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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Great day, ladies and gentlemen and thank you for joining Blackstone Mortgage Trust Fourth Quarter and Full Year 2017 Investor Call. My name is Latia. I’ll be your moderator for today.
At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.
It is with great honor introducing our host for today, Weston Tucker, Head of Investor Relations. Please proceed.
Great, thanks Latia. Good morning and welcome to Blackstone Mortgage Trust’s fourth quarter conference call. I am joined today by Mike Nash, Executive Chairman; Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; and Doug Armer, Head of Capital Markets.
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 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 sections of our 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. Any references to tax reform in this call do not constitute tax advice and you should consult with your own tax advisors regarding the consequences of investment in BXMT. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.
So quick recap of our results. We reported GAAP net income per share of $0.59 for the fourth quarter and $2.27 for the year. Core earnings were $0.65 per share for the quarter and $2.55 for the year. Last month we paid a dividend of $0.62 with respect to the fourth quarter and based on today's stock price, that dividend reflects an attractive yield of over 8%. 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. In 2017, the benefits of BXMT management by Blackstone, the leading real estate investment manager in the world were evident on both sides of our balance sheet. We originated $4.8 billion of senior loans up 37% from 2016 and grew our portfolio by $1.2 billion to over $11 billion.
To support these originations and future growth, we sourced $4.2 billion of new efficiently priced capital during 2017. That investment and funding activity drove full year core earnings to $2.55, which more than covered our dividends paid.
During the quarter, we originated $1.2 billion of loan. The originations were concentrated in the multifamily asset class and in major coastal markets, matching two of the favorite investment themes of Blackstone real estate.
Multifamily originations contributed about $520 million or 44% of our quarterly loan volume with the Walker & Dunlop JV accounting for $110 million of that total. Loans secured by the industrial property in Boston, office buildings in Atlanta and Northern California and a hotel in Southern California, comprised of the rest of our quarterly originations, consistent with our focus in the coastal markets where we see the highest quality sponsors and assets with the most enduring property value.
We have an additional $1.5 billion of loans expected to close in the coming months and our pipeline of origination opportunities remain strong. We worked the right side of the balance sheet as hard as it left and had a truly extraordinary year funding our business.
In December, we raised equity for the first time since 2015, $396 million at 1.2 times book value, primarily driving the 41% increase we had this quarter to book value per share. Earlier in the year, we issued $400 million of convertible debt with 4.38% coupon and sponsor securitization of a large loan that facilitated $889 million origination.
And at year end, we issued a $1 billion CLO and innovative financing participations in 31 of our loans and a new source of credit for our balance sheet assets. We also added $1.6 million of additional credit facility capacity to fund continued growth in our loan portfolio.
In addition to increasing lending capacity, we've reduced our borrowing costs and added corporate leverage with the convert enabling us to compete more aggressively for less transitional origination opportunities that require lower loan spreads. Increased competition is also driving spreads tighter, which has led to more refinance opportunities as property owners look to improve loan terms.
With interest rates picking up, we've seen pressure on our each year prices including our own, but private asset values remain high and cap rates within the historic healthy spread range to treasuries. There is still strong demand for top-quality properties. Corporate tax relief bodes well for U.S. economic activity and for growth in property revenues to offset the impact of higher interest rates and expense inflations.
And with a 94% floating rate portfolio, our performance benefits from increases in short-term interest rates. Tax reform also provides an additional benefit. Individual shareholders get 20% deduction on REIT dividend income, effectively lowering their maximum federal tax rate from 37% to 29.6%.
Our dividend produces an approximate 8.2% pretax yield in the current share price. At that level, its tax deduction will provide most individual shareholders in the top bracket in the pretax equivalent of another 90 basis points of yield.
BXMT is becoming a leading senior real estate lender and our competitive positioning and recognition in the market have never been stronger. The majority of our loans are with repeat borrowers, the greatest endorsement of the way we do business and our differentiated client centric approach.
Our loan portfolio has an overall origination LTV of 61% and is 100% performing. With this attractive yield, we believe the value proposition of investing in BXMT with Blackstone management remains highly compelling for shareholders.
With that I'd like to thank you for your interest and support and I'll turn the call over to Tony.
Thank you, Steve and good morning, everyone. Steve already covered our 2017 full-year results. So, I'll jump right into the fourth quarter highlights. We reported GAAP net income of $0.59 per share and generated core earnings of $0.65, both down slightly from the third quarter. This decrease was in part due to $0.02 of additional prepayment income generated in 3Q as well as the dilutive impact of our $392 million Class A common stock offering in December.
As with any stock offerings, we immediately used these equity proceeds to revolve down our credit facilities, to manage our balance sheet and reduce the J curve impact of new equity on earnings per share. However, some decline in earnings is unavoidable until these proceeds are fully deployed into new loan originations.
For context, all else equal, had we issued these shares on October 01 instead of December 05, our core earnings for 4Q would've been approximately $0.61 per share as a result of this dilution. As Steve mentioned, we have a robust pipeline of new investments and therefore anticipate the earnings dilution to taper over the first half of 2018.
Importantly, we are proud of executing this offer 1.2 times price-to-book, capturing a favorable price for our stock and driving a $0.41 increase in book value per share during the quarter. As we've mentioned on previous calls, our book value is not generally subject to significant fluctuation over time as our loan portfolios has held for long-term investment and we do not own any mark-to-market securities or long dated fixed rate assets.
Accordingly, although we have seen some pressure on our share price following the broader market in REITs in general, we do not anticipate this capital market's volatility to translate to our balance sheet given the floating rate nature of our business.
As Steve mentioned, our 4Q originations totaled $1.2 billion bringing our total portfolio to a record $11.1 million up 14% from 2016. These loans are all floating rate senior loans with an average origination LTV of 63% secured by institutional real estate in major markets.
Loan fundings during the quarter totaled $1.3 billion outpacing $875 million of repayments and benefiting from $227 million funded under previously originated loans. Our portfolio remains 100% performing with an average origination LTV of 61% and risk rating is largely unchanged at an average of 2.7 on a scale of one-to-five with only one $21 million four rated loan in our portfolio.
On the right-hand side of our balance sheet, we had an active quarter led by inaugural $1 billion CLO issuance, providing $818 million of nonrecourse term match financing for 31 of our loans with a weighted average cash coupon of only LIBOR plus 1.21% on notes sold.
This innovative structure includes a replenishment feature, which allows us to maintain the 82% advance rate of the initial tenant loans repay reducing the effective cost of financing these loans. This CLO issuance coupled with our $392 million equity raise in December, reduced our debt-to-equity ratio to only 2.0 times down significantly from 2.6 times as of 9/30.
Available borrowings under our revolving credit facilities comprised the majority of our $681 million of liquidity at quarter end, which amount is available to us for future investment activity.
Lastly as Steve mentioned, we are excited to see the impact of the recently enacted federal tax reform on our business in the REIT sector in general. Under the new laws, REIT dividends are entitled to a 20% deduction by individuals owning the stock, effectively reducing the top marginal tax rate on this income to 29.6% from 37% for bonds and other fixed income products not benefiting from the REIT structure.
Accordingly, all else equal, on an after-tax basis our $0.62 dividend is equivalent to $0.69 of income from such non-resources. We're pleased with our results for the fourth quarter and full year 2017 and we look forward to generating continued value to our shareholders in the future.
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 Don Vandine with Wells Fargo. Please proceed.
Hi. Good morning, Don.
Please check your mute feature at this time, Sir. Your line is open.
Yes. Hi Steve. How are you doing. Quick question on rates. The 10-year yields moved up obviously and one of the things you worry about would be what the impact would be on the ground in terms of the real estate property markets?
I guess my first part of the question is have you seen a slowdown in the velocity of transactions and two, would you expect that to happen? So that's my question.
I haven't seen -- I don't think we've seen a slowdown yet Don. It depends upon how far back you want to go from a rate standpoint, but the transaction activity is still solid in the market. And I think what we're seeing now is the pickup in economic activity. I think the benefit of tax reform I think has already being felt in terms of corporate activities.
We expect to actually leasing velocity to pick up. This to be -- the overall economic impact to be positive for net operating income and the scenario that you want to see with higher rates in that is coinciding with economic growth, higher economic activity and more operating income for real estate.
Okay. And then on the CLO, what is your -- how should we think about the all-in cost of that issuance, let's say relative to your bank financing?
Hey Don, its Doug. That's a great question. The all-in cost will ultimately be a function of the tenor of the CLO and as Tony mentioned, we've got some structural features in this transaction that'll enable us to really maximize the efficiency of the financing.
I think we expect the all-in cost to be below 200 over. So, another 25 to 50 basis points of noncash cost that will amortized in overtime on top of the cash coupon.
Okay. Thank you.
Your next question comes from Douglas Harter with Credit Suisse. Please proceed.
Thanks. Doug just following up on that last question. How should we think about how long -- what the tenor is of how long you stay at that 82% leverage before it starts to pay down?
That's a great question. Obviously, it's a function of the prepayment speed of the loans that are collateral in the pool. And so, it'll be a little bit of a random walk. I think the important thing to understand is that we built in some structural features replenishment and also some ability to maintain flexibility in terms of extensions and modifications of the underlying loans to maximize that tenor.
So, a typical weighted average life for BXMT loan is probably in the three-year range and so our expectation is that we'll be able to push the period out at least that long.
Great. And that -- the all-in cost that your referenced to Don's question, does that factor in kind of your expectations for how this CLO pays them?
No. It does in terms of the additional 25 to 50 basis points, but I think with regard to the potential for rate creep or deleveraging, we'd expect to refinance the portfolio as that comes to pass. Again, that's going to be several years out, so we'll make the decision at the time based on market conditions, then we do of course have the option to maintain the CLO as term financing.
But I think in terms of optimizing the all-in cost would be more likely to call the CLO then have it significantly de-lever or have the rate creep in the out years beyond the three to five-year horizon that we foresee.
Very helpful. Thank you.
Your next question comes from Jessica Levi-Ribner with B Riley FBR. Please proceed.
Good morning. Thanks so much for taking my question.
Good morning, Jessica.
In terms of the credit environment that you're seeing, I know Steve you made comments that there is still strong demand for high quality properties. What kind of credit are you seeing in terms of just on the broader market?
I know that your portfolio is still 100% performing, but is there anything that's concerning to you more so than last quarter with this rate increase and if you can talk a little about that?
Sure. Jess, I would say not really. I don't we've seen a change. I think credit quality in our portfolio and what we're seeing in general remains strong. I think we're still at a good point in the cycle. Property operations and overall leverage in the market are at healthy levels.
So, I haven't seen any impact yet and I think if rates stay in the range they're expected to be in, then I don't foresee any impact from treasury in the three or in the low three's. I think the fundamental backdrop is still very strong.
Have you seen any competitors out of the market because of the higher rates and maybe some of the spread tightening?
I wish some of the competitors would fall out of the market. No, we haven't seen it. The private loan market remains very competitive and so we haven't seen competitors fall away and we are I think from a competitive standpoint feeling very good about our cost to capital and our ability to compete, but not because anybody is leaving the market unfortunately.
And then one last one just in terms of construction lending in '18, you made some comments around participating in last transitional landing, but how you -- are you still thinking about construction lending as attractive? Has anything changed there?
No. I think we still see construction lending as attractive. We didn't close any construction loans in this past quarter. So, I talked about it being plus or minus maybe 10% of what we do. We continue to look for unique construction loan opportunities that seem well priced that don't fit the profile of the banks.
The bank's reluctance to fund construction loans hasn't changed. So, I do think we'll see opportunities to commit to new construction loans as we go forward in 2018.
Okay. Thank you. That's it for me.
Thanks Jess.
Your next question comes from Steve Delaney with JMP Securities. Please proceed.
Thanks. Good morning, everyone. You provided us with a great chart on Page 6 of your deck on the strong execution of [FL1]. When you look at that and the carving off of about 30% of the loans into an A2 participation, is there a structural reason why you couldn't take another 30% of the whole loan and create an A3 and then look to do another CLO? Thanks.
Steve, hey it's Doug. That's a great question, maybe a little bit of a leading question, but no there's no structural reason why we couldn't do that. The one thing we do keep in mind is the point that we were making previously with regard to the expected life of the CLO and the amortization of the upfront cost.
So, I think looking at that static pool of 31 loans we would make an evaluation about what the expected life of those would be. One other thing to keep in mind is that it's not an all or nothing decision. So, we could carve a couple of A3 notes off of half of the pool and combine them with some new loans and collateralize the new CLO with that kind of a pool.
So, I think you'll see this technology used very efficiently in future financings for the company.
Understood. That's very helpful. And the increase -- the relative increase in multifamily, I understand Steve, your view that that's just an attractive asset class in general. I'm just curious when you start talking to CLO investors, is the mix of multifamily important to those investors versus other property types and is that in some way driving -- making [MF] that much more attractive to you because of the financing, thanks?
I think you'll we really have pursued the multifamily asset class because we just like the fundamental of housing in this country and so that's really what's driving our efforts to increase our loans in the sector and it's nice to see that we have some success.
Multifamily does actually perform well in these securitized structures. I also look at that as an added benefit of not the reason for it. The reason for it is our fundamental belief in how the real estate will perform.
Okay. Thanks. And one final thing for me on loan spreads, looking at Page 12 it looks to me like the 538-cash coupon based on where one-month LIBOR was at year-end, puts your average spread at about 380 basis points.
And Steve all the commercial mortgage REITs commented over the past year that spreads were tightening and we heard ranges anywhere from 50 basis points to 75. I was just curious if you can give us some insight as to how your current originations whether it was in the fourth quarter loans or where you're pricing loans now, how that compares to the portfolio average LIBOR spread of about 380, thanks?
I would say in general that spreads are tightening and if I had to throw a number our there, I would say we've seen 50 basis points we saw a tightening in the last 6 to 12 months. In our case, we've had the benefit to offset much of that with improved funding costs and a little bit of corporate leverage.
So, we've been able to maintain our competitive ability despite the compressing spreads.
Okay. Thanks for the color.
Your next question comes from Jade Rahmani with KBW. Please procced.
Thanks very much. a follow-up to Steve's question on spread tightening. What about year-to-date? Have you seen continued pressure on spreads and on the fixed rate side, where I believe there's been spread widening is there any origination potential there?
I think that the spread trend from recently has begun to slow. We saw a lot of spread tightening coming into the first quarter. So, I do think the level of spread tightening has begun to moderate. As it relates to fixed rate lending, I think we have over a longer period of time if we could find a way to add some fixed rate loans into our portfolio, then they’ll be really beneficial.
Floating rate loans work better in our model and are better matched to how we finance ourselves, but we constantly look at how we can expand our lending envelope and if there is an opportunity for us to create shareholder value, with fixed-rate loans, then we'll add fixed rate loans to the mix.
In terms of time financing capacity, can you comment on your appetite for additional CLO issuance as well as the one of $1.5 billion of loans in the pipeline if there's any, if you believe current financing capacity is adequate to close those loans?
Hey Jade, it's Doug. Great question, we do have over $2 billion of current financing capacity on our credit facilities, which would accommodate the $1.5 billion in the pipeline and we also do you have the ability obviously to do another CLO transaction that -- CLO that we do in December generated $800 million plus of capacity.
We took those collateral interest off of our revolving credit facilities to open up some room there and we can do that again. The other thing I'd note is that we have almost $2.5 billion of upsizes and new facilities currently in process. So, we're continuing to generate capacity within the credit facility space.
We're continuing to work the CLO angle and we're very confident about our ability to debt fund growth in the balance sheet to the tune of even $3 billion and $4 billion.
The cost of issuance on the CLO, I think we estimated it was around $10 million or perhaps a little bit higher. Was that outsized due to the inaugural CLO and the size of the CLO so that subsequent financing costs or those issuance costs would moderate?
I wouldn't describe it is outsized and that number isn't a number that we've disclosed. So, I'm not sure where that comes from, but I think you are right that future CLO's will be more efficient way in particular with regard to the legal cost that relate to developing the technology.
So, we think that both the cash coupons will come down given market dynamics and we also think the upfront cost will be lesser going forward.
Thanks. And the number we calculated was just looking at the cash flow statement disclosure and just lastly, want to find out if there are any other business lines you view as interesting or complementary to the current models or you expect to stick to primarily the floating rate transitional space?
We continue to see great opportunity Jade in our bread and butter business. We saw that it grew by 37% from a topline standpoint. In portfolio growth last year, we have really good momentum going into 2018.
We still think that what we do is really the best use of the capital that we have and provides really great returns for our shareholders. So, we love our core business. We continue to evaluate anything that we think we could add on to it that would increase shareholder value and continue the great growth and liquidity for shareholders.
That won't change, but for the time being, we're really liking our core business and think it's really hitting on all cylinders.
Thanks very much.
You're welcome.
Your next question -- final question comes from Rick Shane with JPMorgan. Please proceed.
Hey guys. Thanks for taking my questions this morning. Most have been asked and answered, but I would like to talk a little bit, this is the first quarter that we've seen in a while where funding is actually -- or fundings exceeded originations in the last several quarters. There's been a pretty significant gap.
I'm assuming that this is a function of the construction lending starting to come through the portfolio, but like to think about how we should see that relationship going forward?
We've measured a little bit on our prior calls, but what we have seen meaningful funding each of the recent quarters, for loans that originated in prior quarters. It's primarily the construction loans. So, it was over $200 million this quarter of loans that -- of advances that we made in loans that were originated in prior periods.
So, if the impact of adding one or two loans without having to actually originate them in real time in the quarter. So, it is nice. We've talked about it for a while. So nice to see it come to pass. We didn't originate any new construction loans in Q4. So, we didn't originate loans that had a lot of unfunded commitments, which in part explains the fundings exceeding the originations.
But the funding -- the positive funding balance you saw in the quarter is really beneficial with our old unfunded commitments funding and the new pipeline being very strong. We expect to see some meaningful positive balance in fundings.
Got it. That make sense actually in terms of the relationship with no new originations in the construction space. As we move into 2018, you just mentioned about $200 million of fundings related to draws on the construction lines. What's a reasonable number to think about -- let's not worry about quarterly number, but let's think about an annual number, how much do you think could be drawn or is remaining to draw on those facilities?
Doug, do we have a number?
The total of unfunded commitments is over $1 billion. I think during 2017, the number was $486 million for the year as a whole. It was a little bit skewed toward the fourth quarter as you pointed out at $215 million. So, with the construction loans fundings are in full swing. I think you'd expect to see a number similar to that in 2018.
Rick, one of the to add is that, it's not just construction loans that provide the future funding for loans property previously originated. One of the transitional loans that we make also have unfunded commitments when they close for renovation and lease up. It's a meaningful component of the transitional lending space.
So really, it's a combination of those two and it really is a nice feature. The portfolio is a little bit more mature of having those fundings rolling it.
Got it. We assume though that the construction loans are much more likely to draw closer to the maximum capacity versus the transitional loans where that's basically cushion for them.
The transition loans, the construction loans funding is based upon the progress of construction at least initially that may be ultimately on the leasing and the funding of tenant improvements and leasing commissions.
The renovation loans, some of it is construction in the buildings and a portion really relates to future leasing and we do expect a meaningful amount of that to be drawn as well. So, I think the future fundings on previous commitments will be significant and it's something you should definitely be taking a look at.
Thanks guys.
Thank you, Rick.
I will now hand the call over to Weston Tucker for closing remarks.
Okay. Thanks everyone for joining us this morning. If you have any follow-up questions, please reach out. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now all disconnect. Enjoy the rest of your day.