Q3 2020 Blackstone Mortgage Trust Inc Earnings Call

Real estate as we underwrite these loans and evaluate all of our regions.

Our $18.1 billion portfolio size was up slightly during the quarter.

At higher foreign exchange rates increased the value of our non event.

Mm 142 million jobs. So proceeds we received during the quarter.

After that.

Let me turn it around.

So despite the significant volatility quarter to quarter.

Book value.

Our weighted average risk rating remained at 3.0 on a five point scale.

331, despite weathering another six months of KOVA driven market conditions and we had.

Good luck this quarter.

Our portfolio continues to benefit from a weighted average originated 64.

Reflecting the significant equity are well capital institutional bars have invested in these assets.

Our balance sheet remained 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 VX emptied 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 to consider be exome D. A long term business partner.

We have no corporate debt maturing until 2022, and 97% of our asset level financing is termed.

<unk> lateral.

As of quarter, one quarter end.

31% of our asset level financing is through on pest pressures, either senior syndications, or securitizations, which will increase to 38%. Our third is yellow close shortly.

Financing, an incremental $1 billion of our portfolio at an 81% advance rate and attractive.

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 return 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 will turn the call back over to Steve.

Thanks, Tony before we moved to Q1 day I wanted to provide an update on the leadership of our loan asset management function.

Tom Ruffing, who developed is to show us real estate loan asset management of Blackstone has informed me of his intention to retire in December.

Tom and I have worked together for 20 years and he is always set the group's diluted for technical knowledge experience integrity.

On behalf of all of my colleagues I want to thank Tom the wish him the best in retirement.

Tom leaves the group's stronger than ever and we are very excited to announce that Rob Simmons, our managing director, who has been a great player coach and running our transaction legal function.

I'll be expanding his role to succeed Thomas our new head of asset management.

On the robs leadership, we expect continued great results from our team further.

Further evolution of the function and the continued integration of all the Blackstone real estate has to offer in the management of the VX Unsi loan portfolio.

And with that I will turn the off I'll turn the call over to the operator to open up for questions.

Thank you for your question and answer session. When I became if you wish to ask a question Keith Keith and then one on your telephone if you decide to withdraw your question Tim Peaky.

Hey, you will be if somebody's going to ask your question.

The line will remain R&D and Andy just a quick reminder, if you wish to ask a question Keith Keith.

Then one on your which had the same.

Hi, Joe first question comes from the line.

John Fandetti from Wells Fargo. Please proceed John you on identical.

Good morning, Don can you can you hear us.

Sure and it sounds like a it sounds like we might not have done here I'm here.

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 modification and then can you remind us a little bit more about hobbies modifications work from a cash flow perspective.

Sure I can take that.

On our hotel and 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, you know I think the overall macro trends supporting travel and leisure will reemerge.

We've been highly selective on the hotel lending start programs that were 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 contract performance on the hotel portfolio and I think that's reflected in the modifications. We do on an ongoing basis. We had a few new modifications we reported in the earnings release, you know the overall scope of the modifications and they almost always have been coming with very strong new equity commitment from our sponsor.

Sure it to carry the assets through.

As far as the cash impact we've had almost no interest deferral. So our sponsors are paying interest and therefore, you know the interest that's reflected in our income.

So what's being modified.

Generally it's pushing out timeline milestones in exchange for a much more capital. So you know the the sponsors need more time to implement their business plans as a result of the disruption in the market and our view is that you know with sponsors recommitting to their assets continuing to support.

Our business plan, it's fair to give them more time to be able to implement our business plan. So long as they're investing new capital that's in our perspective, and that's what we've seen from the sponsors.

And do you think like as we get further along in that.

Discussions you're having with the sponsors are owners are there any other hotels that you think are getting closer to where you know the sponsor sounds it's just not worth the equity the turnarounds too long and you might be getting closer to work out can you give us a sense on like.

You know where you are on that front.

Hey, Don This is this is Steve. Thanks for the question, we haven't seen that we haven't seen any indication of any give up from our sponsors on any on any the hotels. You know they are all top quality institutional assets are the sponsors has now been funding for <unk> for <unk> for seven months there in the third quarter of funding operating deficit.

Cobot related.

As they invest more capital I think there was they are likely to continue to invest and.

There is the risk of course of Covance as the cobot 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 they've been acting responsibly, they have the financial wherewithal to continue to support the assets. Our expectation is that will continue but time will tell us as we go but I think the quality of our sponsors and the quality of their assets.

It is why we expect a strong performance from our hotels.

And how will we know Steve if they're getting closer to.

Get an indication of what you have off is that going to be reflected in a rating will you. Let us know like how will we see that as outsiders.

Okay.

Yeah, you when we report to you each each quarter you know if you know we risk weight, all the loans and so.

If if if we see a change in performance or outlook on a on a hotel this material it should be reflected in the risk ratings.

We also do a reassessment of our of our loan portfolio in conjunction with our Cecil review and so we would likely take a specific C stores over to an asset that we have to have we saw a significant change in sponsor behavior that we thought would lead to a different outcome on a low.

Okay. Thank you.

And Joanne if I could just also we've got a few more analysts enter that Q here. So if we could just asked everybody to limit their initial questions to just one question one follow on.

And I can rejoin the queue that'd be that'd be helpful.

Thanks, Keith and just as a reminder to ask a question Keith Keith and then one on your kind of in that Star and then one on your telephone and your next question comes from the line of Steven Lewis at Raymond James Petri CCTV nearly identical.

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 loss.

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 lines with single sponsor has which you know we certainly do have some of those they're very very strong sponsors. So they tend to be multi billion dollar you know AIU and opportunity funds real estate sponsors who we are.

No well and have been doing business with for years. So I would look at you know sponsor concentration in some ways that that strength rather than a weakness you know we want to make loans to very strong sponsors who have the capital to see their business plans through and protect their assets.

And that that is really one of the reasons, we see in such great performance in our portfolio is because we've been extremely selective with the sponsors we land sale and you know we're always looking to make sure we have the highest quality of sponsors on airlines.

Great and then my second question, you know and digging into the seasonal changes in the queue. It looks like you decrease the Cecil reserve across funded unfunded and securities in the U.S. increase the seasonal reserve of.

For for funded unfunded loans in Europe.

Can you talk about what drove those decisions I didnt seem like any material amount of change in portfolio size. So how.

How should we think about that deterioration in Europe, I guess some assets there.

And I assume is that going to drive originations when those turned on to more likely be in the U.S. or how or how will that impact the future portfolio growth.

Sure. This is Tony your Uh huh, Fortunately or unfortunately.

Fortunately the answer to your question is fairly on interesting if FX rates that moved the seasonal reserves. So as ethane 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 c. So reserve just a result indices are being higher.

And beyond that it was really just you know 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 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 Charley Lsts from JP Morgan. Please proceed.

Hey, good morning, everybody. Thanks for taking the questions today.

Well historically you guys have.

Did you guys ever.

Yep.

Sorry about that you guys have really been focused historically on on larger loan size is probably.

A more limited set of competitors, even pre code itself 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 and assays.

Yeah, I think our competitive advantage is on being able to make large loans on 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, you know from the competitor.

I've environment perspective, you know, we you know there's still capital in the market as I mentioned on the call certainly and we see the reemergence attempt regular way market activity in their lenders and borrowers, but as has always been the case you know, we really I think occupy a unique position in terms of being able to after March trends.

Actions when we like the real estate, we like the business plans and the sponsors and I'd I don't envision that changing and 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 land.

So the added advantage of the insight from from that ownership.

What's happening with terms of tenant movement in market activity.

So if it is it further it gives us confidence to make to make large loan commitments when when the opportunities arise it worst.

We're slowly seeing a reemergence of of opportunistic investing as we were as we work ourselves through this cobot period. So we do expect.

Loan demand to increase its been its been pretty light so far in terms of the large scale opportunities, but we're we're hopeful we'll see a pickup in that activity as lean as we roll into the into next year.

Okay. Thanks, so much.

And 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 right. So you know all in coupons relatively comparable but I think on incrementally better credit you know, reflecting sort of the current competitive environment and everyone's outlook or you know the fundamentals.

Thanks, so much for taking the question.

Thank you. Our next question comes from the line of Jade Rahmani from KBW. Please proceed Jay joined I can look we'll see.

Thank you very much.

I was surprised by the increase in interest income.

Despite a loan repayments, having outpaced fundings. So I wondered if you could talk to that what dynamics might be underlying that whether perhaps modifications created additional earnings or their outsize prepayment fees with respect to those loan repayments and secondly, if cash.

Slow performance.

In the quarter was consistent.

Sequentially or if there was a similar uptick as it relates to the growth we saw an interesting Doug.

Oh sure Jade Hey, it's Tony so taking those in order yeah, I'd say one of the impacts that you're seeing in the income statement, which I mentioned on the call of his prepared remarks is the impact of the LIBOR floor. 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 any given quarter. So I'd say this quarter was generally within that normal range.

You asked 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 is repaid in originating a new loan those would tend to create very spiky earnings Pops.

But most for the most part our modifications because they're not changing rates and term materially they're considered a continuation of the existing loans. So I'd say, it's much more ordinary course on the loan side.

And it's a little bit of the LIBOR impacted I think you're really seeing come through in terms of cash flow.

And Katie mentioned earlier in the question on modifications or generally not changing the payment terms of the loans and so our cash flow is largely unchanged quarter over quarter. Our loans are paying you cited. This this is the earlier that there were basically collecting all of our interests. So it's really a flat story in terms of cash.

Cash quarter over quarter and earnings also pretty consistent Tony I might just just to add to that that in terms of the bottom line. In addition to those topline factors and 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 there's a little bit of a reversion to the mean in turn.

Most of our operations generally that you're seeing as you move through the year.

Thank you for that that's very helpful. When you think about the the acuity issuance that took place last quarter. The term loan b that was done last quarter, but then the most recent CLL.

Do you think that those in terms of a cost of capital standpoint.

Offsetting and so the outlook for perhaps earnings core earnings coming in in line with the dividend should be viewed as pretty neutral unchanged from an outlook standpoint, or would you would you make any comment as to whether we should be modeling any perhaps reduction and ER in the rate of core earnings Utah.

Okay.

Hey, Hey, Jay is Doug we don't make forward looking statements you know about core earnings, but you're right that there are several offsetting factors and you know that we've seen sort of at played through 2020, thus far which have resulted net net in a very stable core earnings profile.

And we've seen that stability reflected in the in the dividends as 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 for closure workouts sale of the asset sale of alone.

What should we think about that and maybe if you could also add additional commentary on 14 loans that are in that risk for category and recognizing that overall credit performance came in ahead of what we were expecting for the quarter.

Yes, I think on the Q five rated loans you know we took specific reserves on those assets in the second quarter, which we still believe arent appropriate levels, you know as far as the long term trajectory and the ultimate resolution I think it's a little too soon to say you know we closed a modification with our borrower on.

Hotel loan this quarter, yeah, the ultimate recovery, there will really be contingent on cash flow trajectory and what happens with the New York Hotel market is very challenged right now, but I do think over time, you know the impact on supply with many hotels not reopening will be somewhat of an offsetting factor and you know time will tell how how the market performs and how our asset perform.

And I'm multifamily I thought you know, it's a very small ask that again, you know still working through with the borrower on that and you know I think again time will tell it's a little too soon to predict exactly that the outcome.

And on the risks for category.

Yeah, I think our four rated loans you know they we had we held at the same level quarter over quarter or that can that performance has been consistent you know those are mostly hotels, we covered in our thoughts on the hotel market a little bit earlier, so no material update I think on those lines.

Thank you thanks Jay.

And our final question comes from the line of Steven Delaney with JMP Securities. Please proceed Stephen utilizing the quoting key right.

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 COO I'm, Doug could you comment on the weighted average spread over a lot more in the estimated all in cost of that financing. Thanks.

Sure, Hey, Hey, Steve.

The weighted average spread of the notes that we sold was a 168 over.

That is right in line, you know with well costs on our credit facilities. The on cost will be a function ultimately of the of the tenor of the deal and we do think that that would be longer than it might have been you know sort of under the assumptions. We would have had very good to see a low in the first quarter for example.

So that'll likely you know get closer to 200 over on an all in basis.

But time will channel to to use the phrase you know ultimately hot over.

Over the over the life of that financing, we're very happy with that execution I think you know it being a.

Fully match funded execution for their you know pretty significant cross section of our portfolio, including office hotel loans multifamily loans was one of the 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.

Then lastly.

Again, you may have commented on this but specifically it sounds like you're approaching new opportunities.

Cautiously selected believe but you are looking and maybe I'm just not seeing enough, but have you have you actually made any new loan commitments here in the fourth quarter going into year end.

Yeah, as we mentioned on the call. We have 230 million of new loans in closing I would repeat sponsors direct relationship that we develop those loans offseason. Some multifamily. So we're certainly seeing opportunities in the market. You know, there's there's you know a little bit more transaction activity than we have seen I expect.

Just to continue to be muted relative to pre covered level, but our sponsors are active they have capital to invest in we're seeing you know.

Profit route regular way opportunities that you know, we'll pursue it when we think they meet our criteria for high quality assets performing loans got sponsors.

Thank you Katie repeating that for my benefit and that's it and everyone be well stay safe. Thank you.

Thank you. Thank you thanks, Steve.

Thank you Steven I can't recall, a bit to Weston Tucker for closing remarks.

Perfect. 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 okay. Thank you.

Good bye.

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