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Final Transcript
Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call
July 27, 2016/10:00 a.m. EDT
SPEAKERS
Michael B. Nash – Executive Chairman
Stephen D. Plavin – Chief Executive Officer
Douglas N. Armer – Head of Capital Markets
Anthony F. Marone – Chief Financial Officer
Weston Tucker – Head of Investor Relations
ANALYSTS
Steve Delaney – JMP Securities
Jessica Ribner – FBR Capital Markets
Jade Rahmani – KBW
Don Fandetti - Citigroup
Douglas Harter – Credit Suisse
Rick Shane - JPMorgan
Ken Bruce – Bank of America Merrill Lynch
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 2
Coordinator Good day, ladies and gentlemen, and welcome to the Blackstone
Mortgage Trust Second Quarter 2016 Earnings Conference call. My
name is Derrick and I’ll be your operator for today. At this time, all
participants are in a listen-only mode. We shall facilitate a question
and answer session at the end of the conference. (Operator
instructions) As a reminder, this conference is being recorded for
replay purposes.
At this time, I would like to turn the conference over to Mr. Weston
Tucker, Head of Investor Relations. Please proceed.
W. Tucker Great. Thanks, Derrick. Good morning everyone, and welcome to
Blackstone Mortgage Trust’s Second Quarter Conference call. I’m
joined today by Steve Plavin, President and CEO; Mike Nash, Executive
Chairman; Jonathan Pollack, Head of Blackstone Real Estate Debt
Strategies; Tony Marone, Chief Financial Officer, and Doug Armer,
Head of Capital Markets.
Last night we filed a 10-Q and issued a press release with a
presentation of our results, which hopefully you’ve all had some time to
review. I’d like to remind everybody 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
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 3
discussion of some of the risks that could affect results, please see the
Risk Factor Section of our most recent 10-K and 10-Q. We do not
undertake any duty to update forward-looking statements.
We will refer to certain non-GAAP measures on this call and for
reconciliations, you should refer to the press release and our 10-Q,
which are posted on the website and which have been filed with the
SEC. This audio cast is copyrighted material of Blackstone Mortgage
Trust and may not be duplicated without our consent.
So, a quick recap of our results before I turn things over to Steve. We
reported GAAP net income per share of $0.67 for the second quarter.
We also reported Core Earnings per share of $0.67, which was up from
the $0.65 in the first quarter.
A few weeks ago, we paid a dividend of $0.62 per share with respect to
the first quarter equating to an attractive dividend yield of nearly 9%. If
you have any questions following today's call, please let me know. And
with that, I'll turn things over to Steve.
S. Plavin Thanks Weston, and good morning everyone. BXMT delivered strong
results in the second quarter, with healthy origination activity and
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 4
continued expansion of our credit capacity, a key driver of BXMT’s
strong asset level ROI’s.
The BXMT origination performance through the first half of the year
reflects the success of our client-centric, balance sheet lending strategy.
We closed high quality business throughout the period, despite a
turbulent lending environment which constrained deal flow. While
many lenders retreated early in the year, we maintained our pipeline
loans and sought to originate more.
By early second quarter, credit markets had improved. More borrowers
came off the sidelines and our pipeline expanded. Transaction activity
in the property market is what makes our loan origination business
tick. We don’t need an opportunistic environment. A balanced market
with high levels of regular way transactions, the conditions we are
experiencing now in the US, provides an excellent backdrop for BXMT.
As a result, our new origination activity and pipeline remain strong. We
closed $859 million of loans in the quarter. The new loans were
primarily backed by office buildings located in the major U.S. markets
where our portfolio is concentrated. The $161 million average size of
our Q2 originations reflects our continued focus on larger loans
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 5
secured by major market assets where we can best utilize our
competitive advantages as part of Blackstone real estate.
Since quarter-end, we’ve already closed or have in the closing process
another $1.1 billion of loans, reflecting the uptick in transaction activity
that began in Q2.
To finance all of our activity, we continue to expand our lender base
and debt capacity. We added $1.4 billion of new credit facility capacity
during the quarter. We also closed additional asset specific financings
to round out a very strong quarter of credit expansion from a diverse
group of providers.
Our credit facilities —term, currency and index matched— help drive
our gross, asset level ROI’s which averaged 13.64% on originations
closed in the first half of the year. These ROI’s are well in excess of
comparable B-Note and mezzanine returns, even with our moderate
LTV, senior mortgage loan portfolio. Our secured corporate credit
facilities, structured to price inside of A-Notes, more efficiently lever
the equity invested in our loans.
Perhaps the most newsworthy event of the quarter was the Brexit vote,
which occurred in late June. The initial market reaction in the U.S. was
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 6
negative, but that quickly reversed and the equity markets established
new record highs.
For BXMT, 13% of our loan portfolio is secured by properties in the
UK- a mix of office, hotel and retail assets with an average origination
LTV of 61%. The collateral assets we anticipate being most affected by
Brexit are the transitional office buildings located in London, where
leasing activity is likely to slow. We have four loans secured by London
office assets. They have an average origination LTV of 48% and
represent 2% of our loan portfolio. We believe that the equity cushions
in these loans are more than sufficient to cover any reductions in value
that may occur.
We are hopeful that new European opportunities will emerge post
Brexit as competitive bank lending, now chilled, had made it very
difficult for us to compete. Because of the pre-Brexit market
conditions, we originated only one new loan in continental Europe and
the UK in the first half of 2016.
Brexit may have an additional consequence of increasing the focus of
global investment activity on US real estate where we expect values in
the major markets that we target to remain strong. Global demand for
stable investment opportunities and positive yields is accelerating as
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 7
we face an extended period of low or even negative interest rates
around the world.
Many of you on the call today will remember that we had one risk rated
4 loan in the portfolio over the last three quarters. We acquired the
loan from GE last year and, at that point, it had an outstanding loan
balance of $120 million. Our asset management team restructured the
loan in Q4 of last year which has led to a series of collateral asset sales
executed by the borrower. We are very pleased to report that during the
second quarter, the loan was repaid by an additional $43 million and
now has an $11 million remaining balance and an upgraded risk rating
of 3.
Our loan portfolio generated significant liquidity for BXMT in the
second quarter. The $966 million of repayments we received fully
covered our originations and we expect a continued active repayment
pace while our pipeline remains strong. We ended the quarter with
liquidity of $612 million, which translates to $2.3 billion of lending
capacity.
In closing, BXMT’s steady performance, despite the shifting and
volatile market backdrop we experienced in the first half of 2016,
demonstrates the strength and stability of our pure play, senior
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 8
mortgage business model. Our borrowers, many of which are repeat
customers, continue to seek our capital because of our reliability and
reputation for fair dealing. We appreciate the great relationships that
we have established with our borrowers as well as our lenders. For
stockholders, BXMT’s stable dividend currently yields 8.7%, a highly
attractive value proposition in today’s low-rate environment.
With that, I will turn it over to Tony.
T. Marone Thank you Steve, and good morning everyone.
This quarter, BXMT continued to deliver for its stockholders, with
strong earnings results, robust originations, and increased financing
capacity. Against a backdrop of continued market volatility and
geopolitical events during the quarter, our senior lending business
continues to shine.
We originated four new floating-rate loans and upsized three loans
during the quarter, for a total origination volume of $859 million. The
loans we originated in 2Q have an average yield of LIBOR plus 4.7%,
with an average LTV of only 57%. This compares to our current
floating-rate portfolio average yield of LIBOR plus 4.4% and
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 9
origination LTV of 61%, as we are able to lend at higher yields given the
favorable market dynamics Steve mentioned earlier.
Total loan fundings during the quarter of $848 million was in-line with
repayments of $966 million, as our pace of loan originations and
repayments have begun to converge with the seasoning of our portfolio.
We expect this trend to continue in the near-term; however the exact
timing and amount of originations and repayments may vary
somewhat from quarter-to-quarter. During the second quarter, the
majority of our loan originations closed earlier in the quarter, with new
loans outstanding on average for two-thirds of 2Q. On the other hand,
repayments occurred on average just about mid-quarter, resulting in a
larger portfolio outstanding during the quarter than we have on our
6/30 balance sheet and generating about $0.01 of additional earnings
for Q2.
Our portfolio continues to have no defaulted or impaired loans, and
following the upgrade of the previously “4” rated loan Steve mentioned
earlier, we no longer have any “4” or “5” rated loans. Our overall
portfolio LTV of 62% and risk rating of 2.3 (on a scale of 1-5) is
consistent with prior quarters, demonstrating the strong credit profile
of our loan book.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 10
We financed our 2Q originations primarily using our existing revolving
credit facilities, which had an all-in cost of LIBOR + 2.04% at quarter-
end. During the quarter, we closed $1.8 billion of additional financing
capacity, including $1.3 billion of upsizes to existing revolving credit
facilities, $381 million of additional asset-specific financings, and a
new $125 million revolving corporate credit facility. This facility
provides additional flexibility to our capital structure and is designed to
finance new originations on an interim basis as a bridge to a future
senior syndication or long-term pledge under our $5.5 billion of
revolving credit facilities.
Turning to our operating results, we generated Core Earnings of $0.67
per share, up $0.02 from 1Q largely as a result of the higher intra-
quarter portfolio peak I mentioned earlier. We have maintained our
quarterly dividend at $0.62 per share, a 9% yield on yesterday’s closing
price, and an amount we clearly cover with our Core Earnings and that
we believe is sustainable and supportable given the scale of our
business. GAAP net income of $0.67 per share increased more
significantly than Core Earnings, up $0.06 from 1Q. This incremental
increase is driven by non-recurring mark-to-market income related to
our CT Legacy portfolio, which is carried at fair value and continues to
liquidate in the ordinary course. Notwithstanding the results of any
particular quarter, we believe that our Core Earnings will continue to
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 11
trend toward the expected run-rate of $0.62 per share over the
medium term.
Our book value increased to $26.54 from $26.53 at 3/31. Although the
increment is only $0.01, we believe this is a compelling statistic in light
of the foreign currency devaluation some companies experienced
following the Brexit vote in June. As we have highlighted on previous
calls, we finance our assets in local currencies, eliminating a significant
majority of foreign currency risk in our investments. Further, we hedge
a significant portion of our non-US Dollar equity using forward
contracts, further limiting our net foreign currency exposure. On a net
basis, we recorded an unrealized foreign currency loss of only $0.08
per share following a 7% decline in the pound and 2% decline of the
Euro against the dollar during the quarter. This modest decline of 0.3%
of book value was more than offset by retained earnings during the
quarter, for a net increase of $0.01 per share.
In terms of capitalization for our business, at 6/30, our debt-to-equity
ratio of 2.5x and total leverage of 3.1x are both in line with where we
began the quarter as the converging pace of loan originations and
repayments allows us to self-fund new originations while maintaining
consistent equity deployment. On the capital markets front, we will be
filing an updated shelf registration and prospectus supplements for our
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 12
ATM and DRIP programs later this week. These ordinary course filings
are not in connection with an offering, but will allow us to take
advantage of any compelling market opportunities that may arise in the
future.
To close, I would like to highlight some key thematic differentiators of
BXMT that are reflected in our 2Q results, and in our overall $10
billion senior lending business:
We remain highly correlated to increases in USD LIBOR, with an
increase of 50bps generating approximately $0.04 of additional Core
Earnings on an annual basis.
Our earnings are entirely driven by the net interest income generated
by our portfolio, without reliance on the securitization or other
transactional markets.
We generate returns for our shareholders by making fundamentally
low-risk senior loans and financing them prudently with best in class
credit facilities free of capital-markets-based margin call provisions.
And lastly, BXMT is uniquely positioned among mortgage REITs and
specialty finance companies as a component of Blackstone's real estate
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 13
business, providing us with expertise and market insight that drive
every facet of our business.
Thank you for your support and with that I will ask the operator to
open the call to questions.
Coordinator (Operator instructions.) Our first question will come from the line of
Steve Delaney, JMP Securities.
S. Delaney Thank you, and good morning, everyone. So looking at the second
quarter origination activity, this maybe an oversimplification, but it
looks the current opportunity in the market is offering Blackstone
Mortgage more yield for less risk in terms of LTV than you had
generally seen over the last two years.
I'm just curious if there is anything specific about the loan mix or a
couple of higher yielding loans that may have pushed things up a little
bit in terms of the spread over LIBOR, or is my description of the
market opportunity looking like more yield for less risk is that a
reasonably accurate description of what you're seeing? Thank you.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 14
S. Plavin Thanks for the question, Steve. I think some of the originations that we
closed in the second quarter were carried over from being originated in
Q1 during a period of time of high volatility and wider spreads.
There is a little bit of lag between origination and closing. So you do see
the benefit in the Q2 closings of the Q1 market environment. Spreads
have moderated since the end of the first quarter. Although I think
we'll continue to generate gross ROIs in the same ranges as our historic
levels, a couple of the loans that we closed in Q1 really benefited from
having gone through that very turbulent period.
S. Delaney Got it. That's helpful to have that color and certainly first quarter was a
unique period and I guess that is another reason why you guys try to
maintain a lot of liquidity so that you can be opportunistic if you do see
those stress conditions and take advantage of it.
Something more specific, I was listening to a hotel analyst today on the
morning call and she mentioned that three of her hotel REIT's had just
in last 24 hours had dropped their RevPAR guidance.
Now hotels are I think 19% of your portfolio. It's your second highest
property type behind office. We just appreciate any comments about
how Blackstone sees the hotel market today and from a lending
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 15
standpoint and within your portfolio if there are any defensive
characteristics that you would point to in your portfolio? Thanks.
S. Plavin I think, Steve, what we've seen in the hotel sector is obviously the
deceleration of RevPAR growth. Growth in most markets and most
markets that we’re active in as a lender is still positive, which is again
at a slower pace.
I think we'll begin to see more and more hotel lending opportunities as
a result of the REITs being somewhat on the sidelines and not being as
active buyers as they have been historically.
We're very cautious on full service hotels and hotels in general, which
are most of the deals that were declining. I do think there will be some
special situations out there that will enable us to make very strong
hospitality based loans, but it's definitely an asset class to view
cautiously.
S. Delaney Got it. And I think that's where we can read into it, it seems like most of
your activity in the second quarter was office, would you describe that
as maybe the most appealing sector for you right now from a property
type standpoint?
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 16
S. Plavin I think it really varies market to market and situation to situation.
We're opportunistic, so we can find good loans in all property sectors
and we try and support our client activity. If we see situations that we
think are subject to greater risk and we don’t pass, then we'll lend less.
Our LTVs reflect the potential volatility in our loans. So our low LTVs
give us a lot of protection from any kind of performance issues that
may exist in hotels or in any other property sector that we're active in.
S. Delaney Good point. Well, thank you for the color. I appreciate it.
S. Plavin Thanks Steve.
Coordinator The next question will be from the line of Jessica Ribner, FBR Capital
Markets.
J. Ribner Hey guys. Thanks for taking my question. Just to kind of piggyback off
of Steve's question, are there any loan types or sectors that you're
staying away from in the current environment or is it kind of business
as usual?
S. Plavin I think as we get further into the cycle, we become more and more
cautious and spend more time thinking about where things could
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 17
migrate to. We're focused on larger assets in the major markets,
markets where we see dynamic demand for space and I think there are
still good opportunities in those markets.
We actually see values increasing in those markets given the view of
low rates persisting, maybe for even longer than what people thought,
and more capital coming into the U.S. and finding its home in real
estate in those more liquid, major markets.
So we're sticking to our knitting, focused on larger loans, top sponsors
and better assets. We're not choosing the current market situation to
go and venture into secondary and tertiary markets and we don’t think
the primary markets are oversold.
We think that the opportunity to lend in those markets and in all asset
classes is good as long as you have the information that we have and a
realistic view of what might happen in the future.
J. Ribner Okay. Thank you. And just a quick question on your earnings run
rate/dividend, I know you mentioned the $0.62 run rate, but it looks
like you've been pretty easily covering the dividend. How do we think
about that?
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 18
D. Armer Hey, Jessica, it's Doug. If you look back over the last four quarters,
you’ll see we have covered the $0.62 dividend pretty healthily. That's
been a function of a couple of different factors mostly related to the GE
loan acquisition: the additional leverage and the relatively short term,
but high yielding fixed rate loans that we took on in that acquisition.
Those play through our results and will continue to play through them
through 2016 into 2017.
So we sized the dividend to be sustainable for the long term based on
our floating rate senior mortgage business, and we're continuing to see
some accretion to that on a less recurring basis through 2016.
In this quarter, we had a good deal of repayments. Some of those
repayments came with prepayment penalties and other non-recurring
items that increased earnings a little bit more than the street expected
and more than the run rate might indicate.
We do expect that to continue sporadically through 2016 and into 2017,
it’s part of our business and it does add a little bit to our yield. So the
dividend is sized conservatively and we're very happy to cover it at
105% to 110% on an ongoing basis.
J. Ribner All right. Fair enough. Thanks so much.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 19
D. Armer Thanks, Jessica.
Coordinator The next question will be from the line of Jade Rahmani, KBW.
J. Rahmani Thanks for taking my questions. Just to clarify on the dividend
commentary including what was said in the opening remarks, based on
the run off of the fixed rate, high yielding portfolio and the
prepayments that you’ve been receiving, once that process is complete,
do you believe that recurring core earnings will match that current
dividend level?
D. Armer Jade, hey it's Doug. We don’t give guidance regarding future periods
that specifically. But I would say that if you think about our dividend
policy in general, you’ll see we've set it conservatively, set it at a level
that we believe is sustainable. So I think it stands to reason that we'll
cover that dividend going forward, we wouldn’t have set it there if we
didn’t think so.
J. Rahmani Okay. Just wanted to ask about equity issuance and how you think
about that, it seems that the last couple of quarters repayments are
running close to or slightly in excess of originations over the last say
several quarters particularly this quarter.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 20
So where the stock is currently trading and it’s up modestly today
would you be contemplating any equity issuance and if you made that
decision, what will drive it? Would it be a specific opportunity?
S. Plavin Jade, we feel really good about our liquidity and the firepower that we
have in the business today. You're right in that our repayments have
been in sync with our originations and have been providing us with
liquidity to fund the business.
We look at equity issuance dependent upon where we see the
opportunities to deploy capital in our business. If the deployment
opportunities expand, and we're hopeful that they will, then we'll look
at issuing more equity when we need it for our business.
That’s predicated upon where the stock would be trading as well. We
want to sell stock into a market with a strong demand and when we’re
priced more fairly than where we see it today. But at the moment, we're
very satisfied with our current liquidity and the outlook in terms of
originations and repayments.
J. Rahmani Thanks. And what are your thoughts on diversifying the business
model? So far you’ve stuck to your niche in the first mortgage space
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 21
primarily, are there other sectors that could be attractive such as triple
net lease or even special servicing or are there other ways to diversify
by extending duration or doing more fixed rate lending?
S. Plavin We believe that the business that we run at BXMT, the floating rate
direct origination model, is the best use for our capital and we have
plenty of legs in the business model. So we haven’t really felt any need
to diversify to what we view to be the second and third best alternative
for our capital.
That continues to be the case as we go forward. We believe that the
dividend that we produce is more stable and has a lower volatility than
those that are involved in these other activities, which are inherently
more volatile than generating dividends from a portfolio of senior
mortgage loans.
So we’re pleased with where we are, notwithstanding that we look at all
the alternatives to expand to make our business better to create more
value for our shareholders. If we saw something that we thought was
truly complementary and additive, then we would certainly give serious
consideration to add it into the mix.
J. Rahmani Thanks very much for taking my questions.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 22
S. Plavin You’re welcome.
Coordinator Your next question will be from the line of Don Fandetti, Citigroup.
D. Fandetti Steve, there are some concerns in the market about commercial real
estate property values being at very peak levels, you're seeing this feel
pretty good at least in the near-term just given liquidity, can you talk a
little bit more about what gives you that confidence?
And then secondarily, the early repayments that you're seeing over the
last quarter or two, are they just normal repayments where the
borrowers is just going for permanent refinancing or is it more
opportunistic?
S. Plavin I think on the repayment front, we're seeing a mix of repayments from
property sales and from refinancing. Some of the GE loans that we had
in the portfolio were fixed rate loans and when the call protection
expired they’ve been repaid.
Some of the GE loans in the residential sectors have Fannie and
Freddie alternative take outs, which are obviously at much lower rates
than we’re able to offer.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 23
But in general, our asset management activities are focused on
maintaining the loans that we feel are strong in our portfolio. We've
had good success in extending the duration of the loans that we feel are
very additive and appropriate for us to maintain. That will continue to
be the focus.
But in a liquid market like today, we'll still see a lot of repayments and
this generally is correlated with origination activity. When we see more
opportunities to lend, it is more likely that our existing loans will be
impacted by the strength of property performance and debt market
conditions.
As it relates to valuations, a lot of what we we’re seeing relates to yields
in the market. Cap rates are still well in excess of treasury rates and the
spread between cap rates and treasuries are still historically wide.
We don’t see any upward pressure on rates. In fact, we see downward
pressure on yields almost everywhere in the world. So we feel that
property cap rates are potentially going to go lower as opposed to going
higher and that’s a huge driver of where we see valuations, especially in
the markets that we were involved in.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 24
We try and focus our credit activities again in major markets that are
liquid and have dynamic sources of demand. We feel that by focusing
in those markets the valuations that underlie our loans will endure;
that’s our strategy and we feel very confident that will continue to be
the best strategy available to us as we go forward in terms of our
lending business.
D. Fandetti Thanks.
Coordinator The next question will comes from the line of Douglas Harter, Credit
Suisse.
D. Harter Thanks. Doug touched on this a little bit, but just want to touch on it a
little more, you have a very strong liquidity of over $600 million. What
is the target, minimum level that you guys want to keep and does that
new interim financing facility lower that amount given that it gives you
more flexibility?
D. Armer Hey Doug, it’s the other Doug, answering the question. We’ve talked a
lot about a target liquidity in the range of $400 million to $600
million, which basically relates to a weighted average deployment of
our equity of 80% and that’s what ultimately informs the $0.62
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 25
dividend based on the ROIs that we're able to generate in our senior
floating rate business.
The swing line does actually help us with that math. It allows us to
maintain liquidity in non-equity form, or non-equity funded liquidity,
so that we can increase that proportion of our equity deployment. So
closing that gave us a little bit more range in capital markets terms.
It also helps us operationally in terms of closing loans and executing
the business and so it allows us to up the stroke in terms of
originations, which will also result in a higher degree of equity
deployment on average.
So those are the parameters that we're working within on that front
and as you know, Steve mentioned repayments and originations have
been roughly in balance and we've been operating inside that range for
the last few quarters now.
D. Harter And then I guess along the lines of non-equity liquidity, how are you
thinking about other capital structure opportunities at this point,
whether its converts, high yield notes or something else?
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 26
D. Armer We're thinking about those, obviously health has returned to those
marketplaces and so the economic equation is more appealing than it
was, certainly, six months ago.
The ultimate question for us is what investable capital do we need in
order to fund our originations and our deployment. And those are good
sources of capital that are accretive that will allow us to add a little of
leverage to the balance sheet.
We're very low levered now with a 2.5 times debt to equity ratio. So
there is certainly room in the capital structure to add say the half a turn
of leverage that would result from issuing high yield or convertible
debt.
But we don’t have a need for capital given the current status of the
business. So it’s a market that we keep our eye on, but it's not
something that we have immediate plans to tap.
D. Harter Great. Thank you.
Coordinator Your next question will be from the line of Rick Shane, JPMorgan.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 27
R. Shane Hey guys, thanks, most of my questions have been asked and
answered. But I think I would like to make sure we understand the
dynamics here, the description is that of a reversion to regular way
business and in the way I would think of it is Q1 was very volatile, low
deal volumes, low repayments that’s spilled through into Q2 in terms of
the basically 20 basis point pick up in yield in terms of the originations.
We also saw I think a return to repayments on the fixed rate portfolio,
which has frankly been part of the outlook for a long-time or since the
acquisition I should say and my expectation at this point is that we'll
continue to see that and a reversion to normal originations of floating
rate paper and continue to pay down of that fixed-rate portfolio?
S. Plavin Yeah. Rick, the originations in Q2 were really four loans and so it's
really hard to generalize across such a small sample. If we had one
outlier loan, it would really impact the average of those four.
So I think the profile of the business is consistent as it has been over
the three years or so, since we've been executing it. Spreads did widen
in Q1 and we did benefit a little bit from that in our Q1 and Q2
originations, but not to a great extent.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 28
And so I see the business continuing in a pattern that it’s developed
over the last several quarters. Our pipeline is very active now. We're
seeing a lot of transactions in the market. So it feels like a good time for
our business.
We're excited about it. We're able to continue to maintain strong asset
level ROIs with relatively lower risk senior mortgage assets and
generate our dividends and what we’re trying to do is get the market to
appreciate the value of our dividend and how it’s differentiated from
those who generate it from more volatile activities to hopefully see
some more upward movement in the share price.
D. Armer I would just underscore that relative value point regarding our
dividend yield. We’re trading today at roughly 8.5%, so we're 700 basis
points wide of the 10-year treasury and that’s on a portfolio of first
mortgages that are levered less than 2.5 times in terms of the
company’s debt to equity ratio.
It’s a really incredible relative value story that we're able to generate
from this very simple business model. And so when you talk about
return to the regular way business, we see it as a return to an extremely
appealing, safe business.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 29
R. Shane Okay. I’ll accept that refinement. I guess the other question I would
have is obviously given the size of the portfolio acquisition that you
made and the additional capital that you took on to bring that portfolio
on, as that portfolio runs off, you had a origination platform that was
able to grow a $4 billion, $5 billion balance sheet.
I’m assuming given the brand and the scalability that your expectations
are that you will be able to scale the originations up over the long term
to replace that run-off and this won’t be a story where you have excess
capital.
S. Plavin I think you're already seeing that our pace of originations really reflects
the $10 billion portfolio not the $4 billion to $5 billion that we had
prior to GE and so our originations, which are in an $800 million to $1
billion range, are sufficient to keep that $10 billion portfolio deployed
and we’re seeing the ability to originate more in the current market
environment.
So I think not only am I confident that we'll be able to keep the $10
billion of portfolio deployed over time, but there is a good opportunity
for us to grow that if the market continues to stay strong as it is today.
R. Shane Right, thank you very much guys.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 30
S. Plavin Thanks Rick.
Coordinator The next question will comes from the line of Ken Bruce, Bank of
America/Merrill Lynch.
K. Bruce Thanks, good morning. Firstly, congratulations on another very solid
quarter. Thanks for making our jobs easy. My question relates more to
I guess how you're thinking about future opportunities, there is
obviously some tension in the market as it relates to commercial real
estate and how -- whether values are toppy or not and a lot of other
things that are kind of a wash.
And some of that has to do with the CMBS maturities, some of that has
to do with essentially changes in risk retention and the like, but how do
you the market is going to play out either differently over the course of
next six months, how might that impact what opportunities you're able
to take advantage of in the market and how you think that kind of
works into the fundamentals of your business?
S. Plavin I think on the margin we are seeing a few more opportunities than we
had been previously as a result of the CMBS market not functioning
very well, both fixed and floating, and we’re more impacted by the
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 31
floating rate CMBS market than by the conduit market. But when that
market functions more poorly, we see more opportunity which is
obviously favorable to us. I don’t see a dramatic change in the
landscape over the next six-month period. I don’t think it's the time to
sort of up the risk profile and reach for yield, that’s not what we do.
We keep the risk dialed down and generate our returns taking as little
risk as we can from very safe senior mortgages, and that will continue
to be our profile to make sure that our business and our loans endure
whatever cycle may occur.
But we're confident that given our ability to utilize the Blackstone
Investment platform and focus our energies, as it relates to loan
originations, in the right places, in the right markets, with the right
sponsors and the right assets, our loans on those properties will endure
the cycle very well. And again, I don’t see anything happening over the
next three to six or nine months that is going to cause that to change.
K. Bruce Okay. Thank you. And you mentioned to one of the prior questions
that with rates where they are that there may be some downward bias
in terms of cap rates and that should help valuations.
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I'm interested in how you think about fundamentals in the kind of
major markets and major food groups that you're looking at. Are we
seeing any pressure on fundamentals or do you think that from that
point of view that the business commercial real estate business is still
on a good footing?
S. Plavin I think demand for space in most asset classes is slowing. So I don't
think it's as robust as it's been over the last year or two from a demand
standpoint, but demand is still generally positive in most markets and
in most asset classes.
Slow growth works quite well in commercial real estate in the low rate
environment. So I think the fundamentals are in an okay spot. I don't
think we're going to see the huge uptick in office building leasing and
hotel RevPARs that we've seen in prior years, but in the major markets
with the right properties there’s still enough demand to make top
assets very viable in the current market.
K. Bruce Great I understand, you look first dynamic demand market. So I won’t
ask any questions about which markets you don't like, but thank you.
That's been very helpful. Appreciate the color.
S. Plavin Thanks Ken.
Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 33
Coordinator And at this time, we have no further questions in queue. I would like to
turn the call back over to Management for any closing remarks.
W. Tucker Great. Thanks, everyone for joining us this morning and please reach
out with any questions.