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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome, everyone, to the Blackstone Mortgage Trust First Quarter 2022 Investor Call. At this point, all participant lines are in listen-only mode. [Operator Instructions]
And with that, I would like to turn the call over now to Weston Tucker, Head of Shareholder Relations. Please, go ahead.
Great. Thank you, and good morning, and welcome to Blackstone Mortgage Trust's first quarter conference call. I'm joined today by Katie Keenan, Chief Executive Officer; Austin Peña, Executive Vice President, Investments; Tony Marone, Chief Financial Officer; and Doug Armer, Executive Vice President, Capital Markets. I'd also like to introduce Tim Hayes, who recently joined the BXMT leadership team and will be working across a number of initiatives, including Shareholder Relations.
This morning, 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 Factors section of our most recent 10-K.
We do not undertake any duty to update forward-looking statements, and we'll 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.
For the first quarter, we reported GAAP net income per share of $0.59, while distributable earnings were $0.62 per share. A few weeks ago, we paid a dividend of $0.62 per share 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 Katie.
Thanks, Weston. We had another strong quarter of investment activity, portfolio growth, credit and earnings, further demonstrating the strength and resilience of our business model in a dynamic market environment.
Perhaps more importantly, as we look ahead, BXMT is particularly well positioned to continue delivering for our investors. Today, we see four key advantages powering our company forward.
First, we have a floating rate business. Put simply, higher interest rates mean we earn more on our loans. The magnitude of rate hikes widely expected this year creates a powerful tailwind for our earnings profile.
Second, the credit of our portfolio is secure. With a portfolio of 65% LTV loans on institutional quality assets to many of the best sponsors in the business, our capital is well protected, even if we experience a period of greater market headwinds.
Third, our ability to generate investments is unparalleled. We believe we are entering a more opportunistic investing environment for lenders and BXMT's deep global origination platform allows us to source attractive relative value investments around the world.
And fourth, we have broad access to capital. Our fully scaled, diversified balance sheet comprises a wide variety of asset level and corporate debt as well as premium equity. This gives us the consistent ability to efficiently tap the capital markets, enhance our balance sheet and deploy capital accretively.
Starting with our floating rate model and portfolio. The investment environment over the last 12 months has been highly productive for our growing origination team. We closed $3.4 billion of new loans in the quarter, $16.2 billion over the last 12 months, driving 37% portfolio growth year-over-year to a record $25.6 billion.
Through our strategic portfolio management, we have reoriented both the earnings profile and the collateral mix of our book. While LIBOR floors provided us with earnings stability while rates were falling, they can dampen income growth in a rising rate environment.
But with the majority of our portfolio originated in recent quarters when rates were lower than they are today, we have now reached our crossover point where any upward movement in short-term rates will positively impact our earnings and flow directly to the bottom line. As a result, earnings in our portfolio today would materially benefit from the rate hikes expected in the coming months.
Moving to credit quality. We see positive fundamentals on the ground for high-quality real estate as far as occupancy, rents and supply demand. But a rising rate environment naturally creates considerations for real estate valuations, especially for assets that are more fixed income in nature.
As a low leverage lender, 65% LTV on average, our investments start from a position well insulated by substantial equity value. Moreover, our originations this quarter and indeed over the past 18 months reflect a strong bias toward markets and assets experiencing outsized growth and the ability to drive NOI increases that can outpace rising rates.
Today, nearly half of our loans are collateralized by multifamily, hotels, parking and self-storage, assets that are able to reprice their rents frequently and are, therefore, naturally well-edged for inflation. And as a transitional lender, the majority of our remaining collateral is positioned to capture rent growth stemming from value-add strategies. For example, newly built office buildings, which are attracting an outsized portion of tenant demand and seeing increasing rent levels as a result.
And the persistent impact of supply chain disruption and material cost inflation has driven replacement costs up 10% to 30% or more in core real estate sectors, making new supply more challenging to build and supporting the value of our existing collateral. The credit performance of our portfolio this quarter reflects these positive real estate fundamentals as well as the strength of our borrowers and our investment process.
We continue to see 100% interest collections across the portfolio and positive credit migration. And we had $1.3 billion of repayments, 91% of which were in office and hotel indicative of the progression of business plans and liquidity for our collateral in all property sectors.
Third, on investment activity. The first quarter demonstrated our ongoing ability to source and execute on our brands of compelling low leverage lending opportunities in targeted sectors and markets. We closed $3.4 billion of new loans at a weighted average LTV of 65%, in line with our broader portfolio, while achieving an average all-in yield of 395 over wider than recent levels, all while continuing to shift the focus of our origination activity toward our highest conviction theme.
In line with recent quarters, nearly half of our 1Q loans were in the Sun Belt, including $1 billion of multifamily in South Florida, Nevada and Dallas and $500 million of gross market office. We have also seen accelerating activity in the UK with $850 million of loans closed this quarter.
Because of our long-standing presence in the less efficient Western Europe and Australian markets, we are well-positioned to capture highly attractive relative value lending opportunities. For example, our UK loans this quarter averaged five points lower leverage and more than 50 basis points wider spread than our overall portfolio. And given the ongoing flight to quality across all asset classes, we made over $500 million of new construction loans on assets that will be best-in-class in their respective markets upon delivery.
Looking forward, while broader capital markets volatility may moderate overall transaction volumes, we see an attractive backdrop for our business, which was built for resilience and performance in all market conditions.
Our position within Blackstone results in a constant information flow from over $500 billion of owned and financed real estate, allowing us to make well-informed targeted investment decisions in a dynamic and fast-changing environment. And we have an expansive global sourcing platform and more importantly, deep relationships with major borrowers around the world, which makes us a trusted partner, especially in periods of uncertainty.
We see today the makings of a particularly attractive market dynamic for our brand of lending. There is significant accumulation of real estate funds capital in search of ways to earn a real return against rising inflation, $300 billion and growing.
At the same time, CMBS and CLL market volatility have driven many smaller-scale lenders to the sidelines, rendered securitized executions less reliable and created more demand for transitional debt capital. The overall result is a favorable competitive backdrop for scaled, well-capitalized platforms such as ours. This affords us the continued ability to be discerning on credit while capitalizing on the market trend pushing spreads wider. And we presently have $2.9 billion of loans closed or in closing post quarter end, a further indication of the attractive opportunity set for our business.
Turning to our access to capital. The diversified nature of our fully scaled balance sheet is a critical ingredient for our success. We are an active issuer with well-established relationships across a wide range of capital markets execution. Bank facilities, syndications, CLOs, term loans, high yields, convertible notes and equity. This allows us to be nimble and opportunistic with our balance sheet, tapping various sources of capital when we see strategic execution. Our balance sheet is match funded and well hedged against foreign currencies. And as a result, we are well insulated against basis risk and changes in the yield curve.
This high integrity capital structure underpins the stability in our business despite potential movements in rates, spreads and transaction volumes. With an opportunistic lending environment before us, we expect to continue to strategically access our various funding sources to support the growth of our portfolio into the compelling lending opportunities we see ahead.
In closing, the coming quarter should represent an exciting period for our business. We expect the robust earnings power of our $25 billion performing loan portfolio to accelerate as central banks around the world raise their benchmark rates. Our portfolio has a credit profile that is well insulated from volatility and well positioned to capitalize on growth. And our platform reach and dynamic balance sheet will continue to allow us to execute on attractive investment opportunities wherever they arise.
Thank you. And I will now turn the call over to Tony.
Thank you, Katie, and good morning, everyone. I'm excited to run through the results for the quarter and, as importantly, our position as we move forward in 2022. Starting with the 1Q results, we reported GAAP net income of $0.59 per share and diluted GAAP earnings a new metric for us of $0.58 per share. This diluted earnings metric is the result of a new accounting standard that came into effect this year, which requires us to assume all convertible notes will be settled in shares and therefore dilute earnings.
We've always settled our convertible notes in cash and have the intention to do so in the future, so EPS was not previously impacted. The new accounting rules eliminate the optionality and require earnings dilution to be calculated for all outstanding totable notes. Our distributable earnings per share for the quarter was $0.62, which is unaffected by the GAAP earnings dilution and properly consider only our shares currently outstanding.
Our DE is down slightly from the $0.66 run rate level we discussed last quarter as 1Q earnings included no material fee acceleration income has the typical seasonality of the reduced day count compared to other quarters. Importantly, the growth in our portfolio largely absorbed the new capital we raised, which muted some of the J-curve impacts on our 1Q results.
Finally, our book value per share of $27.21 was flat relative to 4Q and our $0.62 dividend at level we have maintained for 27 consecutive quarters was fully covered by our 1Q distributable earnings with 106% dividend coverage over the last 12 months. Perhaps more important than our 1Q earnings is where we ended the quarter from a rate sensitivity perspective. Our business model has consistently focused on floating rate assets, matched with floating rate liabilities, creating a positive earnings correlation to rising interest rates. We have discussed on previous calls that the floor is embedded in many of our pre-COVID loans modified this direct correlation and contributed meaningfully to our earnings over the past two years following the precipitous decline in interest rates in April 2020.
As of March 31, the weighted average floor in our portfolio was only 37 basis points, down from 81 basis points in March 2020 and materially below current USD LIBOR. Therefore, we are now once again positioned for earnings growth as rates are expected to continue to rise this quarter.
We provide more data in our earnings release and 10-Q, but as an example, a 200 basis point increase in base rates, implying USD LIBOR of about 2.25%, would add roughly $44 million to our annual earnings or about $0.06 per quarter on a run rate basis.
One of the key contributors to our rate sensitivity is the growth of our floating rate senior loan portfolio, which had another record of $25.6 billion at quarter end as loan fundings of $3 billion outpaced repayments of $1.3 billion.
Of course, growth in our portfolio must be accompanied by strong credit underwriting, and we are happy to report another quarter of stable performance on that front. Our portfolio origination LTV remains at a modest 65% level with 100% interest collection, and we upgraded the risk ratings of 15 ones this quarter with no new downgrades impairments or non-accrual loans.
Lastly, our CECL loan loss reserve, which impacts our GAAP EPS and book value, but not our distributable earnings, was effectively flat for the quarter at $0.75 per share. Although about one-quarter of our portfolio is secured by assets in Europe, we have no exposure to Russia or Eastern Europe and so the CECL reserve on our European loans was not impacted by the war in Ukraine.
This quarter, we saw some turbulence in the capital markets as the world digested expectations around rates and inflation as well as the evolving geopolitical situation. With BXMT diverse capitalization structure and Blackstone's broad banking relationships, we continue to efficiently capitalize our business this quarter despite a more challenging market generally.
Notably, this quarter, we closed $2.1 billion of credit facility financing, nearly three-quarters of which priced at a spread of 150 basis points or less, including $548 million financed under a new $1 billion credit facility. This brings us to 14 credit facility counterparties, further diversifying our access to capital and improving our ability to drive the best execution for each of our loan financing.
We also closed two syndications totaling $445 million this quarter, providing another source of financing at attractive levels for these assets. Lastly, we issued $300 million of convertible notes in March, effectively refinancing the notes maturing in May, our only corporate debt returning this year.
Other than our $220 million of convertible notes due 2023, we have no corporate debt maturing until 2026. This, combined with our term matched asset level financing translates to a stable balance sheet designed to endure any potential turbulent market conditions. Taken together, our financing activities increased liquidity to $1.2 billion at quarter end, net of the upcoming May convertible note repayments.
Finally, given the attractive investment environment and robust pipeline Katie mentioned, we also launched a new seven-year term loan this morning to add further flexibility to our balance sheet.
With our current liquidity and access to diverse capital sources, we are well positioned to invest in today's dynamic market conditions. And with our floating rate portfolio, we are poised to organically grow earnings in a rising interest rate environment. For these reasons, we believe BXMT is in a strong position as we move into 2022 to generate robust, high-quality earnings for our stockholders.
Thank you for your support. And with that, I will ask the operator to open the call to questions.
Everyone, your question-and-answer will now begin. [Operator Instructions] And our first question comes from Don Fandetti with Wells Fargo. Please go ahead.
Hi, good morning. Katie, I was wondering if you could talk a little bit about are you positioning the portfolio for a recession, it feels like you're not. And if you did feel like a recession was imminent, what kind of actions would you take?
Thanks, Don. I think we feel that it's a little early to be focusing too much on our recession, record low unemployment, 6% wage growth. We see strong demand for the type of real estate we invested on the ground. But I think as I mentioned in my remarks, the critical piece to our portfolio, which we've really been focused on for years is low leverage lending to very well-capitalized, experienced sponsors who can withstand volatility.
So we feel that our portfolio and our overall investment strategy, which has been consistent over time, put our loans in a position of being really insulated from any market volatility. I think that strategy was really validated during COVID when our credit performance was very strong. And we think that it continues to put our portfolio in a strong position.
Okay. And then it sounds like you think this is a good environment where some of the marginal players have stepped to the sidelines of the volatility, does that mean that you think you can have a pretty strong asset growth again this year or loan growth…?
Yeah. I think that -- sure, we've seen asset growth every year in the history of the company, I think, in strong environments and less active environment. And I think that the key part of our business is that originations and repayments tend to be correlated. So over time, we've been able to very consistently grow the portfolio in various market environments. And I think that, yes, right now, the competitive dynamic is such that scaled well-capitalized platforms with diverse access to capital, I think we'll be in a better position, and that's what we're seeing out there in the market. So I think that will result in us being able to be very discerning on credit, very selective on the assets that we're doing and capture a broader market share of the opportunities that we find most interesting.
Thank you.
And next we have Steve DeLaney with JPM Securities. Please go ahead.
Good morning. Thanks for taking the question. Katie, you made positive comments I thought about office and obviously, rent escalations, about four years ago, Blackstone made a pretty large loan in Hudson Yards. It was a construction loan, I believe to related property, I think, was the Spiral. I think it's one and number six that appears in your deck. Just using that as an example to how you view the office market and you use the term opportunistic when you were talking about the UK. How does this -- how is this loan playing out? And do you see this as like an example of what Blackstone with its relationships with sponsors is able to consistently accomplish? Thank you.
Yeah. I think that the Spiral is a great example of our philosophy and thesis on office. That is a sub 50% loan-to-cost construction loan to Tishman Speyer actually it’s one of our strongest, most experienced and most strategic development sponsors. We've been in that loan. The leasing has been very favorable. There's been a couple of recent news articles about it. Construction has proceeded as expected. And overall, our thesis about newer, higher-quality office in the right locations, really outperforming has very much been borne out by that asset. And we feel great about that exposure, and we actively look to make more loans like that.
I think that thesis, as we've talked -- I've spoken about consistently, it's really true throughout markets. We see that the newer well-amenitized office, it provides an office environment for our employees, for users that is really differentiated and really fosters the type of collaboration that drives companies ahead being in the office. And so we are looking for those opportunities as lending opportunities. We like being in best-in-class assets. We like being at very low leverage points, obviously. And we're seeing a lot of those types of opportunities around the world.
Great. Well, I appreciate that color, and I'll just leave it with that. Thank you.
Next is Jade Rahmani with KBW. Please go ahead.
Thank you very much for taking the questions. Do you agree that mark-to-market portfolio LTV ratios would be lower than the 65% you're showing, considering that in terms of your recent originations, still probably at least half the portfolio might be originated product to the middle of last year, and we've seen a big run-up in commercial real estate prices. So do you think something in the mid-50s is reasonable to assume?
I think directionally, your philosophy is right. I think that, a, there's been increase in real estate values driven by demand fundamentals driven by lack of new supply, rising replacement costs especially in the markets and assets we're focusing on. And even more importantly, as a transitional lender, we're lending into value-add business plan. So the value of the assets we lend on by virtue of the capital going into them, the repositioning that our sponsors are typically doing should increase value in assets over time. In terms of the magnitude, I'm not sure exactly where that would land. But I think directionally, you're on the right track.
Thank you. Secondly, do you believe that the overall commercial real estate market is positioned to absorb the higher rate environment without experiencing an uptick in loan defaults. What we experienced during COVID was a shock to the system with an immediate spike in loan delinquency rates and defaults and then a lot of government assistance as well as forbearance that mitigated that impact and then, of course, the improving economy. So delinquency rates have continued to improve. But at this point, we will have a substantial amount of debt maturing this year that we'll be refinancing into likely a 5% coupon potentially higher depending on term. So do you think that the market can absorb that coupon rate based on fundamentals, or do you expect the market rate of delinquency and default to increase?
I think it's important to think about the fact that we see the market is not monolithic. And we're most focused on the parts of the market, obviously, that we think are well positioned to absorb the types of rising rates we're looking at. Our borrowers are sophisticated. They're investing in assets, as I mentioned, that have value-add plans that should increase cash flow over time. And importantly, rising rates obviously very driven by the inflation that we're seeing, which when you're investing in hard assets is really a place that can realize the benefit of increasing income in the face of inflation.
I think the other thing to really focus on is that, leverage in the system is still quite low generally. So, looking at the refinancing opportunities for assets that are in the market, if we were in a position like pre, last GFC when leverage was 80%, 85%, that's a completely different story than today, when leverage really has been more in that mid-60s level across all markets and asset classes at a much lower level.
And in particular, obviously in our portfolio, we think that the combination of low leverage assets that can grow their incomes in the face of rising inflation to outpace rates. And importantly, sponsors that are sophisticated and have been preparing for the prospect of rising rate for a long time, really should and now to the benefit in terms of the performance of the assets and the loans that we're making.
Thank you.
And the next question is coming from Rick Shane with JPMorgan. Please proceed.
Thanks everybody and hope you’re well. I just want to talk a little bit about execution on the loans given the transitional nature. I'm curious, if you were seeing any delays in terms of build-out or construction? And then are you also seeing any delays in terms of absorption of properties?
Thanks, Rick. That's a great question. I think that, we talk a lot about sponsor selection and that's important from a financial perspective, but it's also really important from an execution perspective. And as far as value-add business plans, when we're lending to some of the most active and experienced developers in the world, that really creates a difference in their ability to source materials and their relationships with the trades with GCs and their ability to really get their projects done.
So on the margin, have we seen one-off examples of one particular material that's been a little bit delayed, of course, I think no one is immune from that. But I think that by and large, because we're lending to sponsors that are really the best able to manage these pressures, we've really seen very on track performance for our assets in terms of the execution of the value-add business plans.
I think on the absorption side, it really depends on the asset and the market, obviously. I think the growth markets have heated all expectations in terms of occupancy, rent growth, absorption really across all sectors. Multifamily is the most obvious example of that, but we're seeing it in all sectors. And I think that in some of the New York and San Francisco’s of the world, I mean, those markets have been a little bit slower, but we're still seeing positive trends for the types of assets that we lend on.
Great. Hey Katie, thank you very much.
And next we have Derek Hewett with Bank of America. Please go ahead.
So, excluding the prior quarter, I believe prepayment fees were still -- remained well below pre-COVID levels. So, could you provide any additional color when prepayment fees could potentially normalize?
Hey Derek, it's Doug. Prepayment fees are lumpy. And of course, in the fourth quarter, we did have an outsized amount of prepayment income. This quarter, we happen to have a vanishingly little effectively none. Typically, we've had close to $0.04 on average, if you look back over the last three to four years. It does fluctuate quarter by quarter. I think with the velocity that we've seen return to the portfolio in 2021, which is maintained through 2022 thus far, we would expect to see that $0.02 to $0.04 of prepayment income on a normalized or annual basis going forward.
So I think we're through the slowdown in prepayment income that we saw due to the stasis in the portfolio during COVID. But we're never going to be away from the fact that it's generally very lumpy and it can fluctuate quarter-to-quarter.
Okay. Great. And then, my follow-up is just given the asset sensitivity disclosures, are there other factors that we -- investors need to potentially consider in terms of either maybe tighter credit spreads to meet the -- those higher rate resets or maybe even the higher delinquency rates that could potentially offset at least a portion of that asset sensitivity?
Hi Derek, Doug again. That is a good question. No doubt, this is an all else equal analysis that we've included in the earnings release, and that Tony has alluded to, and there are lots of variables that go into our earnings. We certainly don't expect in our portfolio any drag from nonperformance. There are no signs of that.
With regard to the loans that are currently on the books, obviously, the spreads are locked in our financing spreads are locked in as well. So we wouldn't expect a lot of variability in that in the time frame that we're expecting these rate changes to happen is there a correlation between, an inverse correlations between rates and spreads generally.
We think there probably is. It's not necessarily one-for-one. So I wouldn't read too much into that. Generally speaking, we're able to maintain the net interest margin that ultimately drops to the bottom-line by moving the spreads on our debt and our assets in tandem. I think an interesting sort of beneath the surface, layer to the interest rate sensitivity is really the sensitivity to the different rates in the different currencies.
So for example, LIBOR -- U.S. dollar LIBOR moved further faster than Euribor, we would see significant upside in these numbers due to the way our FX hedges work. So there is a lot to it in terms of variability, as you suggest. We think there's probably variability for the upside to these numbers, which we presented.
Thank you.
And our final question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks. Following up on that last question about the rate sensitivity, how are you thinking about the dividend given the potential for permeating fully higher earnings coming from higher short-term rates?
Sure. Thanks, Doug. We obviously review the dividend with the board quarterly, and it's a discussion every quarter around our thoughts on earnings and the sustainability of the earnings profile.
The increasing earnings and creating the most attractive, stable stream of dividend income for our shareholders is our key priority. And we also like the benefit of building book value through retained earnings along the way.
We feel very good about the trajectory of our earnings. We've talked a lot about that today, especially given interest rate sensitivity and our ability to continue seeing portfolio growth. And I think with that context, we'll continue to reevaluate the dividend on a quarterly basis.
Great. And just on that, how much -- or how do you view your flexibility about how much capital or how much earnings you could retain versus kind of needing to pay out for the REIT test?
We pass our REIT test pretty cleanly. So the $0.62 dividend level that we have today, I would say, from a technical perspective isn't in jeopardy. The Katie pointed is something that we're regularly, when I say in Jeopardy, meaning that we would need to increase the dividend just for compliance purposes. To Katie's point, we do reassess this quarterly and at some level, if you started to get really far out along the tail you made at that point. But at present, we don't have a lot of technical pressure on the dividend level.
Great. Appreciate that that.
And with that, I would like to turn the call back to Weston Tucker for closing remarks.
Great. Well, thank you, everyone, for joining us. And if you have any questions, please follow-up with Tim or myself after the call. Thank you.
Goodbye.