Blackstone Mortgage Trust Inc (BXMT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Mortgage Trust Second Quarter 2017 Conference Call. My name is Tracy, 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, Tracy, and good morning and welcome to Blackstone Mortgage Trust second 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 factor section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We'll also 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 things over to Steve. We reported GAAP net income per share of $0.53 and core earnings per share of $0.60. Earlier this month, we paid a dividend of $0.62 with respect to the second quarter and based on today's stock price, the dividend reflects an attractive yield of 8%. 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. With our second quarter performance, BXMT continue to demonstrate the strength of our loan origination and capital markets capabilities. BXMT originated $1.5 billion of loans in the quarter taking total originations to $2.5 billion for the first half of the year. 44% ahead of same time last year. We have a healthy pipeline with another $875 million of loans closed during the closing process since quarter-end. The origination highlight of the quarter was the $889 million financing of a portfolio of office buildings in Rosslyn, Virginia, a Washington DC Metro area submarket. The portfolio has strong sponsorship and a stable base of tenants with upside potential from additional leasing in an improving market. We utilized our ability to execute on larger deals as part of the Blackstone real estate platform as well as our strong relationship with the sponsors to successfully compete with this loan. This origination was also driven by our capital market execution. Majority of the properties were combined in a cross collateralized portfolio loan. The large pool loan enable us to capitalize and the strong demand for floating rate single borrower CMBS. We co-sponsor with Goldman Sachs, a $500 million new-ish -- new CMBS issuance. Our first time accessing this market with the balance sheet financing of a BXMT loan origination. The result of the CMBS transaction of BXMT was an efficiently priced term matched non-recourse financing of the Rosslyn portfolio loan. In addition, a two-building Rosslyn portfolio with a long-term major lease and very substantial future capital requirements was separated into a individual $136 million loan that we plan to syndicate. The most efficient senior execution for that loan. We also originated 3 multi-family acquisition loans totaling $279 million during the quarter. Two are New York City deals and the third is in Southern California. We continue to like Class B multi -family in the major coastal markets and are excited about these new loans. We also closed on $189 million refinancing of 1.3 million square foot Chicago office building for one of our top clients. The low basis loan provides the sponsor with additional capital to complete the leasing of the property. Our originations during the quarter, combined with $146 million of advances under preexisting commitments led to $811 million of loan fundings, net of repayments. Our best net deployment quarter since the GE transaction. By comparison, the first quarter even with its $1 billion of originations, had slightly net negative fundings because of repayments and construction loan originations not significantly funded at closing. The full impact of this quarter's positive fundings will be experienced in Q3. Because of our strong origination pace and attractive conditions in the convertible debt market, we raised $288 million of 5-year unsecured convertible notes during the quarter. The notes have 4.375% coupon with a conversion price of 1.35x book value per share. Although the issuance negatively impacted our Q2 earnings, the increased leverage will ultimately enhance our ability to compete in a market where we've seen loan spreads compress for the high quality loans that we pursue. We do not compromise credit quality by reaching for yield, so improvement in our cost of capital from the convert is especially beneficial in the current environment. As to new lending opportunities, we are seeing increased transaction activity in the market and a pick-up in demand for floating rate acquisition loans from our clients. Refinancing and construction loan volumes also continue to be robust. The market remains highly competitive, but the increased demand is very positive. We continue to feel great about the credit quality of our portfolio. Our loans are 100% performing with an average LTV of 61%. Our focus on major markets and top sponsors and strategy that we believe protects our shareholders. And as a reminder, our portfolio is now 92% floating, so we gained $0.23 of net interest income from a 1% increase in LIBOR. During the quarter, 3 private equity platforms took their commercial mortgage lending vehicles public. These are not new players. All were lenders for a few years prior to their IPOs. We expect that their expansion of the public commercial mortgage REIT sector will be beneficial, and lead to additional interest in overall investment. With the Blackstone backing of BXMT and our strong team, track record and high-quality loan portfolio, I'm confident that we will outperform. And with that, I'll turn it over to Tony.

Thank you, Steve and good morning, everyone. This quarter we saw significant activity on both the left and the right-hand side of the balance sheet, with strong originations volume supported by a dynamic financing strategy. As Steve mentioned, our 2Q originations totaled $1.5 billion, bringing year-to-date originations to $2.5 billion, up 44% from the first half of 2016. These loans are all floating rate senior loans with an average origination LTV of 61% and a focus on large projects and major markets with quality sponsors consistent with our overall investment strategy. Our total loan portfolio of $10.6 billion, the largest since our 2Q 2015 acquisition of the GE portfolio, remains strong with 100% performance, a stable risk rating in LTV profile and 92% of our loans index to floating rates. This continued focus on net floating rate exposure positions us to realize significant benefits in the future as rates increase. One note on construction loans in our portfolio. As we've mentioned on prior calls, loans with future funding commitments and construction loans in particular contribute to our earnings in the periods following their origination. These loans are funded over time as our borrowers complete their development over transition plans and request additional capital from us. Effectively acting as organic portfolio growth over time. In 2Q, for example, we funded $146 million under previously originated loans, including $72 million under construction loans, roughly the equivalent of 1 additional new loan origination during the quarter. On the right-hand side of the balance sheet, we had an active quarter on the [capital markets fund] issuing $288 million of convertible notes in closing our first balance sheet securitization financing. The convertible notes have a 5-year term and initial conversion price $35.67 with a coupon of 4.375% down from the [5.17%] coupon of our 2013 convertible notes issuance. As with our existing convert, we view this as accretive balance sheet capital that can further enhance our regular way loan origination business.

Our Rosslyn portfolio securitization generated incremental $475 million of stable term match financing for one of our newly originated loans at a coupon of only LIBOR plus 1.86%. The accounting for this transaction is all consolidated on our balance sheet, reflecting our origination of the total loan and a $475 million liability for the non-recourse note sold into the market. Notwithstanding this gross presentation, the net impact on our stockholders' equity and net income reflect our economics as the subordinate investor in the securitization. In addition to these 2 transactions, we continue to actively manage our mainline credit facilities extending $1.5 billion of maturities during 2Q, and closing the initial $450 million of credit facilities to finance loan originations and our new joint venture with Walker and Dunlop in July. We closed the quarter with a debt-to-equity ratio of only 2.5x, up slightly from 2.4x as of [331] following our convertible note issuance during the quarter. Available borrowings under our revolving credit facilities comprise the majority of our $530 million of liquidity at quarter end, which amount is available to us to capitalize future investment activity. Looking at second quarter operating results.

We reported GAAP net income of $0.53 per share and generated core earnings of $0.60, both down $0.01 from the first quarter. This decline was due in part to the natural earnings drag as we deploy the capital raised in our May 5, convertible notes offering as well as other quarterly timing and operational differences. We have maintained our 2Q dividend at $0.62 per share reflecting our estimation of the consistent earnings power of our platform over the medium term, as we continue to deploy capital under new and existing loans. Our book value of $26.38 is up $0.10 per share driven by appreciation in the Pound Sterling and Euro during the quarter. As we've mentioned on previous calls, our book value is not generally subject to fluctuation over time, as our loan portfolio is held for long-term investment and we do not own any mark-to-market securities or other volatile assets. In closing, we are pleased to conclude another strong quarter of originating senior floating-rate loans and our position in the current credit rate environments. We are happy to add our first balance sheet securitization to our arsenal of financing strategies and look forward to the continued growth of our lending platform. 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 Jessica Levi-Ribner with FBR.

Steve, you mentioned that the full impact of this quarter's funding will be felt in the third quarter. Can you put some numbers around that? In terms of how additive it could be, the EPS?

Hi Jessica, it's Doug. Why don't I take that one. The $800 million or so of net fundings were basically originated in the middle of the second quarter. And so, you can run the numbers. You've got the average spreads. You can run the numbers on what that earnings impact would be if you assume those outstandings for a full quarter as opposed to essentially half a quarter. That's roughly sort of what we expect the impact to be all else equal. There are couple of other dynamics, obviously LIBOR is going to be a little bit higher in the third quarter than it was in the second quarter and we think deployment will increase during the third quarter as well. So I think the wind is at our backs in terms of earnings. I think, with regard to specific numbers. What we point to is the $0.62 dividend, we think, that's supportable over the long-term and earnings will be in and around that $0.62 dividend given our current model.

Okay. And then can you also speak to the pipeline for Walker and Dunlop loans for the loans that you are partnering with Walker and Dunlop on?

Sure. I think, we reported that we said -- we did our initial closings in Walker and Dunlop prior to quarter-end. I think, we're off to a great start in the program. We are $133 million worth of deals closed right away. The program is in its evolutionary phase. We are working great with Walker and Dunlop, and we're seeing a lot of deal [flow very] active pipeline. It will take a while for the pipeline to build, because the marketing of the product really began in earnest as -- when the deal was closed and our financing lines were put in the place. But we see a lot of opportunity. We think they are a great partner. We love that multi-family space and so we're excited about what we're going to see going forward.

Your next question comes from the line of Douglas Harter with Credit Suisse.

Can you talk about your liquidity position as of June 30 following the strong growth in the quarter and the ability to fund the pipeline, you talked about with that existing liquidity?

Sure. It's Doug here. So liquidity at quarter-end was $530 million, that's down a little bit from last quarter given the strong net fundings we had during the period. I think, it's adequate for if you look at a maximum number to fund approximately $1.9 billion of new originations. And so, it's in line with where we want to be. I think, having a quarter 2 of dry powder in reserve and that's after I'd point out raising $289 million of capital convertible notes. So we feel pretty good about our liquidity position, capital markets access overall with regard to growing the balance sheet going forward.

And just with that [$530 million] , can you remind me of where you think of -- what you think of excess liquidity and how much excess liquidity you kind of want to keep on hand?

I could say that, it's sort of -- it's about half of that or $250 million you could consider defensive liquidity. [I mean] , $250 million of that you could consider working capital or offensive liquidity. It's a dynamic picture, so we're -- we do experience repayments. We didn't experience tons of them during the second quarter, but we will during the second half, and so that number -- there are several different sort of inputs into that number on the go forward. But $250 million, I think is probably what you could assume we reserve for purely defensive purposes.

And then thinking about the make up of your capital structure going forward, how should we think about kind of the mix of converts, common equity, any other structures that you might consider to make up that capital base?

That's a great question. One thing I would point out. During the second quarter, obviously we added some convertible debt to the capital structure. We also added some securitized debt to the capital structure. And so if you look at our -- the leverage on our balance sheet in terms of recourse debt is actually flat although leverage and deployment was up during the quarter. So that kind of mixing of financing techniques in order to optimize our capital structure is what we're going to continue to do going forward. It will involve the mix of our credit facilities with limited recourse and involve nonrecourse securitized financing. It's going to involve convertible that potentially high yield debt and some corporate debt as well. Obviously, we didn't have a lot of outstanding on our revolver at quarter end, but that's another tool in the tool shed for us. So we're going to continue to target 3 times recourse leverage and we're going to continue to optimize the cost of capital, which I think is ultimately the most important factor for us, particularly in this market environment.

Your next question comes from the line of Steven DeLaney with JMP.

Certainly the CMBS transaction was noteworthy and Doug had mentioned over the years that that was a market that you were following. I'm just curious, the loan -- the release -- the $753 million piece was priced at about 340 basis points, with little bit lower than what you normally would do. So the question is how critical in terms of meeting your return hurdles? That financing which I think was all in around LIBOR plus [195] . I mean, was that the critical piece that -- that financing at that level of the critical piece that allowed you to competitively price and win that piece of business?

Hey, Steve, good question. I think -- and I say, LIBOR plus 340 today given where we see loan pricing is in the range of where we're quoting the (inaudible) doing. So I think the profile of the deal, its pricing was very consistent with what we do, what was really the differentiating factor versus how large it was. And for the fact it was larger enable us to economically access the strength of the floating rate, single borrower CMBS market, something we wouldn't have been able to access on a smaller loan. So the key to the -- to getting this efficient financing was loan size. Any how, as you know, given our profile, we're always focused on trying to do things bigger and in top market. So really felt good from a strategic standpoint, this loan and sort of all of its qualities.

Yes, it's kind of -- [Steph] you mentioned some new players in the public arena. I mean, it seems to me that with your balance sheet and capital base, you're sort of have the ability, if you choose to play in a much bigger ballpark and now that you've had the sort of the success with the initial CMBS, your names out there in that market. Is it possible that we would see other large financings like this in the future and see what would be sort of a maximum, is there sort of an upper limit that you would commit in terms of a loan size to 1 transaction?

I don't -- I wouldn't put it upper limit on what we would do. I think, that we have the ability to do large size and the creativity to capitalize that. So and it is an important differentiator between us and some of the newer platforms which are smaller and can't compete on the larger deals that we pursue. So we think, it's an important competitive dynamic. And some of it really does distinguish us from some of the smaller platforms.

Okay, thanks.

Just add to that, that I think you can expect to see us do more securitized financings in the CMBS or CLO market. As you mentioned, we've been following that market for a long time, we've had a very successful execution then I think securitization will be the third leg in the stool in terms of our financing strategy on the go forward.

Appreciate that. Doug, And Tony, you mentioned construction loans and funding schedules. Your portfolio, you've got 102 loans, $10.6 billion outstanding. How many construction loans are within that loan count and dollars outstanding roughly?

Steve, I have that stat. We have 5 construction loans, a couple of [that are] our growth construction loans with the constructions now complete. It's about 7% of our commitments and about 3% of our outstanding loan balance, again the difference between those 2 being the unfunded portions of the loans that we intend to fund over time. We are seeing more opportunities to originate, we think very attractive construction loan. So I -- so we have some more in the pipeline that you'll see in the coming quarters.

I hate to ask one more but I want some clarity for model purposes, the Walker and Dunlop JV [85-15] split, should we assume that that's going to be given that your 85% that those loans are going to be consolidated into your portfolio and you will simply show like a minority interests to Walker and Dunlop. Is that the plan?

Yes, that's exactly right. We consolidate or you'll see in the third quarter financials, we'll consolidate the debenture. So the loans will be in our loans, the financings will be in our financing and the 15% will come out of the bottom of the balance sheet and the bottom of the income statement. The way we previously were presenting our CT legacy portfolio, with that bottom line adjustments, it will look exactly the same.

(Operator Instructions). Your next question comes from the line of Jade Rahmani with KBW.

Can you comment on loan spreads in the quarter comparing this quarter's originations versus last quarter, how much of the decline in spread was the result of mix since you did more construction loans last quarter?

Good question, I think that let me answer that more just sort of the trend that we're seeing in loan spreads and why and I think your observation is right in that the loan spreads we show in any 1 quarter will depend upon the composition of those loans. So the construction loans that we do and the more deeply transitional will have higher spreads, the more stabilized, and maybe the multi-family assets, we do have -- will have lower spreads. And so I think that's what you see when you look at any 1 quarter. In general, spreads are trending tighter. We have seen a pick up in loan demand, which is a great factor, but spreads are tightening. We have a very competitive cost of capital, so I think we win relative to our competitors in this marketplace. But I think you will see spreads growing a little bit tighter on the go forward.

And can you quantify the magnitude of tightness that you've seen, is it north of 50 basis points?

No, I would say, again it varies. The construction loans really haven't tightened, and the more stabilized product has tightened, I would say 25 to 50 basis points this year.

What do you think is driving that?

Good question. I think some new competition is driving that. There is some new private equity funds with senior lending strategies, some new separate accounts and until recently and I talked about this in prior calls, loan demand was off. The -- our fund sponsors which comprise the majority of our client base were less active buying properties, so it's just less demand for acquisition loans. And the market pushed a little bit more towards refinancing the construction loans, and the refinancings in particular are very competitive. We have seen in the last couple of months and our pipeline reflects that, a pick up in demand for acquisition loans, a little bit more acquisition activity on the part of the funds. I think some of -- a lot of them are behind in their deployment, so dating back to the slowdown in the first quarter of last year. So it's nice to see the pick up in demand and the pick up in the volume of our pipeline.

And do you anticipate a pick up in repayments as a result of the increased competition?

We work very hard to maintain the loans in our portfolio. We -- our asset management approach is one where we're very interactive with the borrowers. And we will rightsize the loans and reshape the loans to make sure that they match the borrower's objectives and business plans over time, which helps to mitigate the repayment. In a more liquid market we will get more repayments than in a market that's a little less liquid than the one that we are in now. But if you saw in the current quarter, we got way ahead of the repayments to the tune of about $800 million. I think, that is unusually high level, but we feel good about on a longer-term basis, having our originations keep ahead of repayments in our portfolio.

And just touching on the credit performance, can you comment on how borrow business plans are generally coming in, are there any trends you could point to with respect to either geography or property types that would explain either whether business plans are lagging or coming in-line or ahead of expectations?

I think, we've been pleased with the performance of business plans in our portfolio. We stuck with the markets that we've been focused a lot of California, which is a very, very strong market and New York, which is also a stable and in many cases the strong market has really helped us in terms of seeing business plans realized. A lot of the multi-family that we've done in Class B multi-family, it's a really strong sector. And so from a business point -- standpoint, we've been encouraged, It's little bit of a two-edge sword, its the business plans mature, the loans become more likely to be repaid. But again, we have a very good -- a good and focused effort on maintaining our portfolio. So we're seeing a healthy progression through the business plans, what I would consider to be a normalized level of repayments, all things considered. I think, you want to see repayments in our portfolio, it would be problematic if you weren't seeing any. And it's the nature of our business -- loans get repaid. We make new ones. We feel great about the new ones, and hopefully, they'll continue to be the case as we roll forward.

Your next question comes from the line of Ric Shane with JPMorgan.

Couple of things, when we think about sort of the puts and takes on a year-over-year basis LIBOR is up, portfolio size is down, presumably spreads are compressing, Q2 represents an inflection point where the portfolio has started to grow again. Should we see this as the inflection point in terms of earnings growth as well?

Hey, Rick, it's Doug. I think , you have a good point. I think Q2 is an inflection point. We did see material portfolio growth as we sort of put the GE repayments more or less behind us last quarter. The portfolio was up 10% and deployment is coming closer in line with what we would consider a steady state. And as you point out, LIBOR is on the way up. Those are going to be big drivers of earnings and of earnings growth going forward.

One question and one request. When we look at the LIBOR sensitivity chart, a year ago, it was a little bit non-linear, in that, once you hit a certain level LIBOR, the sensitivity started to increase. If we look at that LIBOR sensitivity chart now, it's much more linear, every 25 basis point has a more consistent impact on NII per share. Is that just a function of coming off the floors, or is that a function of something on the right side of the balance sheet either in terms of funding or hedges?

It's the former. So what floors there were primarily in the GE portfolio are either on loans that have since repaid or are no longer in the money with LIBOR at [130] as opposed to close to 100 basis points less than that.

And last, this is more of a request, if I look back through the historical slides, there was I think more disclosure each quarter around spreads on the floating rate portfolio both in terms of the overall portfolio used to show what the LIBOR float was on the -- what the float was on the floating rate portfolio -- spread on the floating rate portfolio specifically, and you also would show each quarter of what the spread was on originations? Given controversy or concerns in the space about spread compression, can you continue to provide that, it would be really helpful, so we can look at it on a year-over-year basis?

Yes, Rick, point taken. I mean, I think as spreads have moved around a little bit, one thing, we always pointed to is the stability in terms of the ROIs as we adjusted leverage and our cost of debt. And so we didn't necessarily want to overemphasize the volatility and spreads, particularly as the loan mix changes and construction loans come into the picture. Each quarter is pretty chunky, so we want to avoid sort of reading too much into any one quarter. But I think, you've got a very valid request and we'll certainly take that under consideration and figure out how to get that information clearly disclose going forward.

Sure, if you are going to get it realized that things like the large loan deals that you're doing come with tighter spreads, but it will just really be helpful to us as we think about our models and sort of able to track the impact of that.

Understood.

Our final question comes from the line of George Bahamondes with Deutsche Bank.

I'm sorry if I missed this, but did you disclose originations done post [630] in your prepared remarks?

Yes, I referred to $875 million of loans that have either closed or now in closings since quarter end. With the pipeline activity is good, I think, that's a good number.

Right, again, I was looking for it. I know you guys usually disclose it on your call, I just missed that this time. I appreciate you guys answering that question. All my questions have been answered at this point.

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

Thanks everyone for joining us this morning. If you have any follow-up questions, let me know.

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