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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Blackstone Mortgage Trust First Quarter 2019 Investor Call. My name is Joanne and I'm your event manager.
During the presentation your lines will remain on listen-only. [Operator Instructions] I would like to advise all parties, this conference is being recorded and I would like to hand over to Weston Tucker, President of Investor Relations.
Great. Thanks Joanne and good morning and welcome to Blackstone Mortgage Trusts first quarter conference call. I'm joined today by Mike Nash, Executive Chairman; Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; Doug Armer, Executive Vice President, Capital Markets and Katie Keenan, Executive Vice President, Investments.
Last night, we filed our 10-Q and issued a press release with a 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 most recent 10-K. We do not undertake any duty to update forward-looking statements and we will also refer to certain non-GAAP measures on the call. 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 $0.62 for the first quarter, while core earnings were $0.71 per share. Last week, we paid a dividend of $0.62 with respect to the first 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 Watson and good morning, everyone. Our 2018 portfolio growth provided very strong earnings momentum going into 2019. We started the year with our balance sheet heavily invested in loans, which provided robust earnings power and helped drive our $0.71 of core earnings for the quarter.
Our asset base remained well positioned throughout the quarter. The capital markets volatility that started in December and carried over to early Q1 slowed transaction activity and limited lending opportunities in the market. But we still grew our loan portfolio with $700 million of originations.
Our performance this quarter further demonstrates the strength and stability of our floating rate senior mortgage lending business model with a large portfolio that we've established. The largest loan close in the first quarters is NEC a 240 million pound mortgage participation secured by the UK market leading convention and Exposition Center and other complementary assets located in Birmingham and owned by our Blackstone Equity Fund.
The 59% of cost loan is a participation with Starwood Property Trust. The NEC business caters to a primarily domestic client base has proven resilient over time with very limited competition. During the quarter we also reached a low LTV transitional acquisition loans for office buildings in Canada, London, a New York City hotel and apartments in San Antonio. We have another $875 million of loans either closed post quarter end or agreed terms in the closing process.
Another origination I would like to specifically highlight is the upsides of an existing loan in California because they exemplify several of the virtues of BXMT including our transitional loan origination strategy, active asset management, the advantages of Blackstone management. The $195 million 55% of cost loan was made by a West Coast team in 2018 to a major institutional sponsor and repeat clients secured by a vacant historic department store in Downtown Oakland undergoing conversion to creative office.
The market knowledge and investment conviction that comes from the Blackstone real estate ownership footprint were major advantages in this origination. As an owner of San Francisco office buildings and our equity funds, we agreed with the sponsor thesis that escalating requirements for space from tech tenants combined with virtually no large block availability in San Francisco would generate strong leasing demand for this high quality but pioneering Oakland asset. This viewpoint was critical in our underwriting and successful pursuit of the loan.
And five months post loan closing, our credit analysis was validated. A lease was signed for 100% of the office space with a major tech tenant on terms that exceeded our underwriting. With the lease in place, the property could attract a more efficiently priced bank or insurance company loan. But we work to maintain the loan and reached agreement on a modification, including an upside to the loan amount, a reduction in rate and an extension of call protection and because of the lower risk profile of the leased asset, our credit facility provider agreed to reduce its rate to us. So we were able to maintain an attractive ROI and a larger more stable loan.
Improving credit profile was the theme across our portfolio in Q1. During the quarter, we accrued nine loans primarily from a risk rating of three where most loans are originated to risk rating of two without any downgrades. The upgrades were driven by improved leasing and cash flow as the collateral properties transition to more stabilized operating performance.
On the capital markets front, we continue to optimize our debt financing. Yesterday we closed the new efficiently priced and innovatively structured $500 million corporate term loan that significantly adds to our firepower with very little J curve. Along with our COL, CMBS indications in corporate credit facilities we have a powerful array of debt execution options to maximize our efficiency.
We also continue to tap our ATM during the quarter raising equity capital at an average of 1.27 times our book value. We built a market leading pure play global senior mortgage lending business with $16 billion portfolio over $4 billion of equity market cap a highly efficient match funded liability structure. Our focus remains on dividend quality and stability and continue to introduce investors to BXMT, the opportunity to invest in this Blackstone sponsored company with it's very compelling 7.1% dividend yield.
And with that I'll turn it over to Tony.
Thank you, Steve and good morning, everyone. This quarter demonstrated the earnings power of the BXMT platform with positive results in all of our key metrics. We generated GAAP net income of $0.62 per share and core earnings of $0.71 both up from the fourth quarter. Our quarterly earnings were almost entirely run rate with minimal contribution from onetime items and our performance was really driven by the strong loan origination volume coming into 2019 and nearly full deployment of our balance sheet capital, which we have been efficiently raising via just in time equity from our ATM program.
During the first quarter, we raised $66 million under the program at an average price of 1.27 times book value, driving an increase in our book value to $27.32 per share. Our $0.71 of core earnings is 115% of our consistent 62% dividend, a further indication of the strength and stability of our platform.
During the quarter we originated $699 million of newer upsized loans and funded $806 million under these and existing commitments. We saw limited repayment activity in our loan portfolio this quarter at only $508 million, which brought our total loan portfolio over $16 million for the first time up nearly $4 million from this time last year. Our portfolio continues to exhibit strong credit characteristics with 100% performance in origination LTV of 62% and risk rating of 2.7 on our scale of one to five, all consistent with prior quarters.
In addition to the equity issuance under our ATM program that Steven and I mentioned earlier, we financed our portfolio growth primarily through our balance sheet credit facilities, which continue to provide us with market differentiated financing for our assets. We continue to manage our cost of capital and negotiate market leading terms for these facilities which had an average cost of only LIBOR plus 1.9% as of quarter end and remain insulated from any capital markets base mark to market provisions.
During the quarter we also closed the $936 million nonrecourse financing of the Spiral the Hudson Yards development loan we highlighted last year. This financing is effectively a syndication of a senior interest in our loan with our lenders committed to fund their share of future advances under the loan representing 30% of total unfunded loan commitments across our portfolio.
We closed the quarter with a debt to equity ratio of only 2.8 times unchanged from prior quarter and liquidity of $487 million. Post quarter end our liquidity grew significantly following the closing of our $500 million term loan Steve mentioned earlier. This loan carries an attractive interest rate of LIBOR plus 2.5% and price at 99.75% at par with a covenant package in line with that of our existing credit facilities. The loan has a seven year term with six months of prepayment protection and limited amortization requirements, providing an additional source of flexible capital for our business.
In closing, we've previously highlighted the floating rate focus of BXMT's portfolio, which was 96% floating rate as of quarter end and how this positions us to capture incremental earnings as rates rise. In addition to that important benefit, we would also like to highlight that while higher rates will directly increase our earnings, we are partially protected from declining revenues should rates decrease with LIBOR floors baked into the structure of many of our loans, which we believe is another example of the stability of the BXMT business model.
Thank you for your support. And with that, I will ask the operator to open the call to questions.
[Operator Instructions] Our first question comes from the line of Doug Harter from Credit Suisse. Please go ahead. you're live in the call Doug.
Thank you. Can you -- you mentioned that your earnings were mostly run rate this quarter. Can you talk about how you're thinking about the dividend giving that given that 115% coverage and kind of the high level of run rate earnings?
Hey Doug it's Steve thanks for the question. I think as I mentioned in my script, we're really focused on the quality of the dividend and we really like the coverage and the fact that we're able to retain earnings. The retained earnings have been beneficial adding to book value. You've seen a steady progression in our book value per share over time.
We'll continue to evaluate the dividend and obviously we're proud of the strong coverage, but right now we like $0.62. Again we'll continue to evaluate it quarter by quarter but what we're trying to do now is get investors to appreciate the $0.62 how well it's covered and have the multiple and the dividend yield reflect that.
Appreciate that. And then on -- when you're thinking about the new loan that you guys just closed, I guess how should we think about kind of your willingness to lever that capital and the impact on leverage for the company as a whole going forward?
Hey Doug it's Doug here. I think it's worth saying at the outset the term loans are really great deal for BXMT its floating rate and flexible capital it's very efficiently priced and it will allow us to maintain moderate balance sheet leverage as we continue to grow our capital base.
I think of it as providing very efficiently priced working capital for our business. As we deploy that capital and continue to grow the balance sheet, I'd expect leverage to increase somewhat from where it is today. We are very well deployed at 3.31 we know with a 2.8 times debt to equity ratio, new capital in the capital structure in the form of debt would imply a slight increase to it but a large part of that capital will be used as working capital and so I think the amount of leverage on our balance sheet will remain in the range that you've seen it in over the last several quarters in that sort of 2.5 to 3.5 range ultimately in terms of debt to equity.
Our next question comes from the line of Rick Shane from JPMC. Please go ahead.
Hey guys. Thanks for taking my questions. Couple things as we look to the sort of inflection point in rates and again I guess none of us really know which way we're going to go, but appreciate the increased disclosure around lower rates. I'm curious two things from a business impact one given relatively tight spreads, we expect that repayments might actually slow little bit as rates decline. And the reason I ask that is in the other part of this question is could we expect spreads and originations to widen a little bit as you regain some pricing power versus LIBOR.
Hey Rick. Thanks for the question. I certainly hope that's the case. I think a lot of the spread compression that we saw was as a result of the increases in the index. And the index was low, spreads were historically wide, now they've tightened a lot with LIBOR having increased. Hard to say what will happen to -- happen to spreads as if rates, if run rates do decline, but I think it's certainly a possibility that we could see spreads stabilize potentially and move wider.
Got it. And again this is the nuance not even the nuance, but the huge difference between what you do and what we do. We look at this on a spread basis I know you guys do as well, but when you're really engaged in conversations with borrowers, is the conversation focused on spread, is it really focused on all in yield?
I think the conversation with us and our borrowers is I think there's a lot of economic and non-economic elements that become -- that become part of the negotiation. I think it is all in yield. I mean the rate is the primary focus around economics but there's origination fees and extension fees and sometimes other fees depending on the nature of the loan rate floors are important part of the negotiation as well.
So all those all those factors economic and non-economic factors around loan structure and other important elements as it relates to how our loan matches the business plan and how we look compared to our competitors, they'll all come into play but ultimately we're seeing most of the composition around economics and so I think and you've seen we've seen a little bit of break compression as a result, but with our repeat clients and the experience that have with us, a lot of times we're able to win on the total package that we're able to deliver to the client not just not just loan rate.
Our next question comes from the line of Steve Delaney, JMP. Go ahead.
Thanks. Good morning, everyone. Thanks for taking the question Steve. I guess the best place to start and the thing that caught our eye right away when we saw the release was the origination volume just based on how significant your originations have been over the last couple of years. So $700 million compared to about $2.5 billion average last year can you just comment -- obviously the end of last year was chaotic, roughly in your mind weigh the lighter number and originations, how much is just sort of the timing lag as clients try to react to the market and how much may reflect some greater selectivity on your part as your portfolio tends to reach optimal leverage as was commented on. Thank you.
Thanks for the question Steve. All those factors in terms of our originations in the first quarter come into play and we are highly selective in terms of on a credit basis and our new originations. The biggest factor was really the volatility and what happens in periods of volatility is that buyers and sellers and again buyers are the primary driver of demand for our loans. They tend to go to the sidelines in periods of volatility with the markets to resettle and so the period of volatility was relatively short and ended really relatively early in Q1 but it takes another sort of 60 or 90 days to regulate transaction activity to resume for deals to start closing after the regular way gestation period.
So we are seeing a pickup in pipeline activity now relative to where it was earlier in the year and I think we feel very good about our origination pace and you can see that if you look, you can see that repayments in the first quarter were still below our originations. So a little bit of a natural hedge in that when the origination environment isn't as potent, we see what we see fewer repayments. The fact that we're able to grow our portfolio in Q1 was really positive and we remain very well positioned at the end of the quarter just like we were at the beginning of the quarter in terms of earnings power on the go forward basis.
Okay that's helpful. Thank you for clarifying that and if we look out a year or two years out, the on balance sheet portfolio today is $14.5 billion. I think I heard a combination of 487 and liquidity $500 million in term loan. Is it reasonable to think that and let's just say market conditions real estate conditions, lending, profitability etcetera are stable reasonable for us to expect some portfolio growth but maybe not at the pace seen over say the last two or three years. Could you give some color on sort of where the portfolio may trend over the next year or two? And that'll take care of me. Thanks.
Yeah I expect over extended period of time that we'll continue to grow the portfolio and it can vary from quarter to quarter. The little bit of what you saw in Q1 was the fact that we had a lot of Q4 deals that just n December, which we thought might roll over into Q1.
So I think our Q4 was extraordinary and that did impact a little bit the spillover it in terms of Q1, we had a little bit less than we were otherwise because of how many we closed over 20 loans in the fourth quarter. So I still think that we have a great product, we have a great client, great client base. We're seeing -- we continue to see large opportunities to originate and to grow the portfolio. So that is my expectation going forward. Not sure that will match 2018 I think that was an extraordinary year. But I think you'll see a steady trend with strong originations.
That's very helpful. Thank you, Steve.
Our next question comes from the line of Steven Lewis from Raymond James. Please go ahead. You're live in the call.
Hi good morning. I guess first looking at the financing side I'm looking at the Q it looks like the asset-specific financing declined quite a bit. I believe from looking back historically a good bit of that was a loan on the European portfolio but could you maybe talk about what drove asset specific financing from up to $1.5 billion down to $100 million please.
Hey it's Doug here. That was largely the result of a recapitalization of some of those financing. A big piece of what we had previously categorized as asset-specific financing was the GE acquisition financing, our portfolio acquisition financing from Wells Fargo.
That portfolio has really been fully turned over and it is in essence cross collateralized and part of our credit facility, our regular way credit facility with Wells Fargo in effect and so as that situation evolved and we re-categorized some of that financing. So the actual outstandings aren't reduced. We're just -- we're redefining how we categorize those in the Q.
Right. That's helpful, Doug. And next question Doug if you could comment on Cecil you know your credit performance has been exceptional. You mentioned during the prepared remarks mentioned that there were some upgrades this quarter in loan performance. But how do you expect Cecil to impact the results. How do you think about reporting the book value number or some adjusted number? Can you comment on that, I think that's about six months away?
Sure. This is Tony here. With respect to Cecil I'd say a couple of things. One is we don't have any specific numbers we can share yet, we're still going through our analysis. We do expect that we will have to book some reserve, everyone is effectively required to. We think given the credit quality of our portfolio that that reserve will be perhaps on the lower end of the range, but that remains to be concluded.
As relates to its impact on the financials that they wanted option is a balance sheet only. So it doesn't go through earnings. It reduces your loan portfolio and your equity and then it changes in that reserve as loans come on or off, go through income -- the income statement in the future. Our expectation is that there'll be an adjustment for core earnings because this is not a realized expense. So from an earnings -- from a GAAP earnings perspective you'll see some noise. The core earnings will remain consistent with what we've seen. You ask specifically about book value. I think we have a decision to make if we are going to adjust our book value. I think we'll have to wait and see how the final analysis comes out on that one.
Great. Thanks for the color on that Tony. I appreciate it.
Our next question comes from the line of Jade Rahmani from KBW. Please go ahead. You're live in the call.
Thanks very much. On the NEC deal, I was wondering if you can give any further color. It started originated loan that you participated in what drove pricing and what kind of approvals are necessary since as you mentioned Blackstone owns the company?
Hey Jane its Katie. Thank you for the question. This was a Starwood originated loan that we then have the opportunity to participate in 49% of as Steve mentioned in his script. The asset itself is pretty attractive. There's a 59% loan to cost loan secured by the dominant exhibition center business in the U.K. which includes five very large conference facilities totaling over 2 million square feet. It is strong in place cash flow. The performance of the build -- of the business has been quite stable with good forward visibility. We like the business and we think our loan basis is very well protected.
As far as the rate because the business is part -- in large part owned real estate but also some operating business. And then that overlaid with the geographic location and the Brexit considerations, that combined with the deal size, we think impacted the general sort of competitiveness of the loan and drove a little bit of a higher rate. But again that rate was established by Starwood as part of their origination and then because of the deal size and the affiliate nature, we do talk to our Board about these types of deals and get their approval from our independent directors.
Okay. Thanks very much. Is it -- is there a transitional element to the business plan? You mentioned strong in place cash flow.
The sponsor does intend to continue investing in the business, improving the facilities and we expect to see some cash flow improvement from that. But again this is -- this is a very stable business and the cash flows are already good. So it would be great to see continued improvement in performance, but even at current levels because of our basis and the stability of the business and also the fact that most of the contracts in the business are three to five years in length. So there is -- there is good visibility as far as the next couple of years. Our protection as far as our loan is well established even if depending on the business plan.
Thanks. Separately Steve, I wanted to ask if you could comment on how prepayments are trending quarter to date? Should we expect kind of a similar range that we've seen over the last few quarters in the $500 million, $600 million range or with a more liquid market should we anticipate an acceleration?
Jade hey it's Doug actually. So we don't disclose forward-looking statements particularly with regard to portfolio activity other than the pipeline numbers that were in the script. So we'll have to wait until next quarter's disclosures for detail on that.
Okay. And lastly I wanted to ask if you guys can share your thoughts on the co-working and flex office trend that we're seeing contributed an outsized share of leasing growth? I think JLL cited this statistic of about 20% of total leasing were to co-working? What are your thoughts there and also does BXMT have any re-work exposure?
Sure. We are seeing -- we work in other coworking as an increasing force in the market in terms of their leasing activity. They're certainly quite active and I think from our perspective, we generally think that a small co-working space can be additive in certain types of buildings as an amenity for tenants and also a source of potentially incubating new tenants that can grow in the building.
But in our portfolio specifically, we have very little exposure to work and co-working in general. It's just not really a factor as far as the tendency in our office buildings.
And by order of magnitude, talking in a couple of percent or less than that?
It's approximately 2.5%.
Jade, certainly it's a force in the market and something that we're very mindful of. We look at recent take up and also the impact on changes of demand going forward. But for a lot of buildings it's positive. We're certainly mindful of our exposures and prefer -- ultimately prefer tenants to have strong underlying credit. And so it's sort of a traditional approach in terms of how we look at credit but for us, for us in our portfolio co-working is I think been positive.
Are you seeing it change any CapEx assumptions on the part of existing owners because they are dramatically improving property and making old buildings a lot more modern and full of amenities. Is that causing any changes in your CapEx assumptions?
Well. You're right in that the co-working tenants tend to get large amounts of PI usually invest some of their own as well to improve their space and create whatever the environment as they're trying to establish in a particular market.
And so yeah, it's usually beneficial and the space gets significantly improved and as Katie mentioned it can create a tenant amenity in the building, it just adds a different vibe, it gives tenants who are expanding or thinking about coming to the building a place to go but they do tend to spend very heavily on their space.
Next question comes from the line of Don Fandetti from Wells Fargo. Please go ahead. You're live in the call.
Good morning, Steve. I was on the CIT call yesterday and they were just talking about being a little more careful in commercial real estate. We continue to hear that from banks. If I'm talking to an investor what are your key points on why you guys would continue to grow pretty aggressively while the banks are pulling back.
I guess they obviously have some regulatory hurdles, but outside of that and then secondarily what are your thoughts on real estate asset pricing let's say CBD in general.
Well thanks for your question Don. Don we are really careful on credit. We have a great credit infrastructure here given our ownership footprint how we'll manage the company and how that information is share across the platform. So we feel like we have a much better ability to assess real estate risk as a huge owner and investor across the globe and frankly an investor owned properties just like the ones that we finance. So we feel that we have better insight and a better ability to make assessments on the margin than some of the banks do but we continue to be very cautious in our growth and whatever we do from a credit standpoint, does reflect an investment committee process and analytical model that's highly focused on risk and I think exercises great caution.
The second part of your question about office building pricing. I think we're still seeing strong pricing for major market assets, high end markets where there's real growth so the costs are still very strong. We like the innovation cities where there's dynamic sources of demand where you're seeing tech take up and biotech along with the traditional office uses. So we're seeing positive fundamentals still in those markets and a lot of demand for those properties and I think the pricing has held. The secondary markets where the tenant demand is less robust and there are less new economy tenants, those markets are much more challenged, but we tend to not participate in those.
Thank you. Next question comes from the line of Ben Zucker from BTIG. Please go ahead. You're live in the call Ben.
Good morning guys and thanks for taking my questions. Most of what I had was asked and answered, so just real quickly I think I missed in your prepared remarks but what did you call out as your origination pipeline right now?
$875 million.
Great, thanks. And then just one more for me, just given the change in the posture at the Fed and what we're looking at now would you happen to know offhand what percent of your loan book does in fact have labor flows in place?
Hey Ben its Doug, let me answer that a little bit and in a roundabout way, our business is very well positioned in terms of rates. We have a lot more upside and downside in our floating rate business model and that's because of precisely the point that you bring up and our loans do have LIBOR floors, which provide significant protection for our earnings in a lower LIBOR environment.
More than you might think because the floors themselves are levered in the same way that our loan book is levered. So there's a range of strike prices for the floors. Most of our loans do in fact have library floors and the impact of those floors is levered and provides significant protection to us.
We don't disclose the precise percentages or range of strike prices as that's ultimately a sort of a confidential and sort of business sensitive matter with our borrowers. What we do disclose and it's in our earnings release is the impact of that given our overall capital structure and portfolio and you can see that it provides very significant protection particularly for big moves in rates and we're obviously very well positioned in terms of benefiting from big moves in rates on the upside.
That is -- that's really helpful and that's all for me. So thanks again for taking my questions.
Thank you. And our final question comes from the line of Arren Cyganovich from Citi. Please go ahead. Arren you're live in the call.
Thank you. This is [indiscernible] dialing in for Arren today. Maybe if you could give an update on what you're seeing with international investment opportunities and what are your risks and benefits of investing outside the U.S.? Are you still expecting it to remain at about 20% of the total portfolio?
Thank you for your question. We see great opportunity in markets outside the US. I think one of the advantages of BXMT and like in the US everywhere we're making loans we also own real estate. So it's true in Europe, true in Australia, true in Canada and so we have the same platform benefits we have outside the US that we have inside the US.
In Europe we are about -- it's about 20% of our portfolio and we are seeing a very attractive spread environment in Europe. Europe hasn't had much spread compression as has the U.S. So on a relative basis from a rate standpoint it's more attractive. But the deal flow is a little bit more episodic relative to the U.S. it's more regular way demand in the US. So our ability to grow further in Europe is just a function of how much -- of how much loan demand there'll be.
We've seen a pretty good pace in recent quarters and we have some good opportunities in our pipeline as we look forward. So we're optimistic. I can't tell you what the percentage will be because that's a reflection of not only what we originate in Europe but also what we originate elsewhere. But I expect our global originations our originations outside the U.S. to continue to be a very meaningful part of the overall BXMT loan portfolio and as we go forward.
Thank you. I'd like to turn the call back to Weston Tucker for final remarks.
Thanks everyone for joining us this morning and please let me know if you have any follow up questions.
Thank you. That concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day. Thank you.