Blackstone Mortgage Trust Inc (BXMT) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Blackstone Mortgage Trust's fourth-quarter and full-year 2016 investor call.

(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, Tracy. Good morning and welcome to Blackstone Mortgage Trust's fourth-quarter conference call. I'm joined today by Steve Plavin, President and CEO; Jonathan Pollock, Global Head of Blackstone Real Estate Debt Strategies; Tony Marone, Chief Financial Officer; and Doug Armer, Head of Capital Market. Last night, we filed our 10-K and issued a press release with a 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 section of our 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, you should refer to the press release and our 10-K, 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 $0.57 for the fourth quarter and $2.53 for the full year. Core earnings per share were $0.62 for the fourth quarter and $2.65 for the full year, up 12% from the prior year and equating to 107% coverage of our $2.48 dividend. And based on today's stock price, the dividend reflects an attractive 8% yield.

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

Thank Weston and good morning, everyone. The competitive advantages we have being part of Blackstone Real Estate were evident throughout 2016.

We originated $3.5 billion of senior floating-rate loans at a steady pace throughout the year despite the turbulent macroeconomic backdrop. Huge market volatility in Q1 and the unexpected results on the Brexit referendum and the US presidential election. We delivered terrific results for shareholders generating $250 million of core earnings and strong dividend coverage while maintaining 100% credit performance on our $10 billion senior loan portfolio.

A big part of our 2016 story was the repayments in the GE portfolio and the redeployment of those repayments into new directly originated floating-rate loans. We have migrated from a loan portfolio in which the GE-acquired loans were 44% immediately post-acquisition to one where they are now just 17%.

Of the $5 billion of GE loans we acquired, $3 billion have now been repaid and another $900 million upsized or modified and thus effectively becoming BXMT-originated loans. The concentrated GE repayments we collected in 2016, especially of fixed-rate loans, generated quarter-to-quarter volatility that should subside as our portfolio transitions to a greater percentage of BXMT-originated floating-rate loans.

At year-end, 89% of our loan portfolio was floating rate and originated or amended by Blackstone with a 61% overall origination LTV. In 2017, with the GE repayments largely behind us, we are in an excellent position to grow the portfolio and then benefit from increasing LIBOR.

During 2016 we also raised $2 billion of financing capacity to replace the GE term-debt repaid and to finance our new originations. Much of the added capacity is efficiently priced revolving credit facilities that we expect to maintain long-term and it will help drive our asset-level ROIs in a competitive loan-pricing environment.

Looking at the fourth quarter specifically, we originated $826 million of loans and already have another $900 million that closed since year end or will close in the coming months. Fourth-quarter activity included loans secured by office, hotel, retail, multifamily and self-storage properties with a continued focus on larger loans in major markets where property is sponsor quality is highest and the synergies with Blackstone Real Estate platform are most powerful.

Our fourth-quarter loan originations have an average size of $139 million and all are senior and floating rate. Two of the loans with the same new sponsor helped establish a great relationship for future business. Our strong origination performance continued to build the reputation of BXMT as the leading commercial real estate senior lender.

Also during the quarter we closed our first post-Brexit UK loan, acquisition financing for a cash flowing cross-collateralized portfolio of self storage properties. Our loan backed an existing Blackstone sponsor expanding its North American storage footprint to the UK.

Turning to the macro environment, our view is that commercial real estate fundamentals remain stable. We are at a good point in the cycle for our business. We continue to focus in the coastal markets where there is dynamic demand and new supply remains in balance. The real estate markets are liquid with significant regular way acquisition and refinancing activity which is the ideal backdrop for our business.

Following the presidential election, we've seen surging confidence in financial markets predicated on our expectations of simplification of the tax code, reduced regulation and the adoption of a generally more business-friendly posture. To the extent there are changes that support better economic growth or lower tax rates on our dividend, we expect these to be positive for our business. The ultimate provisions of any tax-reform legislation and probability of enactment are uncertain, so it's still too early to predict the longer-term implications on demand for our senior loans and real estate market conditions in general.

As for the banks, we don't expect regulatory release to significantly drive increased competition for our transitional senior mortgage loans. The credit culture of the banks limits their risk-taking and they cannot generally meet the demands of the opportunistic and value-add fund sponsors that are our primary client base in transitional assets.

We benefit from our focus on larger major market properties where we have distinct advantages in sourcing and underwriting and the ability to move with speed and certainty. For loans within the credit-strikes of other banks, competition will intensify given their excess liquidity and associated earnings pressure. We hope to benefit from this trend given our utilization of lower risk bank-funding to finance the majority of our activity.

We will soon be approaching the fourth anniversary of BXMT. We've successfully grown the scale, liquidity and earnings power of the Company while building book value by maintaining discipline in our capital raising. And we've delivered with a total return to stockholders of more than 50% since inception. And the macro environment in 2017 offers great opportunity for us to continue to grow our business.

I would like to thank our shareholders for their ongoing support; and with that, I will turn it over to Tony.

Thank you Steve and good morning, everyone. Before turning to the fourth quarter specifically, I would like to review our 2016 results, the first full year since we acquired the GE loan portfolio in Q2 of 2015. All of our operating metrics increased significantly during 2016 with GAAP net income of $2.53 per share, up 5% from 2015, core earnings of $2.65, up 12% and dividends declared of $2.48, up 9%.

We originated a consistent flow of senior floating-rate mortgage loans during 2016, with total originations of $3.5 billion bringing our total loan portfolio to $9.8 billion. To support our continued lending activity, we developed $2 billion of additional financing capacity during 2016 bringing our total capacity to $9.9 billion.

Looking at Q4 results, we reported GAAP net income of $0.57 per share and generated core earnings of $0.62 supporting our continued quarterly dividend of $0.62. As we have discussed previously, we have expected our business would migrate to the $0.62 core earnings level following the runoff of the earnings spike generated by the GE portfolio acquisition in 2015. The trend toward $0.62 has been somewhat lumpy however as our loan portfolio has evolved during the past several quarters, in particular with the large volume of prepayment fees we generated in Q3 driving earnings temporarily higher.

As we discussed on our last call, we typically collect some amount of these fees in a given quarter; however in Q3 we received $7 million of fees related to repayments of fixed-rate loans in the GE portfolio that could be considered outside of our typical results. These prepayment fees effectively shifted earnings into the third quarter that would have otherwise been generated by the repaid loans in Q4 and subsequent quarters by converting future coupon payments into fees collected and recognized upon repayment in the third quarter.

Turning to our balance sheet, as Steve mentioned, we originated seven new floating-rate loans and upsized four loans during the quarter for a total origination volume of $826 million. The loans we originated this quarter have an average yield of LIBOR plus 4.4% with an LTV of 65% in line with our existing portfolio.

Loan fundings of $888 million exceeded repayments of $476 million creating net-positive portfolio growth and bringing our total loan funding and repayment volumes roughly in line for the full year of 2016 despite absorbing the outsized GE portfolio repayments Steve mentioned earlier. Overall our portfolio continues to have no defaulted or repaired loans with a weighted-average risk rating of 2.5 and an overall portfolio LTV of 61% demonstrating the strong consistent credit profile of our loan book.

We financed our Q4 originations using revolving credit facilities which had an all-in cost of LIBOR plus 2.02% at quarter end. We continue to focus on the stability of our balance sheet and employ financing strategies that provide market-leading terms with no mark-to-market provisions outside of credit events.

We closed the quarter with a debt-to-equity ratio of only 2.3 times up slightly from 2.2 at September 30 as we funded our Q4 net originations using previously undrawn facility commitments. Including cash and our revolving credit capacity, we closed 2016 with $654 million of liquidity or approximately $2.5 billion of potential loan origination capacity.

One final note on our financial results, although not a material contribution to our results this particular quarter, is the effectively final resolution of our remaining CT-legacy portfolio. When we launched BXMT in 2013, our balance sheet included $61 million of book value from Legacy Capital Trust Investments, our predecessor business.

Including realizations during the fourth quarter, we have collected an aggregate $91 million from this legacy portfolio, a 50% increase in value over the past 3-plus years. These realizations have translated into additional equity capital we have invested in our loan origination business and incremental value generated for our shareholders.

In closing, we remain bullish on BXMT's business model and market position as we look forward to evolving macro conditions. We embrace rising interest rates as our business is uniquely positioned to benefit from rising rates with an increase of 100 basis points in USD LIBOR generating approximately $0.19 of additional core earnings per share on an annual basis.

We are protected from potential downside risk to our business with a portfolio of senior mortgage loans supported by 39% subordinate equity on average and stability on the right-hand side of our balance sheet; and we continue to benefit from our affiliation with Blackstone's real estate platform which provides us with expertise and market insight to anticipate and ultimately take advantage of any future changes in the global real estate finance landscape. Thank you for your support. And with that, I will ask the operator to open the call to questions.

(Operator Instructions)

Your first question comes from the line of Steve DeLaney, JMP Securities.

Good morning, thanks for taking the question. It was certainly nice to see the principal balance of the portfolio grow in the fourth quarter to just under $10 billion. I was just curious if you guys have a target for the optimal size of the portfolio. You certainly have some incremental financing capacity. I wonder if it is realistic for us to assume that, with your existing capital base, the actual principal balance of the portfolio could increase over the next year. Thanks.

Thanks, Steve. We don't have a target specifically for our asset size. We definitely feel like we can grow a little bit with our existing capitalization, and then for opportunities beyond our capitalization, we will evaluate the equity markets at the time. So for us it's really been a period of rebuilding the portfolio in light of the GE repayments, but we're well positioned to grow the portfolio.

Understood.

We are well positioned to grow from here.

Right. And about $1 billion of remaining GE loans that you haven't touched, that are out there, do you have a sense for what the average term to maturity on that remaining billion would be?

I don't have it specifically, but I would think that we would expect most of those loans to roll off over the next one to three years. A few of them are medium-term duration fixed-rate loans and others are floaters. So I think we might begin to have some similar maturity characteristics to the direct-origination portfolio.

Okay. All right, that's fine. And one final thing, Steve. You guys obviously have consistently had a nice pipeline and been able to put up somewhere around $700 million to $1 billion it seems each quarter. If you look at the pipeline today, I'm just curious if it looks the same as it has over the last couple of years, in terms of borrower type and the nature of the transaction that you are financing. I am just wondering if it's -- is it still primarily private equity? Are you seeing maturing CMBS loans that need to be refinanced? If you could comment sort of who your borrowers are and some sort of order of magnitude. Thanks.

I would say, Steve, that we are generally seeing the majority of our flow still from opportunistic and value-add fund sponsors institutionally backed who are the major acquirers of the transitional assets that work best in our business model. We are seeing an opportunity to do a little bit of construction lending, sort of function of the dislocation of the banks and their inability to provide that product on similar terms to what they've been able to do in the past.

So we are seeing some emerging opportunities there which I think are new. We have made a few construction loans in the past, but the volume of those opportunities have increased as the banks have become less and less able to perform in that sector. But I think, other than construction loans, more of the same, major-market assets, top sponsors, a focus on the coastal market.

And the sponsors, do you see the sponsors continuing to raise new funds for commercial real estate investment?

Yes. Our sponsors have a lot of undeployed equity in their funds. They generally have an ability to raise new capital. Most of them are on -- are mature businesses that raise multiple funds in the opportunistic sector. So we feel very good. There's a lot of undeployed capital within those structures; and ultimately, the deployment of that capital creates a majority of our origination activity. So I think we are well positioned and they have remained active. Even in the uncertain macroeconomic backdrop, we are seeing good transaction flow.

Interesting. Thank you for the comments, Steve.

Thanks, Steve.

The next question comes from the line of Don Fandetti, Citigroup.

Yes, Steve. As you look at your business model and things still continue to look good from a competitive standpoint and it is hard to see where the near-term risks are, but one area would be credit, whether it is a Company-specific type issue that you could have or some type of pressure from higher rates. Can you talk a little bit about how you see credit in your portfolio over the next 12 months, and would you be surprised to see any type of issue? My sense is you would, but just wanted to check in on that tail risk.

You know, our business model -- so the an all senior-mortgage business model, really endures a difficult credit environment well. We are not experiencing one now which is fortunate. We do not see a lot of potential issues in our portfolio as things evolve. I think, in general, the transitional assets that collateralize our loans are improving in quality. We have a big equity component in all of the real estate loans that we finance. So we feel great about the credit. You are right though. I think, over cycles, credit obviously is what you need to watch for, but I don't think it's going to be an issue in 2017.

Okay. Thank you.

Your next question comes from the line of Jade Rahmani, KBW.

Yes, thanks very much. Just in terms of the cadence of originations, are you seeing any slowdown? Property sales volumes did moderate in the fourth quarter and some have commented that deal timelines have extended. Are you seeing that impact the business?

We haven't, Jade. But as we move into the cycle, what we are seeing are more refinancing opportunities. Some of the assets that may have been acquired immediately post crisis 2011, 2012, 2013, or even the early-generation loans that we made, so 2013, 2014, are ready to be refinanced. Business plans have been realized, performance has improved, sponsors looking for more term. So I think any slowdown in acquisition activity should at least be offset by opportunities in the refinancing market, which we didn't see much of in 2013, 2014 but see a lot more of now.

And are those refinancing opportunities less transitional if the business plans have been executed?

I would say in general, yes. They need to be transitional enough for us to be the lender as opposed to a bank or an insurance company. So generally what will happen is maybe they are two-thirds of the way through their plan, but it isn't time to sell yet. Or originally the leverage was sort of 60%, has now become 45% or 50%, they want to top back up to a 65% loan. So those are the opportunities that work well for us.

On repayments, what drove the lower fourth-quarter number, and do you expect a similar quarterly pace going forward with a lot of the GE portfolio having being repaid?

I still think that you will see quarter-to-quarter volatility in repayments. It is just that has been our experience in BXMT over the last year or so and I think we will see a little bit more of that as we roll onto 2017. I di think it will ultimately moderate. But as repayments move from quarter to quarter, it can skew results.

You saw we had $1.7 billion of repayments in the third quarter and a much lighter quarter in Q4, and you would expect that because I think given the heavy quarter is typically followed by a lighter quarter. But over time, I think you will see the trend in repayments moderate in 2017 relative to 2016. And then, as the portfolio becomes virtually all BXMT-originated product, you will see a little bit more of a steady pace; but still, it will still be some volatility quarter to quarter just given the vagaries of any one repayment.

In terms of the loan-pricing environment, you mentioned it is competitive. What are you seeing in terms of incremental loan yields, and are you yet experiencing any benefit from LIBOR increases?

Tony talked about the sensitivity to LIBOR increases and we do have a net-positive exposure to the US dollar LIBOR. So any increase in LIBOR we feel it. There tends to be a lag, and LIBOR is set either monthly or quarterly in the case of some of our loans. So, when LIBOR increases, we wait for the next reset date and then you will see it in the portfolio results in the subsequent quarters.

And just finally, in terms of your approach to capital issuance, it seems that, at this size range, the business is self sufficient, self funding, and you have done a good job calibrating originations and repayments. Is it your expectation that to issue equity it would be for some kind of outsized opportunity, outside of the regular quarterly pace of originations, whether it be an acquisition opportunity or something else?

I think, in general, we think about raising equity relative to our ability to deploy. So as we see more attractive deployment opportunities that extend beyond our existing capital base, we would think about whether it's a good time to raise equity then. It provides that there is strong demand for our stock and we're trading at an appropriate premium. I do think there is room for growth in our existing business. I don't think we have reached the end of the business plan. I think we have the ability to originate more and grow the capital base of the Company. But we're going to do it prudently and with the goal of increasing shareholder value over time.

Thanks for taking my questions.

Thanks, Jade.

Your next question comes from the line of Jessica Ribner, FBR.

Good morning, guys, thanks so much for taking my questions. Piggybacking off of Jade's capital question, do you guys have a different stance towards leverage today than you did about a year ago? And what can we think about as your target leverage levels?

Hey, Jessica, it is Doug. I think the short answer is that we -- no, we don't have a different stance towards leverage than we did a year ago. I think the target leverage level for our business is around 3 times, between 3 and 3.5 times as we reach optimal deployment. And so we are halfway back to that target, if you look at where we'd moved from the third quarter through the fourth quarter. So we are looking at that more or less the same way.

And that includes the asset-specific financing right?

Yes.

Okay. And then, in terms of just a high-rate environment overall, do you have a sense from your borrowers what their appetite would be under a much higher-rate environment especially given Yellen's comments yesterday?

I think, Jessica, in general, our borrowers are just floating-rate borrowers. I do think they need to use leverage to realize their returns in their business strategies. They don't, in general, think of fixed-rate debt as an alternative to the floating-rate debt; it just doesn't work well enough for dynamic business plans on these larger assets.

I do think when yield curve is a little bit steeper, we do see, on the margin, people moving from fixed rate to floating rate. But, in general, I think we will see plenty of opportunities in floating rate. There's a lot of room for rates to go higher and for deals to still be economic. As you hear from us over and over, we win with higher LIBOR. And I think the market can sustain meaningful higher LIBOR than where it is today without there being credit issues or resistance on the part of buyers to make acquisitions.

Okay, thanks so much.

Your next question comes from the line of Rick Shane, JPMorgan.

Hey, guys, thanks for taking my question. It really feels like this is the inflection point that you guys have anticipated in terms of dividend policy following the GE acquisition. And two quarters ago you were getting questions about why not to raise the dividend and now the core earnings have converged with the dividend. I am curious in the short term if you think the dividend will be covered or are we a quarter or two away in terms of growth from that?

Hey, Rick, it is Doug again. We don't give guidance obviously for the go forward. But we did -- as you mentioned, we did set the dividend at $0.62, with an eye towards what was supportable in the long-term floating-rate senior mortgage business ex the GE portfolio and the upside volatility that we experienced as we worked through that portfolio. I think that is probably the right way to look at the dividend going forward and core earnings going forward.

Got it. Okay. Second question, I'm curious if you saw anything in the market towards the end of the year, post-November, for a slowdown in deal flow as sponsors or owners waited potentially for a better tax structure in 2017?

It's a great question. And I think it gets back to Jade's question as well. And we are still seeing good opportunity to make loans, consistent with our strategy and the sponsors -- our group of sponsors are active. I do think that there is a shift a little bit more towards refinancing as opposed to acquisitions, which we would have expected absent the presidential election and the tax-reform uncertainty. But I think that's helped bolster the business.

We still are not seeing acquisition activity and the opportunity to make acquisition loans, so we are seeing both avenues to grow our portfolio and to continue to originate. We will have to wait and see as the tax-reform dialogue increases, whether that begins to put the chill on the market or not. So far, we are still seeing pretty good regular activity.

Got it. And then last question, this is probably a little bit of a dumb one, but I have seen the LIBOR charts for some time and I always look at them and wonder, is it one- or three-month LIBOR that is really the benchmark for you guys?

Hey, Rick, it's Doug again. It is really one-month LIBOR. The vast majority of our loans are priced over one-month US dollar LIBOR.

Okay, terrific. Thank you, guys.

Thanks, Rick.

Our final question comes from the line of Charles Nabhan, Wells Fargo.

Hi, guys. If we look at the G&A line, it came down by about $9 million this year. I believe you said that part of that had to do with the runoff of the GE loans. Just curious, as that portfolio continues to run off, could we see further reductions on the G&A line going forward? Or are we at a steady state from fourth-quarter 2016 levels?

Hey, Charles, it's Tony. I think where we are seeing the G&A run-off level right now is about the steady state. There's two things that drove the 2015, 2016: one was the GE portfolio wind- down, or transaction expenses running off; and the other is activity in the CT legacy portfolio, which has a considerable amount of expenses that go through G&A just due to that accounting regime. So with both of those things behind us, I think if you looked at 4Q 2016, that's a pretty stable level at this point.

Okay. And you alluded to the possibility of some construction loans over the next year or so. I know pricing varies from deal to deal, but just generally speaking how would we think about the yields, the spreads, and/or the leverage that you could apply, if any, on those loans that you would be putting on the books?

I think the construction loan pricing that we are seeing is higher than the pricing that we see for the completed assets, and loan to cost is, I would say, equal or lower. Historically, the banks mispriced construction lending low, and it was an opportunity for us. Banks would lend on buildings that were not built or leased at a lower rate than ones that were completed and leased already, and they own the space. There wasn't room for insurance companies or CMBS or even specialty lenders. It was a bank market. And with [a] CBRE and the other regulation, it's really difficult for the banks to make construction loans, and there is still a demand for them by developers. And pricing is really wiped out.

And so we see a unique opportunity, I don't know if it'll -- the one thing I'm seeing in the market that could be impacted by the deregulation of the banks, maybe they will figure out a way to get back into that business, but they are not really in it in an effective way today, and there is an opportunity for us to fill the void. I think the leveraged returns that we'll earn on that business will be consistent with our regular business overall. So we may attract a little bit less leverage on those loans, but those higher rates will get us to a very attractive ROI. And I think the risk profile of those assets are very attractive, as or more attractive than what we're doing in our regular-way portfolio.

Got it. And if I could sneak one more in, there was a $21 million loan that was downgraded to a 4 risk rating. And I know in the K it said that, that loan is performing. But could you just give us a little color around that loan? Just some background information?

Sure. It's a hotel loan in a market where there has been some new supply. Its performance is down a little bit from where it had historically been, meaningfully down. Still, it covers debt service by a significant margin. The property needs capital and the real discussion with the borrower is getting them to put in the capital to renovate the property. It is a GE loan. Obviously we are not making $20 million loans on hotels today. It is a loan that we acquired; it's one that we are in active negotiations with the sponsor and are working on a resolution.

Great. Thanks, guys.

Thanks.

I would like to turn the conference over to Weston for closing remarks.

Great, thanks for joining us this morning, and look forward to following up with everybody after the call.

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