Blackstone Mortgage Trust Inc (BXMT) 2020 Q2 法說會逐字稿

Good day, everyone, and welcome to the Blackstone Mortgage Trust Second Quarter 2020 Investor Call. My name is Leslie, and I'm the event manager. (Operator Instructions) And I'd also like to advise all parties that the conference is being recorded for replay purposes.

And now, I'd like to hand you over to Weston Tucker, Head of Investor Relations. Please go ahead, Weston.

Great. Thanks, Leslie, and good morning, everyone, and welcome to Blackstone Mortgage Trust's second quarter conference call. I'm joined today by Mike Nash, Executive Chairman; Steve Plavin, Chief Executive Officer; Jonathan Pollack, Global Head of Real Estate Debt Strategies; Tony Marone, Chief Financial Officer; and Doug Armer, Executive Vice President, Capital Markets. Katie Keenan is out on maternity leave currently.

This morning, we filed our 10-Q 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 Factors section of our most recent 10-K and 10-Q reports. 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-Q.

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 $0.13 for the second quarter, while core earnings were $0.62 per share. 2 weeks ago, we paid a dividend of $0.62 per share with respect to the second quarter. 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. BXMT's key advantages, namely our portfolio of senior loans, our well-capitalized balance sheet and a market-leading real estate franchise, continue to provide strength and stability. We had another great quarter of portfolio income, with 100% of scheduled interest collected, driving $0.62 of core earnings, in line with previous quarters. This performance is a testament to the caliber of the underlying real estate, the quality of our borrowers and the proactive approach of our dedicated asset management team.

We further strengthened our balance sheet in the quarter by accessing both the debt and equity markets to raise $607 million of new capital, increasing our liquidity by 60% to $1.3 billion. We added a new Term loan B tranche at accretive pricing and issued common stock at a premium to book value, underscoring BXMT's superior access to the capital markets amid a challenging backdrop for commercial mortgage REITS.

In the broader markets, there was a more significant recovery, including a reopening of the CMBS market. With our increased liquidity, we are very well-positioned to take advantage of the improved outlook and growth in origination opportunities, as well as to protect our portfolio in the event of a prolonged period of disruption. And while we are optimistic about the benefits of this broader capital markets recovery, we remain vigilant and proactive on the asset management side, working closely with our borrowers, especially on those assets most impacted by COVID-19.

With this wide range of activity in BXMT, the resources of Blackstone's market-leading real estate platform continue to provide us with great advantages. Blackstone's global real estate ownership, along with the ongoing investing activity of this $167 billion AUM business, provide real-time data and insights into every market where we are active as a lender in addition to unrivaled operating expertise. This connectivity across the platform helps us to create our existing high-quality loan portfolio that is now helping us to manage that portfolio and evaluate new opportunities.

Our sponsors have stepped up and provided great support for their loans. Many of these sponsors are institutionally-backed repeat borrowers that have protected their assets with additional cash investment. With our active and collaborative management, we expect continued strong performance across our loan portfolio with a 64% origination LTV. While we believe that our senior lending strategy and proactive asset management will continue to translate to credit outperformance, we will not be completely immune to the impact of COVID-19.

In Q2, we increased our CECL reserve by $57 million, primarily related to 2 specific properties directly impacted by the pandemic, one New York City hotel and one transitional New York City rent-regulated apartment building. In each case, it was a combination of COVID-related and asset-specific challenges that led to the impairments.

Our exposure to similarly impacted properties is limited. Our total New York City hotel exposure is 3 loans, representing 3% of the portfolio. The 2 additional loans each have lower leverage, 50% to 60% at the time of origination. Our total loans backed by New York City regulated multifamily properties account for less than 1% of our portfolio.

As we look forward now, relative to a quarter ago, I wanted to share a few additional observations. Our Q2 repayments exceeded our Q2 future advances, all of which were financed as expected by our lenders. With transaction activities slowly resuming, we expect repayments to continue to be a source of liquidity. We also expect to see our pipeline build. Many of our market-leading sponsors have dry powder to invest in new opportunities, and we are standing by to support them. We have capitalized BXMT for the road ahead for both the continuing recovery with the potential opportunity to make new loans and for the possibility that the recovery will be prolonged for certain assets and markets.

In conclusion, fueled by our second quarter capital raising and backed by our $18 billion senior loan portfolio, we have established both staying power and firepower at BXMT, ideal positioning for the current environment. And with that, I'll turn the call over to Tony.

Thank you, Steve, and good morning, everyone.

As we review BXMT's performance this quarter, we will see positive results in terms of core earnings, liquidity and balance sheet stability, notwithstanding the isolated valuation impacts that Steve mentioned earlier. Let's start with earnings, where we reported GAAP net income of $0.13 per share and core earnings of $0.62 per share, both of which benefited significantly from interest rate floors embedded in our loan agreements as LIBOR and other benchmark rates declined to near 0 levels during the quarter.

Looking specifically at USD LIBOR, our most common floating rate index by far, we had $8.8 billion of loans with active floors as of 6/30 at an average rate of 1.47%, which we expect will continue generating incremental earnings going into 3Q as well.

The primary difference between this quarter's GAAP net income and core earnings is the $57 million, or $0.41 per share, increase in our Current Expected Credit Loss, or CECL reserve, which was driven by the 2 loans Steve referenced in his remarks. Similar to our treatment of the general CECL reserve we recorded last quarter, these loan-specific provisions are excluded from core earnings until they are realized. And at this point, we may still see a future recovery above the current mark. Further, as a result of the CECL provisions we recorded in 2Q, these loans will be accounted for under the cost recovery method, going forward, which essentially defers all income recognition and reflects any cash interest received as a reduction of the assets carrying value on our balance sheet.

Overall, our portfolio continues to be strong, with 100% interest collection through July, including the 2 loans where we took a reserve. We had an active quarter on the asset management front, completing 13 loan modifications that generally required additional borrower equity or contained other lender favorable terms, reflecting the collaborative nature of these conversations with our borrowers and their continued support of their assets. As always, we draw on the deep experience and resources of Blackstone's broader real estate platform as we re-underwrite these loans and evaluate our borrowers' positions.

Our $18 billion portfolio size was roughly flat quarter-over-quarter as $386 million of repayments slightly outpaced $317 million of loan fundings. Our weighted average risk rating remained at 3.0 on our 5-point scale, the same level as 3/31, with no new 4-rated loans this quarter. Our portfolio continues to benefit (inaudible) LTV of 64%, reflecting the significant equity our well-capitalized institutional borrowers have invested in these assets.

One of our key focus areas during the quarter has been to build on our strong liquidity position, providing us the resources to address future cash needs as well as originate new loans. We ended the quarter with $1.3 billion of liquidity, almost entirely held in cash. We increased liquidity this quarter by nearly $500 million, driven by our successful Term Loan B and common stock issuance during the quarter. Our new Term loan B raised a net $315 million, is co-terminus with our existing term loan in 2026, and priced at LIBOR plus 4.75% with a 1% floor. We raised the net $278 million from our common stock offering during the quarter, which priced slightly above book and added $0.06 to our 2Q book value per share.

We also continue to focus on the stability of the right-hand side of our balance sheet, which has no corporate debt maturing until 2022, with 96% of our asset level financing term-matched to the underlying collateral. Further, 30% of our asset level financing is through non-debt structures, either syndications or securitizations, and we have reached agreements with our 7 largest credit facility lenders, covering 84% of our outstanding borrowings, to temporarily suspend credit mark provisions for the loans in those collateral pools that have been more heavily impacted by COVID-19. As part of these credit facility modifications, we pledged $414 million of previously unencumbered assets, which modestly reduced the advance rate under these facilities.

We closed the quarter with a debt-to-equity ratio of only 2.6x, down from 2.8x at 3/31 as we further de-levered our balance sheet during the quarter. As we move into the second half of 2020, we will continue to benefit from the key pillars we have in place, with incremental earnings power through our LIBOR floors, market-leading asset management capabilities and a stable balance sheet with ample liquidity.

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

And Leslie will read instructions for the Q&A. But if I could just remind all the analysts, please, to limit your initial question just to one question and one follow-on question; and, if you have any further, to rejoin the queue. Thanks. Go ahead with the instructions, Leslie.

(Operator Instructions) And your first question comes from Don Fandetti from Wells Fargo.

So, Steve, I mean, obviously, you have a lot of cash on hand and made some good defensive moves. How do you balance offense in this kind of environment because it's still a high-risk situation in the markets and for your company? Do you think it makes more sense just to kind of be defensive for a while? Or what are your plans, and how do you think about that?

Don, great question. I think, no, our capital raising was really about the opportunity to return to offense as well as to maintain an appropriately conservative posture through the COVID-19 disruption period. So you saw the magnitude of cash that we raised, and $1.3 billion is the highest level of liquidity we've ever had.

So we really feel well-positioned both to get back on to offense, and there's not a lot of loan demand yet, but we do expect to see loan demand increase through the second half of the year. But we're also very well-positioned for defense. I mean, we obviously have a lot of liquidity to defend our book and to do whatever is necessary to carry our portfolio through. So we feel that we're, again, ideally positioned for both offense and defense, that we've struck the right balance.

And can you talk about the New York hotel property that you reserved for, kind of what's going on, on the ground there? And also, is occupancy increasing, the hotels in your portfolio? And can you just give us a sense on are any of these at breakeven level? Are you seeing improvement at the underlying asset?

Well, let me take -- let me first talk about the New York City hotel. It was a 2018 acquisition loan by Real Estate Opportunity Fund, so there's a lot of equity in the transaction. But with the COVID impacts on demand and operating costs, the hotel spacing, an extended period of operating deficits that need to be funded. I mean, we're in discussions with the borrower about the path forward on the asset. There's no agreement yet, but we're still engaged with the borrower.

I would say, as it relates to hotel performance generally, I mean, we haven't really seen the beginning of the comeback yet. Some of the hotels will open. And in cases, we are seeing mid-scale and economy and [drive-to] hotels pick up in performance, but we haven't seen that across the portfolio broadly. And I think we're cautious, given the potential second wave of COVID-19, so it's a little early to predict the recovery. But I think, ultimately, the long-term prospects for the hotels are favorable.

Your next question comes from Doug Harter from Credit Suisse.

Just, again, on the liquidity, you talked about kind of the pipeline building, but not really there yet. Can you help us size kind of what the lending opportunity might be like in the second half? And then, kind of with that, in this current environment, how you would think about what the kind of minimum level of liquidity that you would want to hold versus kind of the current $1.3 billion that you have?

Well, as we think about the opportunity, it's really about positioning. It's really about having liquidity to take advantage of the opportunity that exists. And we're also sort of monitoring the pace of repayments as we look at our portfolio.

But we do think that having the liquidity is something that will give us really significant advantage. There's not a lot of lenders in our segment that are really positioned -- that have repositioned themselves to make loans as the market recovers.

So it's difficult to predict what the size of the opportunity will be, but we want to be positioned to capitalize on it no matter what its magnitude. And we obviously have the ability, with our $18 billion portfolio and the large scale of the company, to be a really significant participant in the resumption of loan demand that we expect to see in the coming period.

And then just a follow-up. Has there been any sense yet, or enough sort of transactions to get a sense as to kind of what their spreads or returns on incremental loans might look like compared to kind of pre-March?

It's still a little early to make that determination. I will say spreads in general are wider. Leverage on the loans that we're seeing is generally lower. And again, it's what we would expect to see coming out of a period of volatility. And while we wanted to recharge our capital base to take advantage of what we think will be really good opportunities to make new loans in the early stages of the resumption of loan demand.

So that's our expectation. We'll see what happens as the pipeline builds over the next couple of quarters. But we do think it will be a very favorable environment and that we'll be well positioned to take advantage of it.

Your next question comes from the line of Steve Delaney from JMP Securities.

You gave us a weighted average LIBOR floor of 1.47%, and I think we've been trying to get that number out of you for the last year or 2. So we appreciate it.

Repayments for the quarter, about 2% of the total book. Just wondered if you have any visibility that you can share with us as far as what we might see over the second half of this year.

Steve, it's really difficult to predict what the repayments will be for the second half. But I do think, with the reopening of the CMBS market, and we're seeing a little bit more transaction activity generally, that that will ultimately lead to some more repayments. I mean, we were, I think, pleasantly surprised in the quarter that our repayments exceeded our fundings. So I think you'll see the repayments to be a meaningful contributor to our liquidity, but not nearly at the historic pace until we get much more of a regular [way] market. So I think on the margin, they'll add liquidity, but the game-changer in our liquidity was the capital that we raised.

So, I mean, you're saying, I think, that you've got some maybe 3-year-old loans that are reaching a point of stability that they might be able to eke into a 10-year fixed loan, I think is what I'm hearing there, but not so much what Jade used to always refer to as bridge-to-bridge. You think people are pretty much sitting with their existing lenders in terms of the borrowers' attitudes?

Yes. Well, I think, when you think about it, if you're an owner of an asset you're thinking about is this a good time to sell, is this a good time to refinance. And so you'll sell when you think that the transaction market's accommodative to your assets, there'll be good loan demand. I'm sorry, good asset demand.

On the borrowing side, you're looking at what a refinancing could look like. Generally, with our loans, our take-out's a sale, because we're financing Opportunity Fund's business plans. And when they achieve stabilization, they typically sell and then go and return the money to their investors.

It's still a little bit early for it to be, I think, an attractive selling environment. But again, the opening of the CMBS market makes it possible for buyers to finance acquisitions, which will ultimately help lead to the reopening of that market.

So I think, except for the assets that are most heavily impacted by the pandemic, the signs are favorable in terms of the resumption of transaction activity, more refinance activity, which will lead to more origination opportunities for us and also more repayments.

Your next question comes from Jade Rahmani from KBW.

On the New York multi-family loan that you took a reserve on, I wanted to ask you if you could give a sense as to how the reserve was bifurcated between the increased capital costs in the current environment to operate multifamily versus the impact of rent regulation. And also, what drove the magnitude of reserves seems pretty high. This was a 65% LTV loan, so 28% reserve is pretty high and implies something like a 50% decline in the asset value. So perhaps you can give some color on that asset.

Sure, Jade. This is a 2014 acquisition loan on a rent-regulated multifamily asset with a plan to improve units and to increase rents. And they were still relatively early in that plan in 2019 when the rent regs were changed. There have been some renovation and some improvement, but still very much in the middle of what the ultimate outcome would be for the asset.

So first, in 2019, you had the impact that limited the upside achievable on that kind of business plan. So it was just no longer -- owners are no longer able, in the current environment, to make capital investments in units and get high ROE benefits, high ROI benefits from those investments in terms of higher rent levels on units.

So that was really the impact of that 2019 regulation. It was pretty significant also. It really curtailed the upside that was achievable in these kinds of business plans.

The added impact, I think what we're seeing now is that general downward pressure from COVID in terms of city center apartment rents. So we've seen -- the city lost a season. The employer base that would typically come in from schools and everybody who'd moved to the city to start new jobs, it just didn't happen this year. And so we're definitely seeing reduced demand for apartments and increased occupancy, pretty significant.

And so for the market rate units here, which I think we thought had much better prospects pre-COVID, the pressure on rent level and occupancy level really impacted the near-term and intermediate-term potential for the asset. We do believe that the long-term prospects for this market are good, but it's going to take a while to work our way out of the current pandemic-impacted operating environment for the city and apartments.

And just a follow-on is with respect to New York City exposure overall. How are you thinking about that? Within the office space, it's about 21% of the portfolio. Within the hotel space, it's about 27%, although only a few loans. Could you comment on the outlook for New York City?

Yes, sure. I think as it relates to the city, obviously, there's a lot of near-term pressure in the city. I mean, we're ultimately long-term believers that this market is a good place to be. And once we get through the pandemic, we believe that -- again, that New York City will recover and this will end, again, as capital flows typically return to New York City first.

And so, we've been focused always in our lending on asset selection within the city. We like the major markets, but very important to select the right assets. The majority of our assets are in Hudson Yards, Midtown West and the office sector. They're newer assets, assets that appeal to the new economy, to where the new talent wants to work and live. And we've avoided the commodity office in Midtown that's under the most pressure. So we're confident that, because of that asset selection and because of the strong sponsorship, that their office loans will perform well.

As it relates to hotels, obviously a big impact on demand and a longer road out from COVID and from the city being shut down. Again, one of the benefits that we'll see in hotel is going to be a hard stop to the supply wave that existed in New York. There was a lot of hotel construction over the last few years. That's all going to stop. And we do expect the supply of hotel rooms to be down as much as 10% to 15% from hotels that don't reopen post-COVID.

So the supply side is going to be benefited from what's going on. And so we think that will ultimately [in order] the benefit of the owners that can get through to the other side. And we're confident in the case of our other hotel loans, given the sponsorship, the lower leverage, the cash investment from those sponsors so far that they'll see those assets through the pandemic, and they'll ultimately be strong performers.

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

This is Charlie Arestia actually on for Rick today. I was wondering, kind of on a high level, what your thoughts are around maturity defaults on loans that are coming due in the near-term and how you're looking to manage that given that I'm assuming more loans than usual are probably looking to exercise those embedded extension options.

It's a great question. We don't have a lot of near-term maturities, only a very small percentage of our portfolio. Less than 10% has final maturities over the next year.

It's interesting. What we'll see is, in some cases, that some of the interim maturities will have extension tests that won't be met, and what we've seen is very strong sponsor performance around that. We've had tremendous cash investment in our assets during the period of impact on assets that are most impacted. We've had over $175 million of additional equity investment from sponsors that wasn't required in the initial loans. Our loan in Roslyn was one of our 10 largest loans, about a $750 million loan. Sponsor paid down the loan by over $100 million in order to comply with this extension test in the second quarter.

So we're seeing strong performance from all loans as it relates to both interim and final maturities. And so I don't think the maturity issue will find its way into a loan problem. I do think it will help create liquidity in our portfolio and that, as we get closer to maturities, [the borrowers will] be willing to stretch a little bit more in terms of what's acceptable for their exit. But the discussions we've had about maturities in the interim has been very favorable. And again, it's really boosted the performance of our loans with additional cash coming in.

That's really helpful color. And then, just secondly, unrelated, are you guys seeing any divergence in collateral performance in the international portfolio versus your U.S. assets?

A great question. No, I think we're seeing very good performance of our assets internationally. The office market in London continues to hold up well. We have a number of transitional office buildings that have continued to lease through this stage. Our assets in Spain have begun to recover in terms of an activity standpoint as we get through the initial wave of the pandemic.

So I feel like our European assets are well-positioned. Like our U.S. assets, there's a ton of sponsor equity. They're concentrated in major markets, and the long-term prospects in all these markets continue to be favorable. And we're hoping that there'll be some new opportunity in the European markets as it relates to new business as well. Haven't seen a lot of loan demand yet. But again, as we see the terms of new mortgages improve, more pressure from Opportunity Funds to start to invest their capital, we do expect to see more opportunities to lend in Europe as well as in the U.S., and we're excited about that opportunity.

Your next question comes from Stephen Laws from Raymond James.

First, saw the -- modified a number of the credit facilities. I believe the deck said 84% to eliminate, I believe, it was near-term credit marks, or suspend those for a period of time. Can you talk about what you had to give in order to get those modifications? Did you agree to lower advance rates or higher cost of those facilities? Or what was the trade-off in order to modify those credit facilities?

Stephen, it's Doug. I'll take that one. Tony mentioned that we had pledged some additional collateral, just north of $400 million of senior mortgage loans that were in our portfolio. In addition to that, we did make some cash payment just north of $200 million. And so that constituted the de-leveraging, essentially, of those facilities in return for which we got the suspension of credit marks through year-end and additional asset management flexibility, which I think is important relative to the loan modifications and the asset management initiatives in our portfolio. We didn't change the rates on those facilities, and we didn't otherwise alter the terms. As a reminder, those are long-term match-funded credit facilities as part of our match-funded liability structure overall.

Just wanted to understand the trade-off. And thinking about the business plans behind the assets that you lend against, can you provide any color? And I guess this would apply more to heavy transitional or construction, but have there been any material changes since COVID hit in March to alter those business plans for the better for the post-COVID world, maybe moving away from 1 floor being the kitchen back to a kitchenette on every single floor in an office, or more offices versus open space? Can you talk about how active these developers are with regards to their business plans and any modifications that they've already made and had approved by Blackstone over the last 4 to 5 -- 4 months, I guess?

I think as it relates to the construction-heavy transitional deals generally, I think most of those have proceeded on course. We're very comfortable on the new construction about deliveries and delivery timeframes for tenants. We have very significant pre-leasing in our construction and transitional loan portfolio. And so I think a few of the cities which had construction shutdown, we continue to feel very good about, again, meeting all the relevant timetables.

As it relates to modifications and space utilization and design, we've seen a little bit of that with the flexible office companies who were able to adapt more quickly. But we've seen landlords in prebuilt space look to create more distance, less density, rethink some of the collaboration spaces, at least for the time being. I haven't seen anything that I would put into the category of sort of permanent change, but just changes to make the space and its design more reflective of the immediate environment and the immediate challenges in terms of occupying office space. We'll see what that means long term, if any of these changes affect density long-term or their thoughts in terms of how tenants are going to occupy space.

But for us, by having highly skilled operating partners and owners, they're able to very quickly adapt to accommodate their tenants' current needs. And so we have seen that in the portfolio. And it's a real benefit for us to have such a high standard of asset-sophisticated sponsors who are very much on top of what's going on in the market.

Your final question comes from George Bahamondes from Deutsche Bank.

Just had a follow-up on the CECL reserves for the quarter and how we should think about reserves being recorded, going forward. Can you help provide some additional context around the CECL reserves in Holly recorded? I know you mentioned revenue generation headwinds and high operating cost as key drivers. I'd assume that there are a few assets that are facing revenue generation, operating cost headwinds in this environment. What's the performance threshold that assets need to hit before its use reserve is recorded? Is it triggered when loan modification discussions begin? Is there a certain debt service coverage threshold that needs to be met? I'd assume it depends on the situation, but any incremental color on just kind of how we should think about this going forward, because I'd imagine you are seeing headwinds across churn assets in this environment. So any additional context would be helpful.

Sure. This is Tony. And you're right, it is situational. There is some general kind of technical guidance that I could give you.

I'd say there's 2 specific provisions under the GAAP accounting rules that you would look to a valuation test to see if your LTV is north of 100%. One is you mentioned modifications. If you have a modification that under the rules is considered a troubled debt restructuring, which you could think of as where you're just kicking the can down the road, something we saw a lot of out of the global financial crisis, that would be as opposed to the types of modifications we highlighted earlier that are more collaborative and there's some give and some get, and we're working together with our borrowers.

So that would be one instance where the rules say you have to test for an incremental CECL reserve specific to that asset. We did not have any of those this quarter.

And the other scenario would be where you look at the terms of your loan, and the word that the accounting rules use is probable, that it is not probable that you will collect all of your principal and interest due under your loan. Now, that's the technical term. That's very situational, what does probable mean. It's a higher threshold more likely than not, so it's more than 50%, but it doesn't have to be all the way up at high 90s percent.

So you would look at the loans on a case-by-case basis, and you would look at things like are they missing interest payments, which, as we noted earlier, we don't have that in our portfolio. Are they in breach of covenants or in technical defaults, also things we don't have in our portfolio. Is there conversations with the borrower that would indicate that you may have a very near-term change in circumstance?

And so there's a little bit of a gray area in terms of when exactly you trip the probable threshold. When we looked at our portfolio this quarter, as you could see from the results, we felt like we hit it 2x, in particular looking at some of the conversations as we [clicked] over quarter-end into July, which shed some light on the 6/30 balance sheet.

But looking at the rest of the portfolio, we felt like we had not tripped that threshold on our other assets. And so, at the time, we just have the 2 loans. But I know that was a mouthful of accounting rules, but that gives you a little bit around what would trigger that as we go forward.

That was your final question. And now I would like to hand back to Weston Tucker for final remarks.

Okay, great. Thanks, everyone, for your time this morning. And please let me know after the call if you have any follow-up questions.

Thank you, Weston, and thank you to all your speakers. And thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.