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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, everyone, and welcome to the Blackstone Mortgage Trust Quarter Three 2020 Investor Call. My name is Joanne, and I’m the event manager. During the presentation, your lines will remain on listen-only [Operator Instructions] And I’d also like to advise all parties this conference is being recorded.
And now I’d like to hand you over to Weston Tucker, Head of Investor Relations. Please proceed.
Great. Thanks Joanne and good morning and welcome to Blackstone Mortgage Trust’s third quarter conference call. I’m joined today by Mike Nash, Executive Chairman; Steve Plavin, Chief Executive Officer; Jonathan Pollack, Global Head of Real Estate Debt Strategies; Katie Keenan, President; Tony Marone, Chief Financial Officer; and Doug Armer, Executive Vice President, Capital Markets.
This morning, we filed our 10-Q and issued a press release with the presentation of our results, which are available on our website and have been filed with the SEC. I’d like to remind everyone that today’s call may include forward-looking statements, which are uncertain, and outside of the company’s control. Actual results may differ materially.
For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K as updated and subsequent 10-Qs. We do not undertake any duty to update forward-looking statements and we'll also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and our third quarter 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 $0.61 for the third quarter, while core earnings were $0.63 per share. Two weeks ago, we paid a dividend of $0.62 per share with respect to the third 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 lessons. This is our third call since the onset of the COVID crisis and we are pleased to report another quarter of strong credit performance, earnings, and access to the capital markets. Our experienced through this period represents a validation of our long held operating principles, a uniform focus on senior mortgage lending on top quality real estate strong, well-capitalized sponsors, and a diversified efficiently priced liquid balance sheet with long duration matched liabilities.
Our portfolio this quarter continued to show exceptional stability in the face of a volatile environment. We had great sponsors support throughout the period with 99% interest collections and almost no deferrals. Our large scale loans come with institutional sponsors to have significant access to liquidity and their investment vehicles, giving them the ability to support our loans even through this period of dislocation.
With an origination LTV of 64%, our borrowers have equity to protect their assets and their performance through this third quarter reflects that. The investment and asset management process at BMT brings together the resources and insights from across the Blackstone real estate platform, ensuring we focus on superior sponsors, assets, and business plans and drive the best possible outcomes.
The continued strong credit performance in our portfolio this quarter is a product of that approach. We had no new four or five-rated loans and no new specific CECL reserves. So, all-in-all, a very good credit quarter.
We continue to build the company's balance sheet for the road ahead with $1.2 billion of liquidity at quarter end, a level that positions us well for emerging new originations, as well as to manage our existing portfolio.
We priced our third CLO last week refinancing a $1 billion of our loans on attractive terms. This follows our Q2 term loan add-on and common equity offering and a premium to book.
We have demonstrated excellent access to the capital markets through this volatile period, improving our liability structure and greatly increasing our liquidity. These capital markets transactions demonstrate the superior execution Blackstone sponsored vehicles command due to strong performance and a consistently high volume of top quality transactions.
We have generated consistent strong core earnings against not only a tough COVID backdrop, but also amid a yield starved investing environment. With benchmark rates around the world near zero, the current income generated by our portfolio is more attractive than ever.
We are now one quarter closer to the end of the COVID crisis. While the timeline and trajectory of recovery remains unknown, we believe the quality of our portfolio and the strength of our balance sheet position as well to outperform.
And with that, I'll turn it over to Katie to further discuss our performance.
Thanks Steve. This morning we reported core earnings of $0.63 per share covering our $0.62 dividend and consistent with our earnings profile prior to and through the pandemic.
Our liability structures sound augmented by exceptional capital markets access and we have maintained plenty of liquidity. And our loans continue to perform with resilient operations in most asset classes and strong sponsor behavior across the board.
On the office side, the quality of our assets and sponsors has yielded steady performance through the COVID impacted period. Our loans are secured by high quality institutional assets and these buildings tend to attract larger, better capitalized tenants.
As a result, we are seeing strong rent collections averaging 95% across the portfolio, a very healthy number. While COVID has slowed leasing in the market and our collateral, we have nonetheless seen over 1 million square feet of leasing activity in the office portfolio alone since March,
Based on Blackstone's experience as a highly active owner and lender on office buildings, our investment strategy on more transitional assets has long focused on newer buildings with the location and quality to cater to growing tenants that are generating demand, like those in the technology, content creation, and lifescience sectors.
COVID is an amplifier of trends and these segments of the market are outperforming in today's economy. In the BXMT portfolio, we have significant investment in West LA, Hudson Yards, and other sub markets driven by these sectors, and over 65% of the office buildings securing our loans are newly built or recent renovated which means they have the technology, space, flexibility and amenities that we expect will best compete in the post-COVID leasing environment.
Our portfolio includes assets with major leases to marquee tenants like Google in Atlanta, Amazon in West LA, Square in the Bay Area, and Pfizer and Peloton in New York City. In San Francisco, one of our sponsors completed a first-class renovation on the office building earlier this year, and has since leased the asset from 33% to 77% today.
While the pandemic will result in an elongation of business plans for some deals, we and our sponsors share the view that modern high quality assets in the right locations will outperform.
On the new investment front, we are starting to see green shoots in the market for lending opportunities. While transaction activity remains muted relative to pre-COVID levels, normal course refinancing and acquisition activity is reemerging.
Our credit facility lenders are open for business and eager to finance their best clients on new originations. And most importantly, we continue to be able to draw upon our deep relationships with the most active players in the market to source the highest quality pipeline of lending opportunities.
To this end, we currently have $230 million of new loans in closing with experienced well-capitalized fund sponsors. The deals include a stable high cash flow office acquisition in South Florida and a portfolio of loans on five newly built multifamily assets.
With mid-60s LTVs and light transitional business plans, these loans have attractive credit profiles and were sourced through direct relationships with repeat borrowers, evidencing our continued ability to leverage our platform to identify attractive investment opportunities.
We end the quarter with ample liquidity to pursue new investments as well as the benefit of strong earnings power embedded in our current loan portfolio. These factors together afforded us the ability to be selective and seek out the best opportunities for the deployment of our capital, while drawing on the stability of our existing portfolio to continue delivering strong results for our investors.
Thank you. And I will now turn the call over to Tony to provide additional detail in our financial results.
Thank you, Katie and good morning, everyone. This quarter's results showcase the stability and resiliency of BXMT's business model as we now transition past the initial shock to the global economy resulting from COVID-19. We reported GAAP net income of $0.61 per share and core earnings of $0.63 per share, up slightly from 2Q as we continue to benefit from interest rate floors embedded in our loan agreements in this historically low rate environment.
Looking specifically at USD LIBOR, our most common floating rate index by far, we had $9.2 billion of loans with active floors as of 9/30, which we expect will continue generating incremental earnings for our stockholders in future periods. Notably, we generated these earnings while maintaining the elevated levels of liquidity that Steve and Katie mentioned earlier.
Our book value of $26.51 cents per share increased by $0.06 this quarter, primarily due to a modest reduction in our CECL reserve as of 9/30. This change in our CECL reserve is largely attributed to the ordinary course migration of our portfolio in terms of loan size and expected tenor and continues to reflect a prudent level of reserves, $1.30 per share in the aggregate to address the future risk of loss in our low leverage senior loan portfolio during these unprecedented times.
During 3Q, we had no new loans, specific reserves or non-performing loans and we collected and recognize all of the interest due from our portfolio this quarter. Other than the two loans we placed on cost recovery accounting last quarter end. These loans paid $1.1 million of interest this quarter which was applied against our book value and reduces the carrying amount of these loans on our balance sheet.
We had another active quarter on the asset management front, completing 11 loan modifications that generally required additional borrower equity, reflecting our borrowers continued support of their assets. As always, we draw on the deep experience and resources of Blackstone's broader real estate platform as we re-underwrite these loans and evaluate our borrower's positions.
Our $18.1 billion portfolio size was up slightly during the quarter, as higher foreign exchange rates increase the value of our non-USD loans more than the net $142 million of principal proceeds we received during the quarter.
As a reminder, we fully hedged our net exposure to foreign currency. So despite significant volatility in rates this quarter, we reported a negligible impact on book value.
Our weighted average risk rating remains at 3.0 on our five point scale, the same level as 3.31, despite weathering another six months of COVID driven market conditions, and we had no new four or five rated loans this quarter.
Our portfolio continues to benefit from a weighted average origination LTV of 64%, reflecting the significant equity are well capitalized institutional borrowers have invested in these assets.
Our balance sheet remains strong, with a debt to equity ratio of only 2.6 times and best in class credit facility terms that have been a key differentiator for BXMT during this volatile period. We continue to actively engage with our lenders on our existing portfolio and potential new business and the banks continue to recognize the strength of our platform and consider BXMT a long-term business partner.
We have no corporate debt, maturing until 2022 and 97% of our asset level financing is term matched to the underlying collateral. As of quarter end, 31% of our asset level financing is through non-debt structures, either senior syndications or securitizations, which will increase the 38% when our third CLO closes shortly.
Financing an incremental $1 billion of our portfolio at an 81% advance rate and attractive cash cost of LIBOR plus 1.68. These non-debt structures increase the diversity of our financing sources and further enhance the stability of our balance sheet.
As Katie mentioned earlier, we've begun to see more regular way activity returned to the market and look forward to the fourth quarter as we continue to actively manage our existing investments, and look for opportunities to deploy new capital on behalf of our stockholders. Thank you for your support.
And with that, I'll turn the call back over to Steve.
Thanks, Tony. Before we move to Q&A, I wanted to provide an update on the leadership of our loan asset management function. Tom Ruffing, who developed an institutionalized real estate loan asset management at Blackstone has informed me of his intention to retire in December. Tom and I have worked together for 20 years, and he's always set the group standard for technical knowledge, experience integrity. On behalf of all of my colleagues, I want to thank Tom to wish him the best in retirement.
Tom leaves the group stronger than ever, we are very excited to announce that Rob Sitman, our Managing Director who has been a great player coach and running our transaction legal function, will be expanding his role to succeed Tom as our new Head of Asset Management. Under Rob's leadership, we expect continued great results from our team. Further evolution of the function, and the continued integration of all the Blackstone real estate has to offer in the management of the BXMT loan portfolio.
And with that, I'll turn the -- I'll turn the call over to the operator to open it for questions.
Thank you. Your question-and-answer session will now begin. [Operator Instructions]
And our first question comes from the line of Don Fandetti from Wells Fargo. Please proceed. John, you are live in a call.
Good morning, Don, can you can you hear us? Joanne, its sounds like -- sounds like we might not have Don here.
I'm here. I'm on, sorry guys. So Steve, I was wondering, if you could talk a little bit about your hotel portfolio this quarter? And I wasn't sure, if I heard correctly whether new loan modifications? And then you just remind us a little bit more about how these modifications work from a cash flow perspective?
Sure, I can take that. On our hotel loans, the market is certainly disrupted, but we feel the impact on hospitality is cyclical, not secular. Once the science catches up, and people feel comfortable traveling again, I think the overall macro trends supporting Travel and Leisure will reemerge. We've been highly selective on the hotel lending program. So we're starting with low LTV loans less than 60%, on average. And these sponsors continue to demonstrate that they have equity to protect, and they believe in the long term value of the assets.
So overall, you know, we're seeing strong sponsor performance on the hotel portfolio. And I think that's reflected in the modifications. We do -- on an ongoing basis, we've had a few new modifications, when we reported in the earnings released, the overall scope of the modifications, and they almost always have been coming with very strong new equity commitment from our sponsors to carry the assets through. As far as the cash impacts, we've had almost no interest deferrals. So our sponsors are paying interest. And therefore, the interest is reflected in our income.
So, what's being modified?
Generally, it's pushing out timeline milestones in exchange for more capital. So, you know, the sponsors need more time to implement their business plans as a result of the disruption in the market. And our view is that, with sponsors recommitting to their assets continuing to support their business plans, it's fair to give them more time to be able to implement those business plans. So long as they're investing new capital. That's been our perspective. And that's what we've seen from the sponsors.
And do you think, like, as we get further along in this -- the discussions you're having with the sponsors or owners. Are there any of the hotels that you think are getting closer to where the sponsor says, it's just not worth the equity, the turnarounds too long, and you might be getting closer to a workout? Can you give us a sense on like, that, where you are on that front?
Hey, Don, this is Steve, thanks for the question. We haven't seen any indication of any given up from our sponsors on any of the hotels, they're all top quality institutional assets of the sponsors that have been funding for -- for seven months, and they're in the third quarter of funding operating deficits that are COVID related. As they investment more capital, I think they're likely to continue to invest.
And there is the risk, of course of COVID -- of the COVID period being elongated. But as Katie mentioned, we're starting out with low LTV loans, our sponsors have a lot of equity to protect. They've been acting responsibly. They have the financial wherewithal to continue to support the assets. Our expectation is that will continue. And -- but time will tell us as we go. But I think the quality of our sponsors and the quality of their assets is why we expect a strong performance from our hotels.
And how will we know Steve, as they're getting closer to get an indication of a give off? Is that going to be reflected in a rating? Will you let us know? Like, how will we see that as outsiders?
When we report to you each quarter, if -- we risk rate all the loans. And so if we see a change in performance or outlook on a hotel, that's material, it should be reflected in the risk ratings. And we also do a reassessment of our loan portfolio in conjunction with our CECL review. And so we would likely take a specific CECL reserve or an asset that we felt we saw a significant change in sponsor behavior that we thought would lead to a different outcome on a loan.
Okay. Thank you.
And Joanne, if I could just also, we had a few more analysts enter that queue here. So if we could just ask everybody to limit their initial question to just one question, one follow on and they can rejoin the queue that'd be helpful.
Thank you. [Operator Instructions]
And your next question comes from the line of Stephen Laws at Raymond James. Please proceed. Stephen, you are live in the call.
Hi. Good morning. Following up on the questions on the sponsors, can you talk about any sponsor concentration you have or are there certain sponsors that have a handful or more of loans that have a material risk exposure for your portfolio if they were to experience problems?
We have a really well diversified portfolio. And I would say to the extent we have multiple loans with single sponsors, which we certainly do have some of those. They're very, very strong sponsors. So they tend to be multi-billion dollar AUM opportunity funds, real estate sponsors who we know well and have been doing business with for years.
So I would look at sponsor concentration in some ways as strength rather than a weakness. We want to make loans to very strong sponsors who have the capital, to see their business plans through and protect their assets. I think that is really one of the reasons we've seen such great performance in our portfolio is because we've been extremely selective with the sponsors we lend to. And we're always looking to make sure we have the highest quality of sponsors on our loans.
Great. And as my second question, in digging into the CECL changes in the Q, it looks like you decrease the CECL reserve across funded unfunded and securities in the U.S., increase the CECL reserve for funded unfunded loans in Europe. Can you talk about what drove those decisions? Didn't seem like any material amount of change in portfolio size. So, how should we think about that deterioration in Europe, I guess, an assets there? And I assume it's going to drive originations when those turned on to more likely be in the U.S.? Or how will that impact the future portfolio growth?
Sure, this is Tony here. Fortunately unfortunately the answer to your question is fairly uninteresting. It's FX rates that move the CECL reserves. So as FX rates went up, the size of our foreign loans in U.S. dollar terms went up, and so holding a consistent percentage of a CECL reserve just results in the CECL reserve being higher.
And beyond that, it was really just movements on the margin in terms of estimated loan tenor between the U.S. loans and the non-U.S. loans. So it was really a pretty mechanical changes as opposed to anything I would say is indicative of a real change in our view on credit or any of those types of issues. It's much more operational.
Great. Thanks, Tony. That's helpful.
Thank you. Our next question comes from the line of Charlie Arestia from JPMorgan. Please proceed.
Hi. Good morning, everybody. Thanks for taking the question today. Historically you guys have been -- can you guys hear me?
Yeah.
Yes.
Sorry, about that. You guys have really been focused historically on larger loan sizes probably more limited set of competitors, even pre-COVID. So I'm curious to hear your thoughts on what that competitive environment is really looking like today for the upper end of that market on large loan sizes in top 10 call it NSAs [ph]?
Yes, I think our competitive advantages on being able to make large loans on large, high quality institutional assets, and again with large sponsors who have the capability to invest hundreds of millions of dollars in assets, that continues to be a competitive advantage for us today.
From the competitive environment perspective, we -- there's still capital in the market, as I mentioned on the call, certainly, and we see the reemergence of regular way market activity, and there are lenders and borrowers. But, as has always been the case, we really, I think, occupy a unique position in terms of being able to act on large transactions when we like the real estate, we like the business plans and the sponsors and I don't envision that changing. I think we'll continue to be able to have that that competitive advantage in that sector of the market.
And Charlie, we own assets in almost all the markets where we lend. So, we have the added advantage of the insight from that ownership what's happening with terms of tenant movement market activity. So, it's fairly gives us confidence to make to make large loan commitments when the opportunities arise.
We're slowly seeing a reemergence of opportunistic investing as we work ourselves through this COVID period. So, we do expect loan demand to increase. It's been pretty late so far in terms of the large scale opportunities, but we're hopeful we'll see a pickup in that activity as we roll into the into the next year.
Okay. Thanks very much. And then just as a quick follow-up, I apologize if I missed this, but did you guys discuss what the loan spreads are really looking like on the new origination pipeline?
I would say we're seeing wider loan spreads on the new originations somewhat offset by lower base rates. So, all-in coupons relatively comparable, but I think on incrementally better credit reflecting sort of the current competitive environment and everyone's outlook of know the fundamentals.
Thanks so much for taking the question.
Our next question comes from the line of Jade Rahmani from KBW. Please proceed Jade; you're live in the conference please.
Thank you very much. I was surprised by the increase in interest income, despite loan repayments having outpaced fundings. So, I wonder if you could talk to that what dynamics might be underlying that whether perhaps modifications created additional earnings or there were outsides prepayment fees with respect to those loan repayments.
And secondly, if cash flow performance in the quarter was consistent sequentially or if there was a similar uptick as it relates to the growth we saw an interest income?
Sure, David, hey, it's Tony. So taking those in order. Let say one of the impacts that you're seeing in the income statement, which I mentioned on the call, the prepared remarks is the impact of the LIBOR floors. So as LIBOR has gone down further this quarter versus last quarter, you see more of the benefit of that coming through the portfolio. So that's rolling through earnings. Nothing really outsized, in terms of one-off fees, we've covered on prior calls, we always have a few of those in a given quarter.
So I'd say this quarter was generally within that normal range. You ask the question specifically about loan modifications, which is a good accounting question. Generally speaking these modifications are not considered what you would term major, where you're treating the loan as repaid and originating a new loan, those would tend to create very spiky earnings pops.
But most -- for the most part are modifications, because they're not changing rates and term materially, they are considered a continuation of the existing loan. So I'd say it's much more ordinary course, on the loan side, and it's a little bit of the LIBOR impact that I think you're really seeing come through.
In terms of cash flow, I think Katie mentioned earlier, in the question on modifications, we're generally not changing the payment terms of the loans. And so our cash flow is largely unchanged quarter-over-quarter, our loans are paying -- we cited this statistic earlier that we're basically collecting all of our interest. So it's really a flat story in terms of cash, quarter-over-quarter and earnings also pretty consistent.
Tony, I might just add to that, that in terms of the bottom line, in addition to those top line factors, we had somewhat more efficient cash management in the third quarter than in the second quarter, notwithstanding the elevated liquidity levels. So there's a little bit of a reversion to the mean in terms of our operations generally, that you're seeing as we move through the year.
Thank you for that. That's very helpful. When you think about the acuity issuance that took place last quarter, the term loan B that was done last quarter, but then the most recent CLO? Do you think that those in terms of a cost of capital standpoint, are offsetting?
And so the outlook for perhaps earnings, quarter earnings coming in, in line with the dividend should be viewed as pretty neutral unchanged from an outlook standpoint? Or would you make any comments as to whether we should be modeling any perhaps reduction in the rate of core earnings profile?
Yeah, Jay, it's Doug. We don't make forward looking statements about core earnings. But you're right, that there's several offsetting factors that we've seen sort of at play through 2020 thus far, which has resulted net-net in a very stable core earnings profile. And we've seen that stability reflected in the dividends thus far as well.
Okay. Thanks very much. And just wanted to ask about the two loans that are risk five rated. Now, what do you think that the ultimate credit outcome is for those assets? Do you think that there will be like foreclosure, workouts, sell of the app, sell of the loan? What should we think about that? And maybe if you could also add additional commentary on the 14 loans that are in that risk four category, and recognizing that overall credit performance came in ahead of what we were expecting for the quarter?
Yeah. So I think on the two five rated loans, we took specific reserves on those assets in the second quarter, which we still believe are appropriate levels. As far as the long-term trajectory, the ultimate resolution I think it's a little too soon to say, we closed a modification with our borrower on the hotel loan this quarter, the ultimate recovery, there will really be contingent on cash flow trajectory and what happens to the New York hotel markets very challenged right now.
But I do think over time, the impact on supply with many hotels not reopening, will be somewhat of an offsetting factor and time will tell how the market performs and how our asset performs. And on multifamily asset, it's a very small asset again, still working through with the borrower on that. And I think, again, time will tell it's a little too soon to predict exactly the outcome.
And on the risk four category?
I think our four rated loans, they we have -- we held that for same level quarter-over-quarter the performance has been consistent. Those are mostly hotels we covered, our thoughts on the hotel market a little bit earlier. So, no material update, I think on those loans.
Thank you.
Thanks, Dave.
And our final question comes from the line of Steve Delaney with JMP Securities. Please proceed Steven, you are live in the call. Thank you.
Thank you. Good morning, everyone. And congratulations on the solid quarter. Apologies if you commented on this already, I was late hopping on, on the fourth quarter new CLO, Doug, could you comment on the weighted average spread over LIBOR and the estimated all in cost of that financing? Thanks.
So hey, Steve. The weighted average spread of the notes that we sold was 168 over which is right in line with no cost on our credit facilities. The all in cost will be a function ultimately of the tenor of the deal. And we do think that that would be longer than it might have been sort of under the assumptions we would have had for the CLO in the first quarter, for example. So that'll likely get closer to 200 over on an all in basis. But time will tell to use a phrase ultimately, over the over the life of that financing.
We're very happy with that execution. I think it being a fully match funded execution for a very -- for a significant cross section of our portfolio, including office, hotel loans, multifamily loans, was a great thing, particularly in terms of demonstrating liquidity in the market for the quality of loans that are in our portfolio.
No question. I mean, there have been billion dollar deals, but it's not like -- it's not the norm for sure. So congrats. And then lastly, again, you may have commented on this, but specifically, it sounds like you're approaching new opportunities, cautiously selected, but you are looking and maybe just not seeing enough. But have you actually made any new loan commitments here in the fourth quarter going into yearend?
Yeah. As we mentioned on the call, we have $230 million of new loans in closing, all with repeat sponsors, direct relationships that we've developed those loans, office and some multifamily. So we're certainly seeing opportunities in the market. There's a little bit more transaction activity than we have seen. I expected to continue to be muted relative to pre-COVID levels. But our sponsors are active, they have capital to invest, and we're seeing attractive regular way opportunities, but we'll pursue when we think they meet our criteria for high quality assets, performing loans, good sponsors.
Thank you, Katie, for repeating that for my benefit. That said. And everyone be well stay safe. Thank you.
Thank you.
Thanks Steve.
Thanks, Steve.
Thank you, Steven. I will now turn the call over to Weston Tucker for closing remarks.
All right. Thanks, everyone, for joining us this morning. And please let me know after the call, if you have any follow-up questions.
Thank you. And that concludes your conference for today. You may now disconnect. Thank you for joining and have a very good day. Thank you. Goodbye.