Q1 2021 Blackstone Mortgage Trust Inc Earnings Call

[music].

Good day and welcome to the Blackstone Mortgage Trust first quarter 2021 investor call I keep my Weston Tucker head of share holding relations. My name is Jenny and I'm Your event manager, Jim and the presentation. Your lines will remain on listen only a few of them require assistance at any time. Please.

He's still a day when you'll telephone and of course, a nice will be happy to assist you. If you would like to ask a question. Please key star then one on your telephone record your name and press the pound or the hash key if he that'd be somebody to withdraw your question simply Keystone to or have a lines will remain on listen only I'd like to advise on policies.

Conference is being recorded and now I'd like to hand over to Weston Tucker. Please go ahead.

Great. Thanks, Jeremy and good morning, and welcome to Blackstone mortgage trusts first quarter conference call I'm joined today by St. Barbara <unk>, Chief Executive Officer, Katie Keenan, President, Tony Marone, Chief Financial Officer, and Doug Armer, Executive Vice President and capital markets.

And we brought our 10-Q and issued a press release with a presentation of our results which are available on our website and have been filed with the SEC.

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 10-K.

And do not undertake any duty to update forward looking statements and we'll also refer to certain non-GAAP measures on a call for reconciliations you should refer to the press release and our 10-Q.

This audiocast is copyrighted material of Blackstone mortgage trust and may not be duplicated without our consent.

So a quick recap of our results we reported GAAP net income per share a 54 cents for the first quarter. While distributable earnings were 59 cents per share a few weeks ago, we paid a dividend of 62 cents per share with respected a fourth quarter. If you have any questions. Following today's call. Please let me know and with that I'll now turn things over to Steve. Thanks Weston.

The first quarter embarks, a reinvigoration of bx and see originations and a resumption of growth and a loan portfolio.

With a nearly eight years with VX and see activity our business has shown a remarkably consistent trajectory and strategic direction we.

And we source and execute on great investments with top sponsors we innovate on both sides of the balance sheet, we managed liquidity and risk prudently and we create great returns for our shareholders.

2020 demonstrated the benefits of this approach with a strong credit and earnings performance sort of unprecedented periods and 2021 positive within our business as it got building and Q1, we closed $1 $7 billion, a new originations backed by a very high quality properties and strong growth sectors and markets.

We improve both the cost and structure of a funding with multiple capital markets executions.

And we grew the loan portfolio by nearly $700 million, a solid first step and deploying a substantial dry powder.

Our business has been consistently strong because of the fundamental advantages, we realize from a management fee and being part of Blackstone.

Blackstone money and muscle scale across the real estate universe provides unparalleled access to proprietary information is extremely beneficial and our sourcing and underwriting.

And a deep talent pool and experience with and Blackstone has led to a great track record of a investment performance and access to capital throughout cycles.

Today, the emerging transaction environment provides a fruitful backdrop for a business borrowers a coming off this pandemic sidelines and executing a new investment opportunities.

And with more widespread vaccine distribution and growing consumer confidence, we expect to see increasing economic activity that will benefit commercial real estate performance.

The <unk> business.

And on the tremendous competitive advantages from the entire Blackstone platform remains well positioned for growth and outperformance and with that I will turn it over to Katie to address our activities from this quarter and more detail. Thanks.

Thanks, Steve with.

Transaction activity and the market expanding we are seeing strong momentum in our business.

Our investment pace accelerated this quarter and we closed nine new loans and grew our portfolio to a record $18 $7 billion.

A substantial liquidity as well as the increasingly efficient financing available to US provides the runway from meaningful accretive portfolio growth within our existing capital base.

And we are on our way with $2 billion of new loans closed her and clothing, including $600 million already closed so far in April.

Even more importantly, our new investment opportunities are highly attractive from a credit perspective. This quarter, we saw a robust activity and sectors with strong tailwind like industrial multifamily life Sciences and growth market office.

We continue to capitalize on areas, where Blackstone as a market leader affording us excellent insight into deal analysis and the ability to build conviction quickly.

Most of our loans this quarter supported new acquisitions, where our ability to use this information advantage to provide speed and certainty is particularly important and where a borrower's invested substantial new equity alongside our loans.

One 3 billion a our originations were with repeat sponsors where are long term relationships continue to yield differentiated access to opportunity and.

And we also closed loans with six new borrowers that's quite are indicative of our ever growing client base.

We made new loans and growing sunbelt markets like Austin, Texas, North Carolina, and Miami, Florida, as well as solid core markets like Boston.

And we saw the strategic benefit of our deep experience investing in Europe, where the dominant possession of the Blackstone platform, especially on the context of a less liquid market environment has allowed us to consistently find attractive relative value opportunities overtime.

Our business and Europe yielded our largest deal a quarter a $575 million a question if a $1 $2 billion loan to finance the acquisition of a 91% occupied industrial portfolio in Sweden for the.

The Blackstone equity business is best in class European industrial platform.

This portfolio has strong in place cash flow a high quality granular tenant base and powerful momentum from growing e-commerce penetration and one of Europe's most resilient economies.

Given the geography and nature of the acquisition the situation required lenders, who are capable of executing and the Swedish jurisdiction and you could provide certainty and size, thereby creating a compelling lending opportunity with a great real estate assets.

We value large scale transactions, because they typically come with substantial equity from well capitalized experienced sponsors institutional quality assets and deal dynamics that fit well with our core strengths and addition to the Swedish logistics deal. This quarter. We also closed a $491 million 65 per cent.

On to costs, New acquisition financing for Davis and principle on a life Sciences conversion and East, Cambridge mass the best lab market and the world.

One of the largest owners and the market. We are deeply familiar with Cambridge life Sciences, which allowed us to quickly develop confidence on credit while at the same time using our scale to commit to the whole large loan and win and a competitive process.

As a capital markets pick up we are seeing an increasing volume of repayments a headwind on deployment, but a healthy sign for credit and.

The performance of our loans has remained very strong consistent with our experience throughout 2020, we.

We had seven upgrades and no downgrades this quarter as business plans progressed across the portfolio and parallel with the reopening of the economy.

As we see a transaction flow growing we are also focused on optimizing our balance sheet to drive down our cost of capital and further diversify our funding sources.

In February we priced and add on to our term loan B at LIBOR plus 225 in line with a record tight levels of our December 19 deal and reflective of our status as a top quality issuer.

We continue to drive improved pricing and market leading structure on our credit facility as a cash.

Testament to the quality of our assets and depth of our relationships and earlier. This month, we closed a $1 billion CLO or force overall and third and a last 14 months.

In addition to giving us access to attractive asset financing for newly originated loans at.

How far a refinanced our first yellow proving a long term viability of this financing option as a permanent component, but a shift.

And and increasingly competitive spread environment, our ability to access capital markets on compelling terms is a critical advantage, allowing us to capitalize our business efficiently and maintain our focus on high quality assets sponsors and loans.

With more lenders entering the market at the worst of COVID-19 receipts from view on our scale relationships creativity and expertise are more important than ever.

We are seeing and evaluating lending opportunities around the world maintaining a characteristic credit discipline and finding many attractive investments for our capital.

And to the simple business model of low leverage senior lending to great sponsors capitalized by a match term high integrity balance sheet drove strong performance last year and continues to be our north star.

And our performing portfolio, a first mortgage loans financed by a well price and ever improving balance sheet continues to produce attractive current income a 9% return on book and a near zero LIBOR environment. Thank.

Thank you and I'll now turn the call over to Tony.

Thank you Katie and good morning, everyone.

Stephen Katie highlighted this quarter's results kick off 2021, with a resumption of more typical be SMT activity as we and the broader market continue to put the impacts of COVID-19 further behind us.

This quarter, we reported GAAP net income of 54 per share and distributable earnings of <unk> 59 per share in line with a fourth quarter of last year. Despite continued low interest rates globally.

Our book value per share of <unk> $26 35 was also in line with <unk> and there was only a minimal change and our CSO loan loss reserve, which is one of the largest potential drivers of a variability and our GAAP book value.

And we carried a $1 25 per share a cease a reserve as a quarter and so gross of this reserve our book value would be $27 60.

Roughly the same level as we reported and <unk> 2019, before the impacts of COVID-19 and the new Silicon and standard.

During the quarter, we originated $1 seven plus a new loans driving our total portfolio to $18 7 billion.

Although $1 3 billion a visa loans closed in March and therefore had a muted contribution to a <unk> results they position us well for incremental earnings going into the second quarter.

Also we received nearly $800 million and repayments this quarter as overall transaction volume has resumed.

We generated meaningfully less prepayment income and <unk> than a typical pre COVID-19 quarter.

This reflects the seasoning of our.

A resulting from the lower volume of repayments and originations we closed last year.

Credit quality was stable this quarter with only 2% of loans on nonaccrual.

100% interest collections.

And as I noted earlier.

A material movement and our seasonal reserve.

Average origination LTV of 65% continues to be a source of strength and stability for us as markets return to normal and our borrowers are even further incentivized to protect a significant equity capital and they have invested and our collateral assets.

Our capital markets and portfolio a financing activity also reflect a return to more normal markets and operations as we continue to grow our dynamic financing strategy.

Notably.

We closed a $200 million add on to our $737 million 81 secured term loan.

<unk> and the attractive LIBOR, plus two 5% rate from our <unk> 2019 transaction.

Similarly on.

After quarter end in April we closed a $1 billion CLO, our fourth transaction since we began this strategy in 2017.

We continue to improve the structural flexibility of our CLO with the ability to add incremental assets to cielo for over the next six months and addition to the dynamic replenishment and loan modification and features we have utilized in a prior CLO.

Lastly, a significantly we closed $1 3 billion, a new transactions with our credit facility lenders, who finance, 55% of our portfolio as a $3 31.

These large diversified credit facilities, providing you.

A flexible financing for us as we continue to expand and improve our terms and structure.

As an example, this quarter, we added Swedish kroner to one of our facilities to finance the $575 million equivalent loan Katie mentioned earlier and a generally support the growth of our lending activities in Europe.

And closed the quarter with a low debt to equity ratio of only two six times, coupled with significant liquidity of $1 1 billion.

As transaction volume has picked up we look forward to continued growth and our loan portfolio as we deploy our dry powder into the $2 billion pipeline and Katie mentioned earlier.

Which will generate and earnings for our stockholders and provide a larger platform from which to pursue further accretive investment opportunities.

Importantly, we continue to be vigilant with assets sector and borrowers selection to protect our portfolio from any potential downside volatility as the global economy continues its recovery.

Thank you for your support and with that operator to open the call to questions.

Yes.

Okay and you just a question comes from the line of Timothy E G.

Yeah.

Cooler you allow me and good morning. Please go ahead.

Great and good morning, guys and congrats on a very strong quarter.

My first question and it sounds like you're gearing up for some nice origination growth a pipeline seems very strong and I know repayments can be difficult to predict but as the credit environment improves I imagine repayments will pick up as well. So just wondering if you can give us an idea of your expectations for net portfolio growth given the pipeline.

<unk> and expectations for repayments over the coming quarters.

Thanks, Tim and great to have you on a comp I think as far as repayments to your point they are a bit unpredictable, but what we've seen consistently is that theyre very well correlated with our origination activity is and so we expect a similar trend as to what we've had historically pre COVID-19 and with the existing capital base. We have we think we have a.

Lot of runway for portfolio growth so a.

A little hard to predict you know specifically about the correlation really should hold.

Got it Okay and then.

On the pipeline I think I saw.

The weighted average portfolio yield I think actually ticked up a bit this quarter and we accrued and some of your peers.

No distress in terms of pressure on asset yield and seeing that come down with first quarter results I'm just curious with your pipeline how all in coupons look relative to the portfolio average and if you expect youre able to achieve similar ROE that you were.

But you've been able to achieve or maybe even relative to pre COVID-19 levels, given kind of what's happening on the financing side as well.

Yes, I think what we're seeing and the market is ROA and ROE is pretty consistent on a spread based assets from pre COVID-19.

Every quarter, there is obviously, a little bit of idiosyncratic, depending on which loans closed and which quarter, but we've held a very consistent and and I think to your point, we are seeing some spread pressure on the market on the lending side, but we're also a very significant beneficiary from that on the borrowing side and we're always very focused on making sure that our capital sources.

Are enabling us to continue accessing the loans that we want to lend on them, even as we see a spreads compressing and the market.

Got it makes sense and and then just one more broad color from me, it's great to see stable credit trends and the portfolio, maybe if you could just touch on <unk>.

Maybe New York City office exposure in general since you guys are pretty.

And well located there and just wondering how maybe underlying rents and occupancies have trended and those assets underlying your loans and that market and into those into often specifically and just on the market. In general you know if you've had any updated thoughts on how class a office will perform and gateway cities like New York City, and if Theres any.

And a range of valuation haircuts, you're expecting broadly.

Yeah, you know I think as far as.

And that's generally and the markets, where we have been active we're increasingly seeing corporations and ceo's comment on what we've seen for a while which is that in personal and work is necessary for fostering a culture tally.

And it development and collaboration ingenuity.

These dynamics, we think are particularly important and the industries that we're creating office demand even before COVID-19 like life Sciences, and content creation, and where we've long been focused in terms of our lending activity. As you know we like to lend on new quality office buildings, and healthier and more flexible spaces better amenity is the right sub markets. These are the buildings that we saw.

Tenants, expanding and and where demand was being created a pre COVID-19 and that trend is continuing.

And so while the overall office market will take time to recover and we think the work from home dynamic will have some impact on on values and rents and the impact really will be uneven across office markets and as a.

Flight to quality, we're already seeing that and different markets and we think our portfolio is and the right neighborhoods.

Our office loving this quarter I think it's a great example of the long term off a blending philosophy, we've had and the portfolio. It's a brand new build office building in Austin, Texas, low leverage acquisition loan to an a plus add back and a market where we're seeing great fundamentals. So overall, we feel like we've made the right assets selection on our portfolio and we're seeing.

The types of assets, we lend on being the outperformers.

Yeah.

Right right and I'll hop back in the queue. Thanks for the color I appreciate it.

And next question comes from a any sign off until call. It a from credit Suisse. Please go ahead.

Good morning Dara.

Morning.

And you mentioned that the Inc.

Come from prepayments was lower this quarter than pre COVID-19 quarter and I'm. Just wondering if you could size that and then.

Just help us understand kind of how that might look going forward given the season, and you mentioned and we all kind of thought process around when that might return to normal.

Hey, Doug it's Doug here I'll take that one.

Historically, if you look back over the last several years, we've had anywhere from two to four <unk> on a per share basis, a prepayment income.

Think on average as a matter of fact, it <unk> a tends to be lumpy. So that's not a a regular number per quarter, but that's the average over the last set.

Several years this quarter was significantly less than that.

Those are two to <unk>, it's been around between nothing.

And nothing in <unk> in recent quarters, and Thats a function to your point of the seasoning and the portfolio.

Decreased velocity in 2020.

And then the result, and aging of the portfolio. The prepayment income obviously is a function of the a.

<unk> of the loans as a portfolio turns over as originations and repayments resume.

And the portfolio turns over into a more typical demographic so to speak.

Over the next several quarters.

We'll see that velocity resume and the potential for prepayment income resume.

And that additional yield returned to the portfolio.

So just to make sure I understand that and so you're saying that it takes a couple more quarters.

Originating and having a normal repayments and then probably get back to that two to force them on.

Lumpy range.

Yes, I don't know, whether we can put a specific number of quarters on it because it will really depend on the blow by blow of the originations and repayments.

But over the next period as the portfolio turns over and the demographics returned to a more normalized level, we will see that happen. So it's anyone's guess as to whether its two quarters or four quarters, but it's it's some period of time and the intermediate term.

Great. That's very helpful. Thank you.

Okay, and just to remind you if you would like to ask a question. Please key star then one on your telephone record your name and press the pound or the hash key and.

And just to remind a one question one follow up question. Thank you.

And your next question comes from the line of Chellaney Ali asked a J P. Morgan. Please go ahead.

Hey, good morning, everyone and thanks for taking the questions.

Were there any a.

Loan modifications and were executed during the quarter I'm, assuming you've seen a deceleration and those requests but just curious to get your thoughts on how those conversations are going.

Sure. So we're really back and the mode of where we were a pre COVID-19 with respect to loan modifications, where we actively go through our portfolio and look for opportunities to proactively modify a loan to keep a good credits that we like around for a longer so we're seeing in the portfolio.

Restarted our expanded business plans and we're seeing assets progress on their business plans, where we want to write and.

And the Raiders alone to get more call protection and that's really the tenor as a loan modifications we have going on right now.

The COVID-19 impact modifications really are we've turned the page from him as a part on this.

Okay got it thanks Katy.

And then if I could just go to and sort of assets specific updates on some of your larger four rated loans first the a.

360 million Maui Hotel.

Given the recent developments and vaccine progress and I'd.

And I'd say, a stronger performance and leisure hotels, a I'd be curious to hear how things are progressing on that asset and then secondly, I'm not.

920 million and mixed use in Spain again.

Looking at sort of the reopening trends domestically versus one.

And you read about happening in Europe, I'm wondering if we can get an update there and if there's a possibility of.

Any specific reserve builds on either of those loans and I realize there was.

Plenty of runway on a maturities there, but given the size of those and on a risk ratings and I figured I would ask.

Sure. So on the Maui Hotel, you know I think that what we've seen we're big believers in the post COVID-19 travel recovery across Blackstone, and we're obviously investing and that theme and a combination of pent up demand accumulated savings vaccine adoption and travel restrictions lifting I think theres going to be a very powerful a recovery, particularly.

And then a leisure and resort segment of the market and that asset is extremely well positioned and finished its renovation plan during COVID-19.

Why has extremely positive long term supply demand fundamentals. This is right on the beach in Maui and so we're seeing this hotel and be a big beneficiary from the trends that we're expecting a hotel has.

We're seeing some tick up and occupancy and it'll take time, especially with a place like Hawaii, obviously, its a long flight, but once people have a better perception of safety. We think the Hawaii market is really going to perform very well.

On the other asset you mentioned in Spain.

We are I think the broader reopening is also a benefit to that portfolio and we're seeing collections pick up.

L. A business plan that will progress over time, but no real material changes there.

Thanks very much.

And your next question comes from the line of a J to ammonia from K B W. A please go ahead.

Thank you very much I was wondering if perhaps Steve or Katie you could share your thoughts on if theres any rollback and a 10 31 exchanges how do you think it might impact.

On the real estate market.

Hey, Jay this is Steve.

I think the 10 31 exchange market will impact.

Certain net leased assets other assets tend to be.

Frequently traded in that marketplace I don't think we'll have any real impact on our business I don't see a vibrant 10, and 31 market as being important for valuations to the kinds of assets and secure.

Loans.

There'll be a tax headwind for a certain investors that aren't expected to have any impact on our business.

Thank you very much and and tons of ability and nature of the originations human and.

As a multifamily as a bright spot I was wondering if youre seeing any changes from the GSE.

Haps, they've tightened spreads and in order to manage some recent uptick and interest rates, but I'm wondering if there are less active and that presents.

And opportunity.

Yes, Jay and it's a great question and I think we are seeing a little bit of a thought on the margin and the GSE is has been a bit less active generally and in recent months and so on the margin we might be picking up from loans that.

Might have been ready for a GSE execution, a little bit earlier, but by and large the loans, where we're making they.

And they come from relationships there is usually a little bit of a transitional element to them. So we're typically a lender leading up to a GSE execution, so not a huge impact, but I think maybe a little bit on the margin.

Thanks very much.

And your next question comes from Don from Jesse <unk> from Wells. Please go ahead.

A dynamic to a morning Don.

Hi can you guys hear me.

Yes, we can hear you now.

Okay. Great I was wondering if you could talk about the competitive dynamic today and.

The U S and maybe also a contrast that with Europe and.

And then just lastly, as you saw it.

Come out of COVID-19 are there any strategic changes or are you going to just kind of continue forward with the.

The same strategy.

Sure. So I think as far as a competitive dynamic I think what we're really seeing is pretty similar to pre COVID-19 and so there's certainly other lenders out there, but our advantages continue to shine through we've got great relationships with borrowers obviously with our financing Counterparties, we have the ability to act and scale.

And all of that many others cant meet.

And really differentiated access to information that allows us to move quickly and find a loans that we like so we've always operated on a competitive environment and we've always been able to find a really large volume of attractive investment opportunities.

<unk> has also always been a little bit less competitive it's just a bit of a less liquid market environment. There are fewer lenders over there that have the type of information advantage and scale that we have as part of the Blackstone platform, So and we really like the Europe opportunity and it's always been a fruitful ground for a finding investments.

I think as far as a business model and our view of the last year and was that it really was a validation of what we've always thought was a very strong strategy lending to a well capitalized sponsors high quality real estate that proves resilience and having a very high integrity match funded balance sheet.

And all of those things I think really drove outperformance for our business and the last year, and we think thats the right place to be.

Okay. Thank you.

And the final question comes from Stephen Laws Raymond James. Please go ahead.

Hi, good morning.

A number of things have been covered but can you touch on Pik income how much pik income was in the quarter and how did that change year over year and sequentially.

With I guess, a somewhat fair comps a normal since there was less portfolio turnover and the last 12 months and typical.

And.

It's a it's Tony on the on the Pik income question. Yeah. We don't have a specific number disclose but what I would say is important is we only have 2% of the portfolio, which is two two loans on non accrual.

And we're not deferring interest generally across any of our loans. So predominantly the loans are all paying current.

The receivables are all valid and we're not we're not building up any sort of big receivables are back and detect that we're worried about collecting.

So although I don't have a number to share I would say it's not.

The thing that we need to be concerned about.

Thanks, Tony.

As a follow up on a a lot of things covered on the origination and pipeline, but just one more.

It looks like no office origination in Q1, when you talk about where that is on your pipeline and are you less hesitant to do that given more uncertainties around that asset class looking out.

No.

That's at all the case, how should we think about your portfolio a mixed by property type changing if we look say 12 or 24 months forward.

Sure. So we did have the one office origination and the corridor and in Austin, Texas with one of our best sponsors.

And and really I think it is that that loan is indicative of what we're interested in a market, where we've been lending pre COVID-19 and where we expect to continue so we're seeing great opportunities and newer quality office buildings with strong sponsors the types of buildings that have the amenities and a quality that tenants want to be and and that employees once again.

A lot of activity and growth market office, and low basis, often and core market. So we continue to think that we've made the right assets selection in the office space and that they are a good opportunities. That's a lender there. So I'm not sure I would I would think there'll be a significant change over time I think we're just kind a keep adhering to our very disciplined approach to a.

Which office buildings, we think will be the winners and making sure we're making a low leverage loans to the REIT sponsors in that market.

And so it sounds like it stays above 50% just kind a roughly great. Thank you very much for your time.

Thank you now I'll turn the call back over to Weston Tucker.

Great. Thanks, everyone for joining us. This morning, if you have any questions. Please a follow up after the call.

Goodbye.

Thank you that concludes your conference call for today, you may now disconnect. Thanks for joining and Julian Ross T J and take care.

Okay.

[music].

Yes.

Yeah.

[music].