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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.
Good day, and welcome to the Blackstone Mortgage Trust Second Quarter 2019 Investor Call. [Operator Instructions] I would like to advise all parties that this call is being recorded for replay purposes.
And now I would like to turn your host for today Weston Tucker, Head of Investor Relations. Please go ahead.
Great, thanks Sunny, and good morning everyone, and welcome to Blackstone Mortgage Trust's second quarter conference call. I'm joined today by Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; Doug Armer, Executive Vice President at Capital Markets, and Katie Keenan, Executive Vice President of 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 Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call, and for reconciliations, you should refer to the press release and our 10-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 $0.59 for the second quarter, while core earnings were $0.68 per share. Last week, we paid a dividend of $0.62 with respect to the second quarter. If you have any questions following today's call, please let me know.
And with that, I'll now turn things over to Steve.
Thanks Weston and good morning, everyone.
Our second quarter again reflect the earnings power of the high-quality senior loan portfolio that we've built. Our core earnings of $0.68 generate 110% coverage of our dividend that yields an attractive 7% of the current share price.
On the call in April, we announced the Q2 pipeline of $875 million. As the quarter progressed, the hangover from the Q4 volatility that flowed originations at the start of the year abated. Our originations accelerated and we ended up closing $1.3 billion of loans in the quarter.
We continue to see an uptick in large loan opportunities and our forward pipeline has grown. We now have another $3 billion of loans that closed post quarter end are in the closing process. So, we are well-positioned for strong second half.
Our originations in Q2 exemplify our global capability. Our largest loan this quarter was €192 million acquisition financing front office portfolio in a very tight Berlin submarket. In the U.S., we made a $210 million construction loan for preleased asset in West LA another very strong market. We also closed loans secured by apartments in Arizona, the hotel in California and office buildings in Florida and the U.K.
In addition, we close six more loans totaling $165 million in our partnership with Walker & Dunlop. The growth in our pipeline comprised of a broad international mix of larger loans capitalizing on the power of the Blackstone global real estate franchise and the strong relationships we've established.
Blackstone generally owns real estate everywhere BXMT lends and maintains geographic and sector focus teams of investment and asset management professionals that are usually beneficial in the sourcing, underwriting and asset management of our loans.
As we saw our pipeline extend and to further optimize our capital structure, we issued a $500 million corporate term loan that we mentioned in the last call. We also raised $300 million of equity. Doug and our capital markets team did a great job on the execution and market timing for all of this new capital. The equity raised and our earnings in excess of the dividend also contributed to a nice pop and book value. Tony will take you through those details.
To keep pace with our portfolio of pipeline growth, we continue to expand our credit facility capacity in multiple currencies. Fourth quarter end, we closed facilities with two new lenders for the company and now have more than $13 billion of capacity from 12 lenders with more in process.
The scale and quality of our capital markets initiative is well matched to our origination capability. It also benefits from the global Blackstone real estate platform and has great track record as a borrower in banking client.
Improving credit profile continued to be a theme across our portfolio. We upgraded the risk ratings on 18 loans in the first half nine in each quarter. Generally driven by improved leasing and cash flow as the collateral properties advance in their business plans, and transition to more stabilized operating performance. In the second quarter, we put three loans secured by New York City apartment on our watch-list the only risk rating downgrades of the year.
These properties will be impacted by newly enacted legislation related to rent-regulated units that will ultimately result in less revenue growth over time that what we originally underwrote. We believe our credit position of these assets are still protected even under the new regulations, but we still decide the watch-list loans do the projected change in cash flow profile. The collateral properties are owned by strong well capitalized sponsors and the three loans together represent only 1% of our portfolio.
The lending market overall remains competitive with spread stable in part because of anticipated declines in base rates in the U.S. Fundamentals are solid with real tenant demand in the major markets that we target. We continue to achieve our best results with repeat clients, larger loans, special situations where speed and certainty matter most, construction loans and loans in European markets.
We built in market leading global senior mortgage lending business with a $16 billion portfolio almost $5 billion of equity market cap and a highly efficient match funded liability structure. Our focus remains on dividend quality and stability.
And with that, I’ll turn the call over to Tony.
Thank you, Steve, and good morning everyone.
This quarter BXMT again delivered compelling results for our stockholders with strong earnings, a well-covered dividend and increased book value following an active capital raise in quarter.
We generated GAAP net income of $0.59 per share and core earnings of $0.68 providing 110% coverage of our stable $0.62 dividend for the quarter. Our book value increased to $27.85, up $0.53 during the quarter and $0.65 year-to-date, driven by our issuance of 8.6 million shares of common stock during the quarter raising $311 million of fresh capital at 1.3 times our prior book value.
In addition to our common equity raise, we also closed our inaugural $500 million term loan begin April, which priced at a market leading LIBOR plus 2.5% with only 25 basis points of issued discount.
Our term loan has limited amortization, a seven year term and flexibility to prepay after six months, further expanding the aperture of financing options for our business. The term loan and premium equity raise in 2Q will be used to fund the continued growth of our business in the second half of the year and allow us to continue managing our cost of capital and competing for the best investment opportunities for our stockholders.
We also remain steadfast and our focus on balance sheet stability in terms of our asset level credit facilities, which had an average cost of only LIBOR plus 1.89% as of quarter end and remain insulated from any capital markets based mark-to-market provisions.
Moves the quarter with a debt equity ratio of only 2.5 times, down from 2.8 times as of March 31 and liquidity of $962 million available to fund our active investment pipeline as Steve mentioned earlier.
Looking at 2Q originations, we closed $1.3 billion of newer upsized loans during the quarter, highlighted by our international in Southern California loan originations and funded $1.1 billion under these and existing commitments. Our funding’s were roughly in line with repayments of $1.4 billion maintaining our total portfolio of nearly $16 billion as of quarter end.
Asset yield on our total investment portfolio migrated mostly lower during the quarter with spreads tightening about 7 basis points as a handful of legacy assets with higher spreads happen to repay this quarter.
As we have highlighted on previous calls, we look to manage the impact of spreads tightening with offsetting reductions in our cost of capital through accretive equity issuance, negotiating asset level pricing with our credit facility providers and employing other sources of financing like the term loan we close this quarter.
Our portfolio of credit quality remains stable with an unchanged weighted average risk rating of 2.7 on our scale one to five, as nine upgrades totaling $703 million offset the three minor downgrades Steve mentioned, totaling $167 million.
It is important to note that these loans are fully performing and we continue to have no non-accrual or impaired loans on our portfolio. We felt flagging the risk rating of these loans was a prudent disclosure to or stockholders given the change in New York City rent control regulations but we have no expectation of loss on these loans. As a reminder, we’ve had two loans with a risk rating of 400 past both of which are fully repaid with zero losses as we successfully resolve these loans with our borrowers.
In closing, we've previously highlighted the floating rate focus of BXMT's portfolio, which was 97% 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] Your first question comes from the line of Doug Harter from Credit Suisse. Please proceed Doug, you are live in the call.
Can you just update us on kind of where you would expect leverage to get to kind of as the pipeline comes through and how the term loan factors into that leverage or calculation?
Doug, it's Doug here. That's a great question that we do have a very strong pipeline. We expect net growth in our balance sheet which will probably show up in increased leverage. We’re down quarter-over-quarter from 2.8 times to 2.5 times at the end of the second quarter and we would expect that to increase inside of the range that’s anchored right around three times in terms of debt to equity and so you know, I think our expectations for the level of leverage your remain consistent with where they have been for the last several quarters. We’re in a range right around 3.0 times in terms of debt to equity.
Your next question comes from the line of Don Fandetti from Wells Fargo. Please proceed Don, you are live in the call.
Steve, can you talk a little bit about the New York multifamily properties in terms of the risk rating change. What are the scenarios, how do you see that sort of playing out the ball in their case scenario?
This is Katie. It's 1% of our portfolio. So, our risk is relatively limited, and I think in the various scenarios, we expect that our loans are going to be well protected. These loans were 67% LTV on average when we originated them, so we had significant equity cushion, and while the regulations will affect the impact of cash flow growth going forward, we don't think that ultimately, it’s going to results to an impairment as we had that equity cushion.
So, we've underwritten the loans today based on what the regulations are today. You know, we’re obviously closely monitoring any potential developments on the regulation but we’re basing the way that we’re looking at the loans on the current regulations and we thought it was pretty active let’s take them forward but again they are performing and we don't expect impairments.
And Don, I think we feel good about the fact that, although we didn’t fully anticipate this kind of regulatory change. We have strong sponsors and 65% loans that to any kind of be a reasonable fluctuation in the business plans, the risk of the equity and not the debt. I think this is another case of that.
Your next question comes from the line of Rick Shane from JPMorgan. Please proceed Rick, you are live in the call.
Really on the same topic. There’s at least one other New York multifamily property in the portfolio that continues to be on up three rating. I do note that the LTV is a little bit lower, 62% is close to mid-60s, is that the distinction there or is there something -- is there something more nuanced we should all be thinking about in terms of how we think about New York multi?
Yes. So, I think it’s important to note that New York rent regulation affect different properties in different ways. There's a lot of multifamily in New York, that’s fair market and not impacted at all by rent regulation and then other assets maybe have a few rent regulated units and are less impacted.
So, we've taken the approach that we’ve looked at every loan in our portfolio and access the impact and the ones that we have downgraded the ones we think are impacted in a way that would - to downgrade but the others we just don't think are materially impacted.
And just certainly for the operator I just want to make sure that their follow-up questions are coming through there. You can go ahead with your next question.
Your next question comes from the line of Steve Delaney from JMP Securities. Please proceed Steve, you are live in the call.
Steve, you mentioned a $3 billion pipeline, I am just curious if we could parse that a little bit, are all those loans under term sheets at this time or is that sort of just a visible number about what you're looking at. Can you just kind of clarify that for us?
Sure, Steve. Thanks. It’s a stat that we note on all of our earnings call and it’s deals that have signed up. We’ve already signed term sheets agreed terms that were proceeding the closing.
Good.
The applications are closed.
So, some in 3Q and then some in 4Q you know as well, correct? I mean, that’s a big number for one quarter but are you thinking that all these might actually close before September?
No. I think you're right some in 3Q, some are 4Q but we will also continue originating more loans Steve, which will close, likely close in 4Q but the origination process is ongoing. That’s what we have signed up at the moment.
And a quick follow up if I may for Doug. Doug, there was an article on CMA Page 1 last week about sort of been involved warehouse credit product that could provide a lower cost alternatives to CLO financing. They mentioned specifically, Morgan Stanley and KREF. I read the article and the features that they were discussing about no mark-to-market et cetera, it didn’t sound like anything to me, it sounded like a lot of features that Blackstone already has. I just wondered if you were familiar with that article and if you could comment on that briefly? Thanks.
We are familiar with that article and I think we shared your view that that the structure of those transactions in particular in terms of those features is very consistent with stuff that we've been doing for years. So, we're happy to see the activity in the marketplace and we think it will ultimately accrue to our benefit in terms of validating our business model and the market acceptance of the loan and loan financing strategy that we have.
Your next question comes from the line of Steven Lewis from Raymond James. Please proceed Steven, you are live in the call.
Couple of questions around CECL, one I guess what you think is the best historical data set that you look at as far as historical performance versus the portfolio that you guys own. And the specific follow-up to that is a situation like the Tishman the large loan you guys did 1.8 billion last April. You had mentioned that won’t start funding until 2020, but my understanding is you will have to take the entire full CECL or reserve even if the funding is at 0. So, given that accounting treatment does that change your willingness to do large loans that have a significant delay in funding going forward?
Thanks for the questions this is Tony I could jump in on the CECL point. So, I'd say couple of things, one is we are still going through our adoption at CECL I think as is everyone in the mortgage REIT space and frankly a lot of the folks in the banking and specialty finance space overall. So, I can't get into too much specific on exactly where we expect it to land. We think that the important reference data is a mix of looking at our loans which have a great track record as well as seeing what data is available in the market that we can leverage.
So, I can't really speak to definitively what our records set is going to be that will use this time, but we’ll have more detail on that as we finalize our process and put those disclosures out more formally. I would say that we're being very thoughtful about ensuring that the reference data that we do use is as analogous to our loans as possible and not picking up data that may have lower credit quality loans that are not comparable to the high quality loans that we make here.
As for Tishman loan example kudos to your reading of the FASB rules, you're right the CECL does require picking up a reserve on unfunded, not just on deal like Tishman that’s fully unfunded but even if the loan is 90% funded the 10% unfunded has to be taken in new account.
Without getting into a ton of the nuance math, the way CECL looks at that it does take into account the size of the loan over time. So, there is a timing element to those fundings in terms of how you look at how impactful that will be. We think that overall the credit quality of the loans that we make is very high. And so, whatever the loan structure our CECL reserve will be appropriately low and we’ll take that into account.
So, I don't expect that’s going to influence our decision-making in terms of our investments. We make good loans to quality real estate with quality sponsors and that will continue, but you are right there could be a one-off loan here or there that may have a little larger CECL reserve, but we don't think that’s going to move the reserve way out of a reasonable range.
Your next question comes from the line of George Bahamondes from Deutsche Bank. Please proceed George, you are live in the call.
I’m sorry if I may have missed this point, but do you guys have any thoughts on - what potential impacts on the - maybe incremental attractiveness of borrowing as LIBOR declines assuming that we do see some Fed rate cuts in the back half of 2019 and into 2020. Just want to get a general sense of if you think that becomes incrementally more attractive to borrowers and maybe that impacts origination volumes or the same sort of thoughts, you’re going to lay on what the landscape could look like should we see some Fed rate cuts.
I think the second question is tied to that similarly is do we see spreads maybe quite not a bit just given that LIBOR would decline to ensure that the returns on these loans are similar to what they have been more recently. I just wanted to get your general thoughts on if possible? Thank you.
I think as it relates to the impact on loan demand of lower LIBOR, I mean it certainly beneficial. Most of our borrowers are just floating rate borrowers not because of their guessing interest rates because they want to maintain flexibility in the real estate ownership. They don’t want to lose a sale window; they have some ongoing capital needs they need loans that accommodate future advances and floating rate loans do that much better than fixed rate loans.
So, I think on the margin its beneficial having lower floating rates as it relates to loan demand, but our loan demand has been very strong throughout. When LIBOR was at a lower range and also LIBOR is current range.
And I’ll start off with the spread question Doug if you have anything you want to contribute. But I think we would expect spreads we've seen spreads being in the market already. I think that’s in part because of people just have minimum returns in business model they can't withstand continually compressing spreads.
But also, I do think there is - with the expectation of lower base rates that spreads have moderated and I think there certainly is a possibility that spreads could increase as base rates go down, because again a lot of business models or the investors are looking at their total return even on floating rate loans.
I think it’s a great point, it’s another illustration of how the LIBOR analysis is an all else equal analysis and by definition all else will not be equal as we move forward into a different rate environment. There may be headwinds coming from spread compression or decrease in LIBOR, but there a lot of tailwinds coming from other directions albeit increased deployment or demand for our loans potential moderation in spreads.
And also, all of the capital market initiatives that Tony referred to, but reductions in our funding cost optimizing corporate level leverage, raising premium equity. So, I think you with regard to the capacity to offset those headwinds and maintain our earnings power we feel very good about our asset sensitive floating rate business model.
Your next question comes from the line of Jade Rahmani from KBW. Please proceed Jade, you are live in the call.
What drove surge in repayments in the second quarter, was anything surprising there and what do you expect for the balance of the year?
No, I think Jade it's hard to look at repayments in any one quarter. So, I think those repayments that maybe we thought would come last year and just ends up coming in the first quarter. So, we think we’re sort of in a stabilize repayment mode. Again, the repayments tend to be correlated over longer periods with our originations when the market more liquid.
We would expect to see more repayments, but as we go forward, we feel very good about achieving portfolio growth again like we have in most of the past quarters. So, it was a $3 billion pipeline, we do expect to see portfolio growth in the second half.
Just turning to the New York multifamily issue, can you give any sense any insights into the borrower mindsets on these loans. Are they taking a wait-and-see mode and sort of hunkering down focusing on maximizing cash flows, reducing expenses? Have there been any comps any transactions in the market I don't believe there have - so there hasn't been much price discovery as yet. And over what kind of time period do you expect this to play out is it over the next six months or are you thinking much longer than that?
Great questions Jade, I think the answer on a lot of, is too early to say. Our sponsors are very committed to their assets to their New York City multifamily strategy. And so again we spend a lot of time getting sponsors to feel great about the sponsorship on the loans that we've been talking about.
I do expect to see relatively few transactions in the near-term typically in periods of volatility transaction volumes flows and I would assume that’s what will happen here as well. And then over time as things stabilize, we’ll see transaction activity resume in the market. It can take a long time for the impact of this to play through that really relates to future rents.
So, it’s not an adjustment of our in priced cash flow it’s really just an impact on what the future cash flow what might be. And typically, these deals have gradual increases of cash flow over time depending upon how capital will spend and how units turn over. And so that's what’s been impacted here and we think that again that the underlying assets are still strong. We know a lot of conference and our borrowers, so we’ll set to wait and see in terms of the market adjust and what the long-term prognosis is here.
Thank you. Your next question comes from the line of Rick Shane from JPMorgan. Please proceed Rick, you are live in the call.
I got cutoff as I was trying to ask my follow up. It’s largely been explored but just want to ask related to the three New York multifamily properties, is there any commonality among the sponsors or the different sponsors?
We have different sponsors on various assets, so we generally expect all of the -- I mean, they all are very well capitalized. So, the commonality in the asset is really the business plans, which was investment of capital overtime for gradual increases of rents. As we have said, we expect that. That will moderate going forward.
My question wasn’t clear. Is it three discrete sponsors for those properties?
It’s two discrete -- two sponsors, three loans.
Your final question comes from the line of Doug Harter from Credit Suisse. Please proceed Doug, you are live in the call.
Just following up on the term loan. What are your thoughts, I mean, do you view some of the seven year term do you view that as leverageable capital in any way and does that presence kind of give you some ability to kind of be north of three times?
Doug, thanks for the follow-up. I realize I probably address that as clearly as you said asset I think the post term loan, I think the range that we will be able to achieve in terms of our debt to equity ratio is higher and I think the long-term outlook for being above three times as opposed to below three times where we've historically been is significantly greater.
Again it'll really quarter-to-quarter to the amount of deployment that were able to achieve in a given quarter but yes, I think with the term loan being as well structured as it is floating rate and as you point out a seven year maturity, that’s capital that we’re very comfortable leveraging and you know results in the capital structure that were very confident operating on a slightly higher leverage basis than we have been historically. I think that'll be in a range around three times and more likely above three times as opposed to below three times compared to prior -- to the term loan issuance.
And then as you think about kind of constructing the capital structure kind of over the long term, how much term loan could we expect kind of in the capital structure or more broadly how much kind of non-common equity could you expect to kind of make-up that leverageable capital base?
I think the ratio that we have now and we think about the convertible debt together with the term loan and sort of connection with this question is close to our target range. The amount of common equity is also influx and we’ll continue to grow the balance sheet and we will continue to fund that through a mix of debt and equity.
I think that you would expect to see that mix state roughly where it is today in terms of proportions but again, I think with the term loan in the picture that proportion is higher than it was previous to the term loan.
Thank you. There are no questions and I’ll turn the call back to Weston for closing remarks. Thank you.
Thanks everyone for joining us this morning and please let me know if you have any follow-up questions.
Thank you to all speakers. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.