments that occurred in this quarter. And as we redeploy those repayments into new loans, then you will see our deployment increase and our leverage tick up a bit.

Makes sense. Guys, thanks. The comments were very helpful.

Thanks, Steve.

And your final question comes from the line of Charles [Madahan] with Wells Fargo. Please proceed.

Hi, guys. I apologize if this has been asked already, or addressed in your market commentary. But I was wondering if you could talk about the environment for asset acquisitions in North America and in Europe, as well as your willingness to stray outside of your core senior floating mortgage competency.

Well, as it relates to markets, we like the core markets that we're in. That continues to be our focus. We think the prognosis for those markets continues to be favorable, and it's the better place to be through cycles, so we tend not to want to stray to secondary markets or go down market. As it relates to North America, the coastal markets continue to be generators of great opportunities for us. Even in the markets where demand for space has slowed, there's still generally positive absorption in the REITs. The REITs reported strong NOIs across the board and across the board and across sectors, and we're seeing that in our portfolio, where underlying assets are performing well in line with the business plans that we underwrote. And so, I do think we'll sort of be pursuing more of the same. We're very, very cautious in terms of anything sort of in secondary or tertiary markets, which tend not to have the dynamic sources demanded, and don't fare as well through cycles.

As it relates to the UK, the environment there, as I mentioned, is more opportunistic, but there's much less deal flow than there is in the US, so just less opportunities to lend, less demand for capital like ours. The opportunities that we're seeing are more interesting than they were before, and hopefully, we will see more of them, as we move past the Brexit referendum. But yes, we'll see. We have a great team in London, and we see a lot of very interesting opportunities. Our presence there is as strong or stronger than it is in the US.

The second part of your question, in terms of sort of straying from the senior mortgages that really have been the sole focus of our business strategy to date, we're going to be very, very, very thoughtful in terms of anything else that we do, other than what we've done so far, as our strategy really has worked very well. The quality of our dividend is great. We're working very hard to get that differentiated in the market by the investors who look at our stock and that of the other REITs, but with whom we compete for capital. And so, you know, I think ultimately, we always look at expansion opportunities and abilities to create more value for shareholders. I don't see us moving up the risk spectrum. Blackstone sponsors a large private debt fund that really has a mandate for higher-risk debt investing, and so our mandate really is in the senior part of the capital structure. We're able to generate high returns from loans with conservative LTVs that are very much senior in their risk profile. We like that profile, and I don't think that that will change in the foreseeable future.

Okay, thank you for the comments.

Sure.

And we have a follow-up question. It comes from the line of Jade Rahmani with KBW. Please proceed.

Thank you very much. In terms of earnings cadence and the elevated level of repayments, is 4Q a quarter in which we should expect still an elevated level of repayment, potentially exceeding originations? Or if you did about $1 billion of originations, do you think that's likely to exceed the repayment level?

I think at this stage of the quarter, it's still too early to predict, especially in the fourth quarter, where a lot of things tend to get done with short notice in December. We're very pleased with the pace of our originations and our foreign pipeline, and that's really the part of this that we're able to control.

I do think the repayment trend will abate over time, because we don't see the same pace of repayments in the BXMT direct origination portfolio that we see in GE. And when you think about it, most of the loans that we make are five years, including extensions of ultimate term, and our oldest loan is only a little over three years. So we haven't even approached the maturity of any of our loans yet, so we are still well short of stabilized repayments in the BXMT portfolio. And we still have a significant GE exposure. Some aspect of that will play out over time. But, again, we feel good over time about the balance of originations through (inaudible) repayments is really difficult to call on any one quarter.

And in terms of the earnings trajectory, do you think it's reasonable to project perhaps a two-quarter timeline to core earnings getting back to exceeding the dividends?

Hey, Jade, it's Weston here. We've just got to be a little bit careful, since we don't give guidance, to imply any sort of directional movement in earnings. But we're happy to talk about the drivers offline.

Okay. Thanks very much. Appreciate your time.

Thanks, Jade.

Okay, we have no further questions in the queue at this time.