final transcripts21.q4cdn.com/.../1q2016/bxmt-transcript-1q-2016.pdffinal transcript blackstone...

Final Transcript

Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call

April 27, 2016/10:00 a.m. EDT

SPEAKERS

Stephen D. Plavin – President & Chief Executive Officer

Michael B. Nash – Executive Chairman

Douglas N. Armer – Head of Capital Markets and Treasurer

Anthony F. Marone – Chief Financial Officer

Weston Tucker – Head of Investor Relations

ANALYSTS

Sam Choe – Credit Suisse

Jessica Ribner – FBR Capital Markets

Jade Rahmani – KBW

Don Fandetti - Citibank

Joel Houck – Wells Fargo

Ben Zucker – JMP Securities

Final Transcript Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call April 27, 2016/10:00 a.m. EDT

Coordinator Good day, ladies and gentlemen, and welcome to the Blackstone

Mortgage Trust First Quarter 2016 Investor Conference call. My name

is Derrick and I’ll be your operator for today. At this time, all

participants are in a listen-only mode. We shall facilitate a question

and answer session at the end of the conference. (Operator

instructions) As a reminder, this conference is being recorded for

replay purposes.

W. Tucker Great. Thanks, Derrick. Good morning, and welcome to Blackstone

Mortgage Trust’s First Quarter Conference call. I’m joined today by

Steve Plavin, President and CEO; Tony Marone, Chief Financial

Officer, and Doug Armer, Treasurer and Head of Capital Markets.

Last night, we filed our Form 10-Q and issued a press release with the

presentation of our results, which hopefully you’ve all had some time to

review. I’d like to remind everybody 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 Form 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 to GAAP, you should refer to the press release and our

10-Q, 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 core earnings per share of $0.65 for the first quarter. That’s

up 25% versus the prior year first quarter with an increase due to

greater net interest income from the continued growth in our loan

origination portfolio, as well as the positive impact from the GE

portfolio acquisition.

A few weeks ago, we paid a dividend of $0.62 per share with respect to

the first quarter, equating to an attractive dividend yield of over 9%

based on the most recent stock price. If you have any questions

following today’s call, please give me a call. With that, I’ll turn things

over to Steve.

S. Plavin Thanks Weston, and good morning everyone. Amid highly volatile

market conditions, BXMT delivered an excellent first quarter

performance. Even with CMBS spreads blown out and the CRE

securitization market barely functioning, we produced strong results


because of our singular focus on originating senior mortgage loans for

our own portfolio efficiently financed to maximize ROI. Our

originations are sourced and underwritten by Blackstone and backed

by major market real estate with top sponsors.

Our business model insulates us from CMBS market volatility as our

core earnings are entirely driven by net interest income derived from

our loan portfolio. Our earnings are not predicated upon trading or

securitization activities. We have not bought CMBS, higher risk

mezzanine loans, preferred equity positions or otherwise moved out on

the credit curve. We have utilized Blackstone’s strong, longstanding

banking relationships to develop expansive, bilateral term credit from a

diverse group of lenders that provides greater financial flexibility.

At BXMT, we have stayed true to senior mortgages, because we

continue to believe they are the best value proposition for our capital.

During the quarter, we originated $861million of loans in a choppy, but

ultimately favorable environment for BXMT with wider spreads and

diminished competition. Market volatility slowed new transaction

activity early in the quarter, but during March, it became clear that the

period of highest volatility was behind us- at least for now- and our

pipeline grew as prospective borrowers moved off the sidelines.


Since quarter-end, we have already closed or have in the closing

process another $625 million of loans and have an active pipeline of

additional potential opportunities. The more volatile, less liquid

conditions slowed overall market activity, but played to our strengths

as a Blackstone managed direct originator with a reputation for quick

and reliable execution.

100% of the new loans closed during the quarter are senior and floating

rate, and in the same coastal, major markets where our direct

origination portfolio is concentrated. Two of the loans are with repeat

borrowers -- high-quality sponsors that we know well and that like our

customized, client-centric approach. We feel great about the credit

quality of our new originations and our loan portfolio overall with its

63% appraised LTV and 100% performing status.

In Q1, we also demonstrated our consistent ability to efficiently

capitalize our business even during a challenging period when market

liquidity was contracting. All of the quarter’s originations are financed

with existing credit providers. During the quarter, we extended an

existing $750 million facility to a fresh, five-year term. Post quarter-

end, we finalized the increase of another credit facility by $300 million

to $1 billion and extended its final maturity to 2022. We also closed a

new, $125 million committed credit facility, which we intend to grow


over time, that provides us with increased flexibility in the term

funding or syndication of our loans. And we have other upsizes and

new facilities in process to further expand our credit capacity and

improve our access to liquidity.

At quarter-end, we had liquidity of over $575 million which translates

to $2 billion of loan capacity. We expect that capacity and increasing

repayment activity in our portfolio to fund our new originations during

the coming quarters. If repayments slow, we are happy to maintain our

existing loans longer and will calibrate our originations accordingly

while equity market conditions remain weak.

In closing, despite what was a truly tough quarter for the public and

CRE capital markets- and leveraged, lending strategies in general-

BXMT flourished. We were able to leverage the reputation we’ve built

over the past three years as a reliable counterparty and capital provider

to move the business forward on all fronts. Blackstone and its

employees are the largest stockholder in BXMT and we see great value

in the shares. We love the high cash dividends generated by our low

volatility, floating rate, senior mortgage business, especially in this

yield challenged environment.

With that, I will turn it over to Tony.


T. Marone Thank you Steve, and good morning everyone.

As Steve mentioned, BXMT stayed true to its core business during the

first quarter, and we continue to generate strong returns for our

stockholders, while protecting their capital from market volatility.

We originated six new loans during the quarter, for a total of $861

million and an average loan size of $142 million, reflecting our

continued focus on large loans. The loans we originated in 1Q have an

average coupon of LIBOR plus 4.4%, almost 50 basis points wider than

our existing floating-rate portfolio, and reflecting the market

conditions Steve mentioned earlier. Importantly however, the average

LTV of these originations at 61% is in-line with our existing portfolio,

so we have not simply traded additional credit risk for higher returns.

Total loan fundings during the quarter of $619 million outpaced

repayments of $375 million, increasing total assets on our balance

sheet to $9.6 billion as of quarter-end. We continue to have no

defaulted or impaired loans in our portfolio, and our overall portfolio

LTV of 63% and risk rating of 2.2 (on a scale of 1-5) is consistent with

prior quarters, demonstrating the strong credit profile of our loan

book. During the quarter, we collected a par repayment of over 50% of


the only “4” rated loan in our portfolio, reducing its balance to $54

million.

Before leaving our loan portfolio, I would like to highlight some

additional loan-by-loan disclosure we have included in our earnings

release and 10-Q beginning this quarter. Specifically, we have added

disclosure of our loan per square foot, per unit, or per key, reflecting

our basis in the collateral property, a metric we focus on at Blackstone

when evaluating each potential investment. We believe this additional

information furthers our goal of providing best-in-class disclosure to

our stockholders and can be used in conjunction with origination LTV

and risk rating to get a fulsome picture of each loan in our portfolio.

We financed all of our 1Q originations primarily using our existing

revolving credit facilities, which had an all-in cost of LIBOR plus 2.03%

at quarter-end. As Steve mentioned, we are in active dialogue with our

lenders to extend and expand our access to credit under both existing

and new facilities. During the quarter, we fully repaid our GE portfolio

add-on advance financing, fully satisfying this obligation prior to its

maturity, and reducing our balance sheet leverage as expected

following repayment of the shorter-term GE loans. At March 31st, our

debt-to-equity ratio of 2.6x and the cost of our revolving credit facilities

of LIBOR plus 2.03% are both consistent with where we began the


quarter and within the range we expect to maintain for the foreseeable

future.

Turning to our operating results, we generated Core Earnings of $0.65

per share and declared a dividend of $0.62, up 25% and 19%,

respectively, from the first quarter of last year, and reflective of the

dramatic growth we experienced in 2015. GAAP net income of $0.61

per share is up 33% year-over-year, after adjusting for $0.14 of non-

recurring income in 1Q 2015 related to our CT Legacy portfolio, which

was substantially resolved in 2015 and is no longer a material

contributor to our financial results.

Quarter-over-quarter, Core Earnings has continued to trend toward

our expected run-rate of $0.62 per share, reflecting the impact of

balance sheet deleveraging resulting from the repayment of the

shorter-term loans in the GE portfolio I mentioned earlier.

Our Core Earnings of $0.65 covered our $0.62 dividend by 105% and

retained earnings during the quarter contributed to our book value of

$26.53, which was essentially flat relative to $26.56 atDecember 31st.

The stability in our book value during a quarter marked by capital

markets volatility highlights our focus on stability on both the left and

right-hand sides of the balance sheet. Our earnings are entirely driven


by the net interest income produced by our loan portfolio. Our loans

are held for long-term investment, with no impairments in the

portfolio, and are not subject to mark-to-market accounting associated

with securitization or other shorter-term business models. We did not

experience any margin calls on our credit facilities during the quarter,

maintaining our portfolio leverage and reflecting the stability of these

facilities. As we have discussed previously, none of our credit facilities

have capital-markets-based margin call provisions.

Our portfolio remains highly correlated to increases in US LIBOR, with

an increase of 50bps generating approximately $0.04 of additional

Core earnings on an annual basis. Although recent signals from the

FED and others have been mixed, we believe rate increases are

inevitable and we are positioned to benefit from any future rate

increases when they occur, something we believe is a key differentiator

from other mortgage REITs and specialty finance companies.

In closing, we believe that our business produces exceptional value for

our stockholders with a high current return, generated by a stable

portfolio, with superior sponsorship by Blackstone and we look

forward to continued positive results in future quarters.


Thank you for your support and with that I will ask the operator to

open the call to questions.

Coordinator (Operator instructions.) Our first question will come from the line of

Sam Choe, Credit Suisse.

S. Choe Hello. I’m filling in for Doug Harter today. So, given that you guys

have seen a reduction in the risk-weighted four loans this quarter, I

just wanted to revisit your thoughts on managing the risk profile of the

loan portfolio. Specifically, is there like a certain sweet spot you guys

are looking for when balancing the higher risk-weighted loans?

S. Plavin Hello, Sam. In general, we don’t have a barbelled approach for credit,

meaning we don’t originate a combination of higher LTV and lower

LTV loans to average 63%. In general, our LTVs are close to that

average. The one four rated loan was a loan that we acquired from GE,

not one that we originated. We’re well on the way towards resolving

that loan, but it’s not reflective of any other loan in our portfolio.

The two- and three-rated loans, which dominate our portfolio risk

ratings, are loans that are consistent with the average credit profile of

our deals. Again, we’re typically originating loans on major-market


assets with top sponsors that have some degree of transition. For

example, an office building that has lost a tenant, or a hotel that needs

a renovation, it’s a consistent profile.

S. Choe So you’re more focused on keeping the average consistent over time?

S. Plavin Yes. We’re not trying to step out on risk, and there’ll be no four rated

loans by design.

S. Choe Got it. Okay. So, my second question; I know this is largely dependent

on market conditions, but do you have a general sense of, or do you

have a target range for, capital deployment this year?

S. Plavin I think that given where our shares are trading, we’re going to keep our

capital deployment generally consistent with where it is today. That

means that we think that our originations and the repayments in our

portfolio will remain in sync. We have some additional capacity as

well, which you talked about in terms of our overall liquidity.

We’ve been able to maintain a very strong level of deployment in terms

of our existing capital base. Given the repayments that we foresee, we

think we can maintain that level of deployment through the year. It’ll


vary in any one quarter, the swing of a loan repaying or a loan being

originated, and we can’t keep them exactly in sync on a quarterly basis.

But in general, over a couple of quarters, we think we can.

S. Choe Got it. Thank you.

Coordinator The next question will be from the line of Jessica Ribner, FBR Capital

Markets.

J. Ribner Good morning, guys.

S. Plavin Good morning.

T. Marone Hello, Jess.

J. Ribner Just a couple of questions here. Your new swing line credit facilities,

could that speed up the rate of originations since you’re originating a

little bit more, or is it more dependent on what you have in the pipeline

and how you like those kind of loan characteristics?

D. Armer That’s a great question, Jessica. It doesn’t really relate to the types of

loans we’re going to be originating. We’re going to continue to

originate the senior floating rate loan strategy that we have been thus


far. I think it will facilitate more efficient originations for us. And so,

it’s a liquidity management tool for us. It enables us to coordinate our

originations and term financing executions more efficiently, and it’s a

step towards a more efficient balance sheet.

By providing additional liquidity, it does give us more optionality in

terms of our capital markets alternatives, but it doesn’t affect our

origination strategy.

J. Ribner Okay. Great. Then I just wanted to clarify; you said you’ve already

closed $625 million of loans in the second quarter?

S. Plavin That’s a combination of loans that are already closed and loans where

we have agreed terms and are in the closing process. Our success rate

on converting in closing deals to closed deals is very high.

J. Ribner All right. Perfect. I think that’s all for me. I think the credit

disclosures that you’ve given and the loan level disclosures are really

helpful. So, thank you very much for that.

S. Plavin You’re welcome. Thanks, Jessica.

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


J. Rahmani Thanks for taking my question. Can you comment on what drove the

sharp decline in loan repayments and if you have seen a resumption in

repayment activity?

S. Plavin Yes. I think that the unique nature of our loan portfolio to some extent

is what caused a low repayment quarter, but it was also definitely

impacted by the volatility in the markets, especially in January and

February.

In order for our loans to get repaid, a new loan has to be closed. In

general, given where the CMBS market was, a lot of lenders retrenched

or revised terms on loans to their borrowers, which caused transaction

activity to get canceled or delayed. We had a couple of loans that we

thought were going to repay that didn’t because of either buyers getting

cold feet, or lenders changing loan terms.

We have seen a resumption of more regular way activity in the market

and expect that repayment activity will increase during the year,

starting in this quarter.

J. Rahmani Can you say whether that’s sort of back to the previous levels that we

saw in, for example, the last quarter as an annualized repayment rate,


or as a percentage of your portfolio, or is it still below what you would

have otherwise expected absent the volatility?

S. Plavin I think it’s very hard to predict, with floating rate loans, when they are

going to get repaid. The fixed rate loans are much easier. They tend to

go to maturity or near maturity because of the prepayment protection

that lenders get on those loans.

But, for the floaters, they get repaid when an asset is sold, or a

borrower has an opportunity to borrow on a more accretive basis. It

isn’t tied to the maturity of the loans, it’s really a matter of predicting

the behavior of a borrower, what he’s going to do.

As we look across our portfolio, I do expect that we’ll see a return to

more normalized levels of repayment. I can’t say that they’ll exactly

match 3Q or 4Q of last year, but I do think that 1Q of this year was an

anomaly, in that it was an especially low repayment quarter.

J. Rahmani Just with regards to your liquidity position, which is close to what it

was last quarter, but slightly lower, do you anticipate any near-term

need to raise equity, and what would drive your decision to raise equity

at the current valuation level?


S. Plavin We don’t, at this moment, see any near-term need to raise equity. We

talked about $2 billion worth of loan capacity plus the repayments that

we expect over the coming quarters. If you match that to what our

originations have traditionally been, $700 million to a billion dollars

plus, you can see that we have plenty of capacity for our loan

origination program.

J. Rahmani Okay. Just with respect to the liability structure, what are your

thoughts on potentially diversifying the liability structure by, for

example, issuing unsecured debt, which one of your commercial

mortgage REIT peers recently did? How do you feel about unsecured

debt, which although at a higher cost could be viewed as safer than

credit facilities?

D. Armer Hello, Jade. This is Doug. It’s an interesting point. We have our eye

on the high yield market. I think high yield debt is a potential

alternative for us. There has been some positive activity in the market

recently for companies similar to ours.

We don’t have a public rating, and that’s one of the things that we think

about when we’re looking at the high yield market. But, high yield as a

capital markets alternative for us is definitely interesting. So are

convertible notes, for example. But, we’re basically happy with the way


the company is capitalized now in terms of the asset-level leverage that

we have and where leverage is on the balance sheet. High yield debt

would be a way for us to take that up a little bit, maybe half a turn. So,

it’s something that we think about.

J. Rahmani Lastly, you guys have done a nice job extending and upsizing credit

facilities, including the past quarter. We have gotten some investor

questions about how credit facilities would perform in a downturn or

hypothetical stress environment. Would you care to comment on

whether you have any concerns about how these repo facilities could

perform in a downturn scenario? For example, what events could

trigger a margin call and what level of margin call could you experience

on say a 65% LTV loan?

D. Armer Sure. I think the thing to keep in mind is that our credit facilities are

different from the 1.0 generation or what’s out there in the market

today. People tend to focus on economics, but the real difference is in

the structure. Our credit facilities are term-matched or long-term.

They’re currency- and index-matched, limited recourse, and we have

no capital markets-based mark-to-market provisions.

You mentioned the potential for non-performance or credit-based

marks. In our facilities, collateral non-performance is not a repurchase


event. Our lenders look to the relevant real estate fundamentals and

have to make a judgment about the collectability of the loan according

to a commercially reasonable standard.

Keep in mind what commercially reasonable means in the context of a

cross-collateralized pool of 63% LTV mortgages. It’s a relatively high

bar, we think, for a potential margin call so, we don’t believe there’s

any scope for material deleveraging in our portfolio in any realistic

scenario. I just underscore, again, that during the last quarter, which

was a quarter where there was some stress in the market for sure—we

didn’t have credit stress in our portfolio, but there was stress in the

market generally— and we extended and upsized almost $2 billion of

credit. I think that’s the best indication of the stability in our credit

facilities and the strength of our relationships with our credit

providers.

J. Rahmani That’s very helpful. Thanks for the color.

Coordinator Your next question will be from the line of Don Fandetti, Citigroup.

D. Fandetti Steve, your simple strategy of originating senior loans seemed to play

out pretty well with the volatility that we saw in Q1. As you come out of

that, do you think to yourself, “You know what? There’s been some


distress out there. I could possibly get into different businesses,” or do

you say, “I’m glad that we kept things simple and we’re going to stay on

that track”?

S. Plavin We’re certainly glad that we kept things simple and we had this

strategy, which we think fared the best among the alternatives. You

raised an interesting point because those activities which are highly

volatile will cycle up, as well as cycling down. It’s certainly easier to

talk about not participating when they cycle down.

I think that ultimately in a vehicle like ours stability is hugely

important. I do think that REITs as yield vehicles work best when they

produce low volatility, reliable income that allows people to get

visibility on core earnings and dividends and feel good about the safety

of those.

So, we always look at potential new opportunities and new business

lines. We’re always evaluating things that could create additional

shareholder value. If there are activities out there that we think would

fit that model we would do them, but not if they’re high volatility

activities.

D. Fandetti Thanks.


Coordinator The next question will comes from the line of Joel Houck, Wells Fargo.

J. Houck Good morning, guys. So, the spread widening we saw in CMBS in the

first quarter did not—I don’t think it was expected to you, but it

certainly didn’t really extend into kind of the senior loan market as

evidenced by—you still got L plus 440, which is pretty close to what the

overall yield is.

I guess the question is, is there some point where dislocation or

distress in capital markets, particularly CMBS, could result in you guys

getting wider spreads on new originations, or do you see it more as

your segment is more insulated and the sell-off we’re seeing away from

your guys is more technical in nature?

S. Plavin I think the sell-off that we’re seeing is more technical and not

fundamental. I think the spread widening isn’t reflective of bad quality

credit, rather unique market factors that impact CMBS perhaps more

heavily than other like securities.

Our market is less volatile because the participants are not exiting their

loans through the capital markets. As a result, we did not see, nor did


we expect to see, spreads increase nearly to the extent they did in

CMBS-related loans.

They did trend a little bit wider, I would say 25 to 50 wider. As

volatility diminishes, I think we’ve seen those spreads stabilize. I don’t

think they’re going to get any wider from here.

So, I think it’s unlikely we’re going to see an environment of higher

spreads. Our market is still pretty competitive, but I always think we’ll

be able to finance a little bit better than most of our competitors and

originate a little better. As long as we can maintain the very efficient

financing that we have, as we have been able to thus far, we expect to

see a stable to positive trend in our ROIs.. And so, it gives us a nice

trend line on our deals, but not anything that’s going to really deviate

from the pattern that we’ve seen over the quarter and since we started

up in 2013.

J. Houck All right. Great. Thank you.

S. Plavin Sure.

Coordinator Our final question will come from the line of Ben Zucker, JMP

Securities.


B. Zucker Good morning, guys, and thanks for taking my question. I was going to

ask about the strategy matching originations with repayments, but it

sounds like you kind of touched on that.

I wanted to look at the fixed rate portfolio really quickly. When that

GE portfolio first closed, it added something like $2.1 billion, $2.2

billion in fixed rate loans, and those were always highlighted as very

short duration at the time. We might have even started to talk about

this last quarter, but as we sit here now, the portfolio is nearly $2

billion in size. I saw the commentary in the queue mentioning the

percentage that are subject to early repayment and not.

I was just wondering based off your updated conversations with

borrowers, specifically the 36% that have the eligibility to repay, what

your feeling is or understanding on how this fixed rate portfolio that

has kind of not really shrunk as much as we might have thought, how

that might play out during the year.

S. Plavin I do think that we’ll see a significant reduction in the fixed rate loans,

especially in the manufactured housing sector across our portfolio. The

loans that we have in that property category are very stable, strong

performing loans and there is now a very strong agency bid for those


loans. Fannie and Freddie are very active in the sector. The loans that

we have in general are stabilized enough where they work in that

model.

So, as we progress through the year and we get to the point where those

loans can be economically prepaid, I think you’ll see a lot of movement

in the fixed rate loans, in that sector, and our balance sheets out to

Fannie and Freddie.

B. Zucker Okay. Then just lastly, and this is maybe a little technical, I just wanted

to ask about the target leverage. I feel like I’ve always kind of been

hearing the term that you’re comfortable running this up to a three, but

we kind of hear these like different leverage ratios. I think previously,

you were including the non-consolidated senior interest, and this

quarter, I heard you reference a 2.6 figure, which I calculate for myself

also. It kind of includes your senior converts as equity capital.

When I’m thinking about the three times leverage level to run this

business, in what element should I be thinking about that? In the

context of the 2.6 that you called out, or including those non-

consolidated senior interest that you include in your marketing debt

when you list the leverage?


D. Armer Ben, it’s Doug. I think that’s a great question. The difference between

the two numbers is exactly what you’re referring to. The 2.6 is the

debt-to-equity ratio based on the actual credit facilities that we have.

The 3.2 takes into account our senior loan participations, some of

which are on balance sheet as loan participations sold, and some of

which are off balance sheet in the form of mortgage-mezzanine splits.

And so, if you think about the portfolio as a portfolio of 100% senior

mortgages that are financed in a couple of different ways, then the right

way to look at it is 3.2 times levered. If you’re thinking about our debt-

to-equity ratio with regard to debt maturities, then the 2.6 times ratio

applies.

From a modeling point of view, I would look at the three times leverage

level and think about that being carried forward and that being our

stabilized leverage level. From a credit point of view, I would think

about the debt-to-equity ratio because that’s the amount of debt that

we actually have maturities on.

B. Zucker Right. Okay. That’s very helpful. Appreciate your comments, guys.

Thanks, again, for taking my questions.

S. Plavin You’re welcome.


Coordinator At this time, I would like to turn the conference back over to Mr.

Weston Tucker for any closing remarks.

W. Tucker Great. Thanks, everyone for your time today and please reach out with

any questions.

Coordinator Ladies and gentlemen that concludes today’s conference. We thank

you for your participation. You may now disconnect. Have a great day.

final transcripts21.q4cdn.com/.../1q2016/bxmt-transcript-1q-2016.pdffinal transcript blackstone...

Documents