Blackstone Mortgage Trust Inc (BXMT) 2017 Q4 法說會逐字稿

Great day ladies and gentlemen and thank you for joining Blackstone Mortgage Trusts Fourth Quarter and Full Year 2017 Investor call. My name is Latoya (ph), and I will be your moderator for today. (Operator Instructions). It is with great honor introducing our host for today, Weston Tucker, Head of Investor Relations. Please proceed.

Great, thanks Latoya. Good morning and welcome to Blackstone Mortgage Trusts Fourth 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-K and issued a press release with the presentation of our results, which are available on our Website and have been filed with the SEC. 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 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call and for reconciliations, you should refer to the press release and our 10-K. Any references to tax reform on this call do not constitute tax advice and you should consult with your own tax advisors regarding the consequences of investment in BXMT. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

So a quick recap of our results, we reported GAAP net income per share of $0.59 for the fourth quarter and $2.27 for the year. Core earnings were $0.65 per share for the quarter and $2.55 for the year. Last month we paid a dividend of $0.62 with respect to the fourth quarter and based on today's stock price, that dividend reflects an attractive yield of over 8%. If you have any questions following today's call, please let me know. And with that, I'll now turn things over to Steve.

Thanks Weston and good morning everyone. In 2017 the benefits of BXMT Management by Blackstone, the leading real estate investment manager in the world, were evident on both sides of the balance sheet. We originated $4.8 billion of senior loans, up 37% from 2016 and grew our portfolio by $1.2 billion to over $11 billion. To support these originations and future growth, we sourced $4.2 billion of new efficiently priced capital during 2017. That investment and funding activity drove full-year core earnings of $2.55 which more than covered our dividends paid.

During the quarter we originated $1.2 billion of loans. The originations were concentrated in the multifamily asset class and in major coastal markets, matching two of the favorite investment themes of Blackstone real estate. Multifamily originations contributed about $520 million, or 44% of our quarterly loan volume with the Walker & Dunlap JV accounting for $110 million of that total. Loans secured by the industrial property in Boston, office buildings in Atlanta and Northern California and a hotel in Southern California comprised the rest of our quarterly originations, consistent with our focus in the coastal markets where we see the highest quality sponsors and assets with the most enduring property values.

We have an additional $1.5 billion of loans expected to close in the coming months and our pipeline of origination opportunities remains strong. We work the right side of the balance sheet as hard as the left and had a truly extraordinary year funding our business. In December we raised equity for the first time since 2015; $396 million at 1.2 times book value primarily driving the 41% increase we had this quarter to book value per share. Earlier in the year we issued $400 million of convertible debt with a [4.38%] coupon and sponsored a securitization of a large loan that facilitated an $889 million origination.

In the year-end we issued a $1 billion CLO, an innovative financing of participations in 31 of our loans and a new source of credit for our balance sheet assets. We also added $1.6 billion of additional credit facility capacity to fund continued growth in our loan portfolio. In addition to increasing lending capacity, we have reduced our borrowing costs and added corporate leverage with the convert enabling us to compete more aggressively for less transitional original origination opportunities that require lower loan spreads.

Increased competition is also driving spreads tighter which has led to more refinance opportunities as property owners look to improve loan terms. With interest rates ticking up, we've seen pressure on REIT share prices including our own but private asset values remain high and cap rates was in the historic healthy spread range to treasuries. There is still strong demand for top quality properties. Corporate tax relief bodes well for U.S. economic activity and for growth in property revenues to offset the impact of higher interest rates and expense inflation.

And with a 94% floating rate portfolio, our performance benefits from increases in short-term interest rates. Tax reform also provides an additional benefit. Individual shareholders get a 20% deduction on REIT dividend income, effectively lowering their maximum federal tax rate from 37% to 29.6%. Our dividend produces an approximate 8.2% pre-tax yield in the current share price. At that level, its tax deduction will provide most individual shareholders in the top bracket the pretax equivalent of another 90 basis points of yield.

BXMT is becoming the leading senior real estate lender and our competitive positioning and recognition in the market have never been stronger. The majority of our loans are with repeat borrowers, the greatest endorsement of the way we do business and our differentiated client-centric approach. Our loan portfolio has an overall origination LTV of 61% and is 100% performing. With its attractive yield, we believe the value proposition of investing in BXMT with Blackstone Management remains highly compelling for shareholders.

With that I'd like to thank you for your interest and support and will turn the call over to Tony.

Thank you Steve and good morning everyone. Steve already covered our 2017 full year results so I will jump right into the fourth quarter highlights. We reported GAAP net income of $0.59 per share and generated core earnings of $0.65, both down slightly from the third quarter. This decrease was in part due to $0.02 of additional prepayment income generated in 3Q as well as the dilutive impact of our $392 million Class A common stock offering in December.

As with any stock offerings, we immediately used these equity proceeds to revolve down our credit facilities, to manage our balance sheet and reduce the J Curve impact of new equity on earnings per share. However, some decline in earnings is unavoidable until these proceeds are fully deployed into new loan originations. For context, all else equal, had we issued these shares on October 1 instead of December 5, our core earnings for 4Q would have been approximately $0.61 per share as a result of this dilution. As Steve mentioned, we have a robust pipeline of new investments and therefore anticipate the earnings dilution to taper over the first half of 2018.

Importantly, we are proud of executing this offer at 1.2 times price to book, capturing a favorable price for our stock and driving a $0.41 increase in book value per share during the quarter. As we had mentioned on previous calls, our book value is not generally subject to significant fluctuation over time as our loan portfolio was held for long-term investment and we do not own any mark-to-market securities or long-dated fixed rate assets.

Accordingly, although we have seen some pressure on our share price following the broader market and REITs in general, we do not anticipate this capital markets volatility to translate to our balance sheet given the floating rate nature of our business. As Steve mentioned, our 4Q originations totaled $1.2 billion bringing our total portfolio to a record $11.1 billion, up 14% from 2016. These loans are all floating rate senior loans with an average origination LTV of 63% secured by institutional real estate in major markets.

Loan funding's during the quarter totaled $1.3 billion, outpacing $875 million of repayments and benefiting from $227 million funded under previously originated loans. Our portfolio remains 100% performing with an average origination LTV of 61% and risk ratings largely unchanged at an average of 2.7 on a scale of one to five with only one $21 million [for] rated loan in our portfolio.

On the right-hand side of our balance sheet, we had an active quarter led by our inaugural $1 billion CLO issuance providing $818 million of non-recourse term match financing for 31 of our loans with a weighted average cash coupon of only LIBOR plus 1.21% on notes sold. This innovative structure includes a replenishment feature which allows us to maintain the 82% advance rate as the initial ten loans repay reducing the effective cost of financing these loans.

This CLO issuance, coupled with our $392 million equity raise in December reduced our debt to equity ratio to only 2.0 times, down significantly from 2.6 times as of 9/30. Available borrowings under our revolving credit faculties comprised the majority of our $681 million of liquidity at quarter end which amount is available to us for future investment activity.

Lastly, as Steve mentioned, we are excited to see the impact of the recently enacted federal tax reform on our business and the REIT sector in general. Under the new laws, REIT dividends are entitled to a 20% deduction by individuals owning the stock effectively reducing the top marginal tax rate on this income to 29.6% from 37% for bonds and other fixed income products not benefiting from the REIT structure. Accordingly, all else equal, on an after-tax basis, our $0.62 dividend is equivalent to $0.69 of income from such non-resources.

We're pleased with our results for the fourth quarter and full year 2017 and we look forward to generating continued value to our shareholders in the future. 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 Don Fandetti with Wells Fargo, please proceed.

Hi, good morning Don.

Please check your mute feature at this time sir, your line is open.

Quick question on rates. You know, the ten-year yield moved up obviously and one of the things that you worry about would be what the impact would be on the ground in terms of the real estate property markets. I guess my first part of the question is have you seen a slowdown in the velocity of transactions and, two, would you expect that to happen? So that's my question.

Yeah, I haven't seen -- I don't think we've seen a slowdown yet Don, I mean, that depends upon how far back you want to go from a rate standpoint but the transaction activity is still solid in the market. And I think what we're seeing now is the pickup in economic activity. I think the benefit of tax reform I think is already being felt in terms of corporate activities. We expect actually leasing velocity to pick up, this to be the overall economic impact to be positive for net operating income and, you know, it's the scenario that you want to see with higher rates in that it's coinciding with economic growth, higher economic activity and more operating income for real estate.

Okay, and then on the CLO, what is your -- how should we think about the all-in cost of that issuances, let's say relative to your bank financing?

Hey Don, it's Doug, that's a great question. You know, the all in cost will ultimately be a function of the tenure of the CLO and as Tony mentioned, we've got some structural features in this transaction that will enable us to really maximize the efficiency of the financing. I think we expect the all-in cost to be below [200] over so another 25 to 50 basis points of non-cash cost that will amortize in over time on top of the cash coupon.

Okay, thank you.

Your next question comes from Douglas Harter with Credit Suisse, please proceed.

Thanks. Doug just following up on that last question, how should we think about how long -- what the tenure is of how long kind of you stay at that 82% leverage before it starts to pay down?

That's a great question. Obviously it's a function of the prepayment speed of the loans that are the collateral in the pool and so it will be a little bit of a random walk. I mean, I think the important thing to understand is that we built in some structural features, you know, replenishment and also some ability to maintain flexibility in terms of extensions and modifications of the underlying loans to maximize that tenure. So, a typical weight-average life for a BXMT loan is probably in the 3 year range and so our expectation is that we'll be able to, you know, push the period out at least that long.

Great, and that -- the all in cost that you referenced to Don's question, does that factor in kind of your expectations for kind of how this CLO pays down?

No, well, it does in terms of the additional 25 to 50 basis points but I think with regard to the potential for rate creep or deleveraging we'd expect to refinance the portfolio, you know, as that comes to pass. Again, that's going to be several years out so we'll make the decision at the time based on market conditions and we do, of course, have the option to maintain the CLO as term financing but I think in terms of optimizing the all in cost we'd be more likely to call the CLO than have it significantly delever or have the rate creep in the out years beyond the three to five year horizon that we sort of foresee.

Very helpful, thank you.

Your next question comes from Jessica Levi-Ribner with B. Riley FBR, please proceed.

Good morning, thanks so much for taking my questions. In terms of kind of the credit environment that you're seeing, I know Steve you made comments that there's still strong demand for high-quality properties. What kind of credit are you seeing in terms of, just on the broader market, I know that your portfolio is still 100% performing but is there anything that's concerning to you more so than last quarter with this rate increase and can you talk a little bit about that?

Sure Jess, I would say not really. I don't think we've seen a change. I think credit quality in our portfolio and what we're seeing in general remains strong. I think we're still at a good point in the cycle, you know, property operations and overall leverage of the market are at healthy levels. So I haven't seen any impact yet and I think if rates stay in the range that they're expected to be in then I don't foresee any impact from a treasury in the three or in the low threes; the fundamental backdrop is still very strong.

Have you seen any competitors fall out of the market because of the higher rates and maybe some of the spread tightening?

I wish some of the competitors would fall out of the market. No, we haven't seen it. You know, the private loan market remains very competitive and so we haven't seen competitors fall away and we are, I think, from a competitive standpoint, feeling very good about our cost to capital and our ability to compete but not because anybody's leaving the market, unfortunately.

And then one last one just in terms of construction lending in 2018, you made some comments around participating in less transitional lending, but how are you -- are you still thinking about construction lending as attractive? Is it -- has anything changed there?

No, I think we still see construction lending as attractive. We didn't close any construction loans in this past quarter and I sort of talked about it being plus or minus maybe 10% of what we do. We continue to look for unique construction loan opportunities that seem well priced that don't fit the profile of the banks. You know, the banks reluctance to fund construction loans hasn't changed so I do think we'll see opportunities to commit to new construction loans as we go forward in 2018.

Okay, thank you. That's it for me.

Your next question comes from Steve Delaney with JMP Securities, please proceed.

You provided us with a great chart on Page 6 of your deck on the strong execution of FL1. We look at that and the carving off of about 30% of the loans into an A2 participation. Is there a structural reason why you couldn't take another 30% of the whole loan and create an A3 and then look to do another CLO? Thanks.

Hey, it's Doug. That's a great question, maybe a little bit of a leading question but no there's no structural reason why we couldn't do that. You know, the one thing we do keep in mind is the point that we were making previously with regard to the expected life of the CLO and the amortization of the upfront costs. So, you know, I think looking at that static pool of 31 loans we'd make an evaluation about what the expected life of those would be. One other thing to keep in mind is that it's not an all or nothing decision. So, we could carve a couple of A3 notes off of half of the pool and combine them with some new loans and collateralize the new CLO with that kind of a pool. So I think you'll see this technology used very efficiently in future financings for the company.

Understood, that's very helpful. And the increase, sort of the relative increase in multifamily, I understand Steve your view that that's just an attractive asset class in general. I'm just curious when you start talking to CLO investors, is the mix of multifamily important to those investors versus other property types and is that in some way driving your -- making [MF] that much more attractive to you because of the financing? Thanks.

I think we really have pursued the multifamily asset class because we just like the fundamentals of housing in this country and so that's really what's driving that, our efforts to increase our loans in the sector, and it's nice to see that we had some success.

Multifamily does actually perform well in these securitized structures. I'd still look at that as an added benefit, not the reason for it. The reason for it is our fundamental belief in how the real estate will perform.

Okay, thanks. And one final thing from me on loan spreads, looking at Page 12, it looks to me like the [538] cash coupon, based on where one month LIBOR was at year-end puts your average spread at about 380 basis points. Steve we've -- all of the commercial mortgage REITs commented over the past year that spreads were tightening in. We heard ranges anywhere from 50 basis points to 75. I'm just curious if you can give us some insight as to how your current originations, whether it was the fourth quarter loans or where you're pricing loans now, how that compares to the portfolio average LIBOR spread of about 380? Thanks.

Well, I would say in general that spreads are tightening and if I had to throw a number out there I would say we've seen 50 basis points or so of tightening in the last sort of six to 12 months.

Okay, good.

In our case we've had the benefit to offset much of that with improved funding costs and a little bit of corporate leverage so we'd be able to maintain our competitive ability despite the compressing spreads.

Okay, thanks for the color.

Your next question comes from Jade Rahmani with KBW, please proceed.

Thanks very much, a follow-up to Steve's question on spread tightening, what about year-to-date? Have you seen continued pressure on spreads? And on the fixed rate side where I believe there's been spread widening, is there any origination potential there?

I think that the tight -- the spread trend from a -- recently has begun to slow. I mean, we saw a lot of spread tightening coming into the first quarter so I do think the level of spread tightening has begun to moderate. As it relates to fixed rate lending, I think we have I think over a longer period of time if we could find a way to add some fixed rate loans into our portfolio that would be really beneficial. You know, floating rate loans work better in our model and are better matched to how we finance ourselves but we constantly look at how we can extend our lending envelope and if there's an opportunity for us to create shareholder value with fixed rate loans then we'll add fixed rate loans to the mix.

In terms of current financial capacity, can you comment on your appetite for additional CLO issuance as well as the $1.5 billion of loans in the pipeline if there's any -- if you believe current financing capacity is adequate to close those loans?

Hey Jade, it's Doug. Great question. You know, we do have over $2 billion of current financing capacity on our credit facilities which would accommodate the $1.5 billion in the pipeline and we also do have the ability, obviously, to do another CLO transaction. That CLO that we did in December generated $800-plus million of capacity. We took those collateral interests off of our revolving credit facilities to open up some room there and we can do that again.

The other thing I'd note is that we have almost $2.5 billion of up-sizes and new facilities currently in process. So we're continuing to generate capacity within the credit facilities space. We're continuing to work the CLO angle and we're very confident about our ability to debt fund growth in the balance sheet to the tune of even $3 billion and $4 billion.

The cost of issuance on the CLO, I think we estimated it was around $10 million or perhaps a little bit higher, was that outsized due to the inaugural CLO and the size of the CLO, so that subsequent financing costs or does issuance costs would moderate?

I wouldn't describe it as outsized and that number isn't a number that we've disclosed so I'm not sure where that comes from but I think you are right that future CLO's will be more efficient, in particular, with regard to the legal costs that sort of relate to developing the technology. So we think that both the cash coupons will come down, given market dynamics, and we also think the upfront costs will be lesser going forward.

Thanks and the number we calculated was just looking at the cash flow statement disclosure. And just lastly wanted to find out if there are any other business lines you view as interesting or complementary to the current models or [do you just expect] to stick to primarily the floating rate transitional space?

Yeah, we continue to see great opportunity Jade in our bread and butter business. You saw that it grew by 37% from a timeline standpoint in portfolio growth last year. We have really good momentum going into 2018. We still think that what we do is really the best piece of the capital that we have and it provides really great returns for our shareholders so we love our core business, we continue to value anything that we think that we could add onto it that would increase shareholder value and continue to create growth in liquidity for shareholders. That won't change but for the time being we're really liking our core business and think it's really hitting on all cylinders.

Your next question, final question, comes from Rich Shane with J.P. Morgan, please proceed.

Thanks for taking my questions this morning. Most have been asked and answered but I would like to talk a little bit, this is the first quarter that we've seen in a while where funding's actually -- or funding's exceeded originations and the last several quarters there's been a pretty significant gap. I'm assuming that this is a function of the construction lending starting to come through the portfolio but like to think about how we should see that relationship going forward.

We've mentioned a little bit on our prior calls but we have seen meaningful funding's each of the recent quarters from loans that originated in prior quarters. You're right Rich, it is primarily the construction loans, it was over $200 million this quarter of loans of advances that we made in loans that were originated in prior periods. So it's the impact of adding one or two loans without having to actually originate them in real time in the quarter; so it is nice. We've talked about it for a while, it's nice to see it come to pass. We didn't originate any new construction loans in Q4 so we didn't originate loans that had a lot of unfunded commitments which in part explains the funding's exceeding the originations but the funding, the positive funding balance we saw in the quarter is really beneficial and with our old unfunded commitments funding and the new pipeline being very strong we'll -- we expect to see some meaningful positive balance in funding's.

Got it, that makes sense actually in terms of the relationship with no new originations in the construction space. As we move into 2018, you just mentioned about $200 million of funding's related to draws on the construction lines. What's a reasonable number to think about? Let's not worry about a quarterly number but let's think about an annual number, how much do you think could be drawn or is remaining to draw on those facilities?

Doug, do we have a number?

Well the total of unfunded commitments is over a billion dollars. I think during 2017 the number was $486 million as the whole as a whole. The fourth -- you know, it was a little bit skewed toward the fourth quarter as you pointed out at $215 million. So with the construction loans funding's sort of in full swing I think you'd expect to see a number similar to that in 2018.

Rich, one other thing to add is that it's not just construction loans that provide the future funding for loans previously originated. One of the transitional loans that we make also have unfunded commitments when they closed, you know, for renovation and lease-up. It's a meaningful component of the transitional lending space. So really it's a combination of those two and it really is a nice feature now that the portfolio is a little bit more mature of having those funding's rolling in.

Got it, we assume though that the construction loans are much more likely to draw closer to the maximum capacity versus the transitions loans where that's basically cushion for them.

Well the transition loans, you know, the construction loans funding's based upon the progress of construction. So at least initially and then maybe ultimately on the leasing and the funding of tenant improvements and leasing commissions. For the renovation loan some of it is construction in the buildings and a portion of it really relates to future leasing and we do expect a meaningful amount of that to be drawn as well. So I think the future funding's on previous commitments will be significant. That's something you should definitely taking a look at.

Terrific, thanks guys.

I will now hand the call over to Weston Tucker for closing remarks.

A Okay, thanks everyone for joining us this morning. If you have any follow-up questions, please reach out. Thank you.

Ladies and gentlemen, thank you for your participation, this concludes today's conference. You may now all disconnect, enjoy the rest of your day.