Blackstone Mortgage Trust Inc (BXMT) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust First Quarter 2017 Investor Call. My name is Derek, and I'll be your operator for today. (Operator Instructions) This conference is being recorded for replay purposes.

At this time, I would like to turn the conference over to Mr. Weston Tucker, head of Investor Relations. Please proceed.

Great. Thanks, Derek, and good morning and welcome to Blackstone Mortgage Trust's first quarter conference call. I'm joined today by Steve Plavin, President and CEO; Jonathan Pollack, Global Head of Blackstone Real Estate Debt Strategies; 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 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-Q, both of 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 the things over to Steve. We reported GAAP net income per share of $0.54 per share and core earnings per share of $0.61. Last week, we paid a dividend of $0.62 with respect to the first quarter 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.

And with that, I'll turn things over to Steve.

Thanks, Weston, and good morning, everyone. The strength of our investment team was a dominant theme of our first quarter as we closed $1 billion of new loans and agreed to terms on another $1 billion plus of originations that are now in the closing process. The full run rate impact of our first quarter originations is not reflected in our 61% share -- $0.61 per share core earnings, as we closed $350 million of loans in the last day of the quarter. But we will see the beneficial impact of those funds going forward as our BXMT-originated portfolio continues to grow. Our strong origination pace reflects a broad mix of acquisition loans, refinancings and construction loans.

With interest rates rising and the real estate cycle in a stable phase, we've seen opportunistic acquisition activities slow, but refinance volumes have more than compensated. Our business is primarily driven by borrower demand from real estate opportunity and value add funds for the senior floating rate transitional loans that we provide. The fund sponsors are now more actively pursuing opportunities to refinance loans made a few years ago, in order to recapitalize assets, extend hold periods or just access more accretive debt. In addition to the acquisition and refinance loans, during the quarter, we closed 2 construction loans totaling $348 million. Although construction loans that we like are not abundant or easily originated, we've sourced a few excellent opportunities.

The risk return dynamics in our transactions are compelling. The loans we closed in Q1 had an LTV of 46% and a weighted average all in a rate of L plus 6.

Construction lending is the segment of our business where we have benefited from the regulatory climate. The banks used to dominate, but are now much more challenged by regulations, so loan terms have improved for lenders.

The earnings impact of construction loans is phased, because they fund over time with progress of construction. As a result, construction loans contribute to our quarterly fundings well beyond the periods in which they originated.

We only pursue those loans with best-in-class developers that provide guarantees of completion, greatly reducing the risk of construction.

The projects we have financed to date are primarily office buildings in major markets with low LTVs. The low basis of the new high quality buildings at a 30% to 50% discount to development costs, mitigates the market risk associated with lease up. I don't expect construction loans to ever get to more than 10% to 15% of our Loan portfolio, but we are enjoying the opportunity to selectively deliver this product to our clients. Our construction loans, like all of our portfolio assets, are managed by our experienced, high-quality loan asset management team. We bring all the Blackstone real estate experience and resources to the table in monitoring our sponsors' progress in the assets that secure our loans. All 6 loans that we originated in Q1 were with repeat sponsors, strong validation of how we do business from origination through asset management.

The origination LTV in our loan portfolio was 60% for the quarter and declined to 61% overall. Our loans are 100% performing. Demand for space and property NOIs remained healthy in most of the coastal markets where we focus our lending, providing a sound fundamental backdrop. And the impact of new supply in most sectors of these markets remained calm, which bodes well for the continuing of the current balanced state of the credit cycle. We do not see danger signs in the property and capital markets.

As to the right side of our balance sheet, we had another strong quarter upsizing credit facilities by $1.1 billion and taking total asset level financing capacity to $10.1 billion. Post quarter end, we doubled the size of our corporate swing line to $250 million and improved its terms. The swing line expands our capacity to execute on bigger loans without carrying excess liquidity or requiring a simultaneous senior execution.

When we grow our debt capacity, we do not compromise on structure and our credit continues to be longer term, match funded and without capital market's mark-to-market provisions. As most of you know, on Monday, we announced the joint venture with Walker & Dunlop, a leading originator and servicer of multi-family loans for Fannie, Freddie and HUD to source and fund loans prior to their eligibility for permanent agency financing. We expect the relationship to drive meaningful multi-family loan origination volume for us over time, as we'll be funding 85% of the JV equity. The target loans are floating rate, interim senior mortgages, consistent with the BXMT theme in a market segment that we don't presently address. I have known Walker & Dunlop's CEO, Willy Walker, for several years, have great respect for the multi-family agency business that he has built. We are very excited about this new relationship and initiative and look forward to the contribution of the JV to the growth in our loan and originations overall.

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

Thank you, Steve, and good morning everyone. As Steve mentioned, this was a strong origination quarter for BXMT with $1 billion of originations, a 21% increase over 4Q volume, outpacing repayments of $781 million, our strongest origination quarter since 2Q of 2015. The senior loans were all floating rate with an average yield of LIBOR plus 5.25%, well above our current floating rate portfolio average of LIBOR plus 4.48%, but importantly, with an average origination LTV of 60% right in line with our current floating rate portfolio.

Our strong 1Q Originations maintained our total loan book at around $10 billion, a level we have maintained since our acquisition of the GE portfolio in 2015, despite repayments of the $3.3 billion of the acquired loans. Our fixed-rate loan portfolio predominantly acquired as part of the 2015 GE transaction, declined by $181 million during the quarter to $886 million, or only 9% of our total loans. This further increases our positive earnings correlation to rising interest rates with a 100 basis point increase in USD LIBOR generating approximately $0.19 of additional earnings per share on an annual basis.

Overall, our portfolio continues to have no defaulted or impaired loans with a stable weighted average risk rating of 2.6 and portfolio LTV of 61% demonstrating the strong, consistent credit profile of our loan book. On the right-hand side of the balance sheet, we had a productive quarter with $1.1 billion of new credit capacity created across 3 of our facilities and term extensions on $2.8 billion of credit facilities, demonstrating the continued support and confidence of our lenders. We closed the quarter with a debt-to-equity ratio of only 2.4x, consistent with our ratio of 2.3x as of 12/31, with a slight uptick in net borrowings to fund loan originations during the quarter. We view our access to stable, attractively priced credit from a variety of mark-to-market -- of market participants as a strong endorsement of our business by the market and a key differentiator versus our competitors.

Looking at 1Q results, we reported GAAP net income of $0.54 per share and generated core earnings of $0.61, down $0.01 from 4Q. This slight decline was primarily a result of the particular timing of loan originations and repayments during the quarter. Although our overall origination volume was positive, the majority of these loans closed late in the quarter, outstanding for only about 1 month on average, while repayments happened to fall primarily in the first half of the quarter. All else equal, had we closed the entire $1 billion of loans earlier in 1Q, we would have generated an additional $0.01 to $0.03 of core earnings for the quarter. We have maintained our 1Q dividend at $0.62 per share, reflecting our estimation of the consistent earnings power of our platform over the medium-term, notwithstanding the slight ups or downs of any particular quarter.

In closing, we are excited for the future of BXMT, as we begin to pursue new loan origination opportunities through our joint venture with Walker & Dunlop, anticipate continued rising interest rates to generate additional earnings for our shareholders and continue to expand our balance sheet capabilities to prudently finance our business. Thank you for your support. And with that, I will ask the operator to open the call to questions.

(Operator Instructions) And our first question will come from the line of Jessica Levi-Ribner, FBR.

With regards to the Walker & Dunlop joint venture. How much capital would you be willing to put into it? Does it have kind of like a ceiling, like a 10% to 15% of the portfolio would be construction loans? Is there something similar to that? Or just kind of see how it goes?

Yes. I don't think there's any particular ceiling. We're excited about the opportunity to make these loans. They're consistent thematically with the loans that we make through our direct origination group today. So we're hopeful for a lot of volume and I don't see any constraint in terms of what we will be able to do with Walker & Dunlop.

And the portfolio yields this quarter, it doesn't seem like the increase in LIBOR really showed up in the yields. When can we kind of expect that to flow through or am I thinking about it the wrong way?

Hey, Jessica, it's Doug. Obviously, the floating rate loans on the books did benefit from the increase in LIBOR. We also had the timing issue with originations in the portfolio. There's a portion of the loans that were fixed rate that, that's reducing and reduced further this quarter. So on the go forward, I think we'll see that correlation Tony mentioned of 1 point increase in LIBOR, add $0.19 on an annual basis and we've got that floating rate correlation. There are a lot of other variables in any given quarter with regard to results. So we look at the whole picture there.

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

Hi, this is actually Ryan on for Jade. I was wondering if you could just characterize a competitive environment overall in terms of the originations you're doing. You mentioned the increase in refi volume over acquisition. What types of trends are you seeing in those loan spreads versus what you've been doing previously?

I think the market is becoming increasingly competitive, but we're also seeing more and more opportunities to lend. So if you look at what we were able to originate in Q1 and our pace for Q2, it's never been stronger. So from a competitive standpoint, our platform is doing great. We've, so far, been able to maintain spreads and yields in our loan portfolio consistent with prior quarters. As -- if rates rise, we think there could be a little bit of additional spread compression. But I think in general, we're very constructive about where we are from a competitive standpoint and very pleased with how we're performing.

This is Jade Rahmani from KBW. In terms of the pipeline. What would you say is driving the strength? Is it a function of market activity increasing? Or a shift in competitive dynamic away from banks for example. What would you say is driving that?

I think that for us it's really I think the quality and the strength of our platform. We have a great investment team. We're able to move up in size much more easily than a lot of our smaller competitors. So our average loan size was over $160 million in the first quarter and we have the ability to do very large loans, which is a huge competitive advantage to us and really moves the needle in our originations. So I think those are probably really the primary factors that we see.

Did you see any geographic mix shift in your pipeline to speak of? For example, in New York we've noticed the investment sales transaction volumes have been pretty weak. So is there any notable mix shift and what you think is driving those lower New York-based investment sales volumes?

I think we've seen a slowdown in investment sales volumes sort of overall. Rates are higher and the environment is more stable. So I think pricing is still relatively high. We've been able to backfill our volume with a lot of refinancing, which obviously, isn't contingent on properties being sold. Our client base, who are generally active of buying properties are now -- or active refinancing as well. If you look at our Q1, which was a mix of acquisition loans, refinancings and construction loans, all loans were with sponsors we've done prior business with, so 6 for 6 on repeat clients. Speaks to the platform, and speaks to our ability to move our business and our products in the direction where our clients want them to go.

Would you be able to give any color on the construction loans you did in the quarter? Just the kind of opportunities that you've identified and what the timing of these expected projects are? And your advancing of cash flows?

The construction loans that we've done have been primarily major market office buildings. So generally, in sort of the 45% to 60% loan-to-cost range. Top sponsors, so with sponsors that we've done other business with. And we've really limited the product to best-in-class developers and we think for risk -- on a risk-adjusted basis there -- it's really a great opportunity for us. Typically, they don't have a large funded balance at closing. The equity goes in first and we fund over time. So we're going to get the benefit of increased fundings over time as construction progresses. I think we'll continue to limit the business to top assets, top sponsors, top markets, consistent with our refinancing and acquisition lending.

In terms of the joint venture with Walker & Dunlop. I was wondering if you could provide any color on how it's structured, how things like origination fees would be treated. And if there's any performance fees? And just generally, how much capital would you expect to commit? What kinds of originations you think could be achieved?

The JV with Walker & Dunlop is really -- it's the combination of 2 companies that I think are ideally matched to pursue this business together. So they're a market leader as are we in the lending and origination business. We're really excited about the combination, what it might yield. Credit approvals and major decisions are joint within the partnership. Capital is 85% us, 15% Walker & Dunlop. The loans are going to be senior mortgage loans, floating rate, similar in profile to the BXMT loans from a returns standpoint as well. We expect a smaller, lower -- a smaller average loan balance than what you see across our portfolio, as Walker & Dunlop has a broader origination footprint in the multi-family space. So I think what should you look at is again, is for loans that look a lot like the loans that we have made, and smaller and we're hopeful there'll be a very high volume going forward. But right now, we just closed and we're working together to get the venture up and running.

Your next question will be from the line of Doug Harter, Credit Suisse.

Can you talk about the retail portfolio and how the credit quality of that portfolio is faring today?

Sure. In terms of a pure retail, so straight retail, our portfolio is about 8% retail. I think the significant thing to note is that we have no loans on enclosed malls. So we've avoided the B mall space, no Sears or Penneys. We haven't tried to make the credit call on whether a secondary mall is a survivor or not. So we've been very selective in what we've done. What we have done has been mostly urban retail in major markets, top sponsors. The average LTV across our pure retail is under 50%. We feel very good about the quality of our portfolio. And we're obviously aware -- fully aware of the pressures and the headwinds that exist in retail and I think if you look at our portfolio, the asset selection and what we've done reflects that view.

Great. And then, I guess, just taking a broader look at the credit quality of the portfolio. Any trends you're seeing in the underlying real estate performance and the execution on -- of the business -- of the underlying business plans on the portfolio?

No. I think in general, our clients are working their way through the business plans. The assets -- leasing is generally improving at the assets that where we made transition loans with assets that weren't fully stable at the time of loan closing. We feel very good about the credit quality of the loans -- of those loans across the board and so we're not seeing any alarming trends. We've stuck with strong markets with dynamic demand and top sponsors and lower LTVs. And the portfolio looks good and we're confident that we'll endure any conditions going forward.

Your next question will be from the line of Steve Delaney, JMP Securities.

I wanted to touch on the GE portfolio. That -- your deck shows that it's down to $1.6 billion. Could you share any color on sort of the expected timing of any remaining payoffs coming out of that over the next few quarters?

I think at this point the most -- the GE loans that remain are a combination of loans that we've had the opportunity to amend or -- and extended and really, we sort of view those loans as having been converted to BXMT loans. I'd say a large amount of the remaining GE loans, fixed rate loans that they're still call protected and we expect most of those loans to get repaid when the call protection expires. So the remainder of the MHC portfolio and some of the other loans that we acquired, some fixed-rate hotel loans. The LTV in that portfolio was also in general, very low and we have -- we've gotten a little bit more duration on some of the stabilized assets because of the fact that those loans are fixed-rate and called protected.

That's helpful. So it sounds like the pressure from heavy prepayments is maybe slowing from that large acquisition as you sit today versus may be 6 months ago.

Yes, I think that GE repayments were a very important part of the story in 2016. We did have 1 significant GE repayment in the first quarter. But going forward, I think, it will be much less impactful. And so now the repayments that we'll see going forward will be to a lesser extent GE and then just some of the repayments in the earlier stage loans we made at BXMT.

That's helpful. And just 1 final thing, last Friday, Commercial Mortgage Alert reported that "Blackstone," and I'll put that in quotes, because they didn't mention Blackstone Mortgage specifically, but that the company's committed to a very large senior floating loan on an office project in northern Virginia, and they cited it as being over $800 million. Just curious, you mentioned about $1 billion pending closing. Can you say if BXMT, specifically, is involved in that financing and if so, would that large loan be shared with other entities?

Yes. Steve as a matter of policy, we don't comment on any loans prior to their being -- to them being closed. What I will tell you is our forward pipeline is very strong. I mentioned it was $1 billion plus. It's spread across a few different loans. We feel very -- we feel great about the momentum we have with our investment team in terms of new originations. I think we're at as good a place in terms of a -- pace of originations as we've been since the company was formed.

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

I know Jade had asked a couple of questions about Walker & Dunlop, but I wanted to circle on 2 things there. Given the 85-15% split in terms of capital, is that the way we should think about any fees being allocated? Or is there some sort of sourcing agreement that disproportionately allocates that?

I think that the key to the 85-15% is that really relates to the percentage of the loans that we ultimately own. And so we run a much more of a balance sheet and capital-intensive business than Walker & Dunlop and so the majority of the loans will sit with us. And one of the big benefits of the JV for us is obviously to increase our originations with high quality multi-family business that we were presently not addressing that Walker & Dunlop address in a great way with a market-leading team.

Hi, Rick, it's Doug. I just wanted to add that. We're not disclosing the specific economic terms of the joint venture. But what we can say is that the returns to the joint venture to the 85-15% capital are going to be consistent with our existing floating rate business. So we're going to be levering those loans to LIBOR and low-teens returns that we've seen in the rest of our business and that'll be the net economic impact for the company.

Doug, thank you for telling me that the first -- that the question wasn't fully answered, because I wasn't sure. So I appreciate that. The other question related to the Walker & Dunlop relationship -- and Steve you talked about the size of the loans being smaller and the returns being comparable. Given the ultimate take outs there, is the duration on that portfolio likely to be shorter than the typical BXMT loans?

I think on average the duration will be a little shorter. Some of the loans will -- we typically make loans that have an ultimate 5-year maturity at BXMT and in our Direct Origination business. These loans will be a combination of 3-year and 5-year loans. So potential, they could be a little bit shorter. The takeout's typically dependent upon progress along the business plan and when properties qualify for an agency take out. We expect to get -- we expect the velocity in the joint venture to be high and we're hopeful of maintaining a high average loan balance across the portfolio.

Got it. Last question, any impact that you guys are seeing in terms of the changes in risk retention rules or bank behavior, given some of the increased scrutiny related to CCAR and the issues that regulators have raised related to commercial lending, commercial real estate lending, in particular.

Well, the banks have been cautious. I believe it's more of a credit profile, a credit culture issue than a regulatory issue. But we don't have a lot of bank competition except for at the lowest LTV and the least transitional assets that we pursue. The one area where I think regulation's really impacted the banks has been in construction lending. And the reason why we have that opportunity at the moment is because the banks have been unable to address the needs of their historic client base, again, because of the capital treatment and the consequences of HVCRE rules. So it's been a great opportunity for us. We've been highly selective in pursuing that opportunity, but we have found some great opportunities as a result. But otherwise, I think in a regular way that the regulatory environment for the banks isn't really what influences the bank competition with us.

Your next lesson will be from the line of Charles Nabhan, Wells Fargo.

I understand there's a degree of variability in pricing from deal to deal, but I was wondering if you could talk about what you're seeing in the spread environment and your expectations for spreads as the tightening cycle proceeds over the next year or 2?

Well, I think if you look at the spreads in our loans, we have a fairly wide band of spread depending upon the nature of the loans that we're making. The more stabilized loans that we make have lower spreads and they typically have higher LTVs as well, because we address volatility in assets by lending less. And so the assets that are further from the stabilization process, typically have lower LTVs and higher rates. So the spreads on our loans in any 1 quarter really reflect the composition of the loans we made during that quarter. We try and -- as a business, always try and broaden the palette of loans that we're able to pursue. So we want to be able to go for low -- have more efficient liability so that we can pursue lower Spread business and grow our originations that way and also make -- have the ability to assess the risks of deals that maybe are a little bit less efficient or a little bit more challenging. So I think you'll continue to see a wide array of spreads across the loans that we originate and potentially, a wider band than what we've seen previously, as we look to expand what we're able to do in BXMT.

Great. I guess what I'm trying to understand is -- I understand the variability, but if you were to compare on an apples-to-apples basis a similar deal that you might have done this quarter versus something you did in the first quarter or even the previous year. I guess I'm just trying to understand apples to apples if spreads have come in at all?

Spreads have come in. If you -- forgetting Q1 of last year, which was a period of unusually high volatility. The trend in the -- of spreads over the last year or so in the business that we've been pursuing has been on the tight side. So yes, spreads are tighter. I would say at least 25 basis points tighter.

Got it. And just as a quick follow-up, and I apologize if you touched on this earlier, but the originations coming out of the Walker & Dunlop JV, should we think of those as incremental to the current run rate for originations?

Yes. The Walker & Dunlop -- the loans that we expect to see from the JV are loans that we don't presently address in our current direct originations. We don't -- we have not pursued the multi-family bridged agency space. It's dominated by the agency originators like Walker & Dunlop. So we have the good fortune of now teaming with a leader in the space that have great access to a pool of high-quality, multi-family loans that we didn't presently have access to. So we would expect all the originations that we do through that venture to be incremental.

Your next question will come from the line of George Bahamondes, Deutsche Bank.

It seems like you guys may have answered my question. It was really around maybe giving an example of an opportunity you would anticipate seeing via the Walker & Dunlop JV, that BXMT may not have been exposed to or completed had the JV not been put in place. And it sounds like the size of the loans will be smaller duration, maybe somewhat shorter. You did mention just now, it's addressing a gap that existed in the multi-family bridged to agency space. Are there any more specifics you can give around, maybe a type of opportunity you might see? Maybe in a different market or a bucket within the multi-family asset class that you typically have not worked on in the past?

I think, George, a prototypical loan would be, let's say a $25 million or $30 million asset or maybe a couple of assets in a market, where somebody -- where they've been acquired or they're owned and somebody's trying to upgrade a Class B asset to a Class A asset and spend a lot of money -- spend money renovating and improving asset quality. And then trying to roll the rents and once the rents have been reset and a new NOI established, then the loan would get taken out by agency financing. So our loans would be sort of financing the business plan, the contribution of additional capital to improve an asset prior to its permanent financing.

Your final question will come from the line of Jade Rahmani, KBW.

Thanks for taking the follow-up. Just looking at the consensus earnings expectations. The projection is for earnings to exceed the dividend and in some cases by wide margins. And I assume analysts are factoring in the forward LIBOR curve. So I just wanted to see if you could comment on the reasonableness of that expectation, assuming additional interest rate hikes this year.

Hi Jade, it's Doug. We don't give guidance or make forward-looking statements along those lines. I would point you to the chart with regard to correlation to LIBOR and we've talked about that. So we think that increasing LIBOR will definitely benefit our earnings, but we're not going to comment on projections or estimates for the go forward.

And would the risks to whether those expectations are too high involve loan yield compression as well as timing, pace of originations and potential capital rates? I mean those are the main factors that could impact that outlook?

I think that the 1 factor that you're missing would be repayments. So it's really about originations relative to repayments and the net growth in our loan portfolio. That's the major driver.

And then just finally, could you comment on how you assess current capital availability, given the strong originations pipeline potentially waning, GE repayments and also the WD joint venture, which you said was incremental. Just how do you assess current capital availability?

Well, we reported our liquidity at the end of the quarter and you saw that it was a strong number reflecting maximum origination capacity of about $2.5 billion. You saw that our net fundings for the quarter were about break even. So I think we're in a very strong liquidity position. But the way we look at our liquidity is relative to the opportunities that we see to deploy the capital through our origination pipeline, so we are happy with the forward-looking originations. We talked about $1 billion plus. The impact of Walker & Dunlop is going to be a little further out. We have to -- we're in the process of arranging credit facilities for Walker & Dunlop and there will be a little bit of a lead time from originating those initial loans to getting them closed and onto our books. So again, that's sort of how we look at -- that's how Walker & Dunlop factors into our thinking in terms of our liquidity and how we would think about when we think we might need more capital.

And at this time, I'm showing no further questions in queue. I would like to turn the conference back over to Mr. Weston Tucker, for any closing remarks.

Great. Thanks everybody, for joining us and if you have any follow-up give me a call.

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