Q1 2022 Blackstone Mortgage Trust Inc Earnings Call

[music].

Welcome everyone to the Blackstone mortgage trusts first quarter 2022 investor call at this point all participant lines are in listen only mode. If you'd like to ask a question. Later, please press star one on your telephone and with that I would like to turn the call over now to Western Tucker.

Shareholder relations. Please go ahead.

Okay.

Great. Thank you and good morning, and welcome welcome to Blackstone mortgage trusts first quarter conference call.

I'm joined today by Katie Keenan, Chief Executive Officer.

Austin Pena Executive Vice President investments, Tony Marone, Chief Financial Officer, and Doug Armer Executive Vice President capital markets.

I'd also like to introduce Tim Hayes, who recently joined the <unk> leadership team and we'll be working across a number of initiatives, including shareholder relations.

Morning, We filed 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.

I'd like to remind everyone that today's call may include forward looking statements, which are uncertain and outside of the company's control.

Actual results may differ materially for a discussion of some of the risks that could affect results. Please see the risk factors section of our most recent 10-K.

We do not undertake any duty to update forward looking statements and we will also refer to certain non-GAAP measures on the 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.

For the first quarter, we reported GAAP net income per share of 59.

While distributable earnings were <unk> 62 per share a few weeks ago, we paid a dividend of <unk> 62 per share with respect to the first quarter have you have any questions. Following today's call. Please let me know and with that I'll now turn things over to Keith.

Thanks Weston.

We had another strong quarter of investment activity portfolio growth credit and earnings further demonstrating the strength and resilience of our business model in a dynamic market environment.

Perhaps more importantly, as we look ahead <unk> is particularly well positioned to continue delivering for our investors today.

Today, we see four key advantages powering our company forward.

First we have a floating rate business.

Simply higher interest rates mean, we earn more on our loans and magnitude of rate hikes widely expected. This year creates a powerful tailwind for our earnings profile.

Second the credit of our portfolio is secure.

With a portfolio of 65% LTV loans on institutional quality assets to many of the best sponsors in the business. Our capital is well protected even if we experience a period of greater market headwinds.

Third our ability to generate investments is unparalleled.

We believe we are entering a more opportunistic investing environment for lenders and the S&P has deep global origination platform allows us to source attractive relative value investments around the world.

And fourth we have broad access to capital are fully scaled diversified balance sheet comprises a wide variety of asset level and corporate debt as well as premium accident.

This gives us the consistent ability to efficiently tap the capital markets enhance our balance sheet and deploy capital Accretively.

Starting with our floating rate model and portfolio.

Investment environment over the last 12 months has been highly productive for our growing origination team.

We closed $3 $4 billion of new loans in the quarter $16 2 billion over the last 12 months driving 37% portfolio growth year over year to a record $25 6 billion.

Through our strategic portfolio management, we have reoriented the earnings profile in the collateral mix of our book.

While LIBOR floor has provided us with earnings stability, while rates were falling they can dampen income growth in a rising rate environment.

But with the majority of our portfolio originated in recent quarters when rates were lower than they are today. We have now reached our crossover point, where any upward movement in short term rates will positively impact our earnings and flow directly to the bottom line.

As a result earnings in our portfolio today would materially benefit from the rate hike is expected in the coming months.

Moving to credit quality, we see positive fundamentals on the ground for high quality real estate as far as occupancy rents and supply demands.

But a rising rate environment naturally creates considerations for real estate valuations, especially for assets that are more fixed income in nature.

Our low leverage lender, 65% LTV on average our investments start from a position well insulated by substantial equity value.

Moreover, our originations this quarter and indeed over the past 18 months reflect a strong bias towards markets and assets experiencing outsized growth and the ability to drive NOI increases that can outpace rising rates.

Today, nearly half of our loans are collateralized by multifamily hotels parking in self storage assets that are able to reprice their rent frequently and are therefore naturally well hedged for inflation and.

And as a transitional lender the majority of our remaining collateral is positioned to capture rent growth stemming from value add strategies. For example, newly built office buildings, which are attracting an outsized portion of tenant demand and seeing increasing rent levels as a result.

And the persistent impact of supply chain disruption in materials cost inflation has driven replacement cost up 10% to 30% or more in core real estate sectors.

Making new supply and more challenging to build and supporting the value of our existing collateral.

The credit performance of our portfolio. This quarter reflects the positive real estate fundamentals as well as the strength of our borrowers and our investment process.

We continue to see 100% interest collections across the portfolio and positive credit migration.

And we had $1 3 billion of prepayments, 91% of which were in office and hotel indicative of the progression of business plans and liquidity for our collateral in all property sectors.

Third on investment activity.

The first quarter demonstrated our ongoing ability to source and execute on our brand a compelling low leverage lending opportunities in targeted sectors and markets.

Closed $3 4 billion of new loans at a weighted average LTV of 65% in line with our broader portfolio, while achieving an average all in yield of 395 over wider than recent levels, all while continuing to shift the focus of our origination activity toward our highest conviction themes.

In line with recent quarter nearly half of our <unk> loans were in the sunbelt, including $1 billion of multifamily in South, Florida, and Nevada, and Dallas and $500 million of growth market office.

We have also seen accelerating activity in the U K with $850 million of loans closed the quarter.

Because of our long standing presence in the less efficient Western Europe , and Australian markets, we are well positioned to capture highly attractive relative value lending opportunities.

For example, our UK loans this quarter averaged five points lower leverage and more than 50 basis points wider spread than our overall portfolio.

And given the ongoing flight to quality across all asset classes, we made over $500 million of new construction loans on assets that will be best in class in their respective markets upon delivery.

Looking forward, while broader capital markets volatility may moderate overall transaction volumes, we see an attractive backdrop for our business, which was built for resilience and performance in all market conditions.

Our position within Blackstone results in a constant information flow from over 500 billion.

Owned and finance real estate, allowing us to make well informed targeted investment decisions in a dynamic and fast changing environment.

And we have an expansive global sourcing platform and more importantly, deep relationships with major borrowers around the world, which makes us a trusted partner, especially in periods of uncertainty.

We see today, the makings of a particularly attractive market dynamics for our brand of lending.

There is significant accumulation of real estate fund capital in search of ways to earn a real return against driving inflation 300 billion and growing.

At the same time, <unk> and CLO market volatility have driven many smaller scale scale lenders to the sidelines rendered securitized execution black reliable and created more demand for transitional debt capital.

The overall result is a favorable competitive backdrop for scale well capitalized platform such as ours.

This affords us the continued ability to be discerning on credit while capitalizing on the market trend pushing spreads wider and.

We presently have $2 $9 billion of loans closed or in closing post quarter and a further indication of the attractive opportunity set for our business.

Turning to our access to capital the.

The diversified nature of our fully scaled balance sheet is a critical ingredient to our success.

We are an active issuer with well established relationships across a wide range of capital markets execution bank facilities syndication CLO term loans high yield convertible notes and equity.

This allows us to be nimble and opportunistic with our balance sheet tapping various sources of capital when we see a strategic execution.

Our balance sheet is match funded and well hedged against foreign currencies and as a result, we are well insulated against basis risk and changes in the yield curve.

This high integrity capital structure underpins the stability in our business despite potential movements in rates spreads and transaction volumes.

With an opportunistic lending environment before us we expect to continue to strategically access our various funding sources to support the growth of our portfolio into a compelling lending opportunities we see ahead.

In closing <unk>.

Coming quarter should represent an exciting period for our business.

We expect to the robust earnings power of our $25 billion performing loan portfolio to accelerate our central banks around the world raise their benchmark rates.

Our portfolio has a credit profile that is well insulated from volatility and well positioned to capitalize on growth and.

Our platform reach and dynamic balance sheet will continue to allow us to execute on attractive investment opportunities wherever they arise.

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

Thank you Katie and good morning, everyone I'm excited to run through the results for the quarter and as importantly, our position as we move forward in 2022.

Starting with the <unk> results, we reported GAAP net income was <unk> 59 per share and diluted GAAP earnings a new metric for us for <unk> 58 per share.

This diluted earnings metrics as a result of the new accounting standard that came into effect this year, which requires us to assume all convertible notes will be settled in shares and therefore dilute earnings.

We've always settled all convertible notes in cash and have the intention to do so in the future.

<unk> was not previously impacted.

The new accounting rules eliminate optionality and require earnings dilution to be calculated for all outstanding horrible note.

Our distributable earnings per share for the quarter was <unk> 62, which is unaffected by the GAAP earnings solutions and properly considers only our shares currently outstanding.

Our <unk> is down slightly from the 66 run rate level, we discussed last quarter as <unk> earnings included no material acceleration income.

<unk> seasonality of the reduced day count compared to other quarters.

Importantly, the growth in our portfolio largely absorbed the new capital, we raised which muted some of the J curve impact on our once your results.

Finally, our book value per share of $27 21 was flat relative to <unk> and our <unk> 62 dividend at a level. We have maintained for 27 consecutive quarters. It was fully covered by our <unk> distributable earnings with 106% dividend coverage over the last 12 months.

Perhaps more important than our <unk> earnings is where we ended the quarter from a rate sensitivity perspective.

Our business model has consistently focused on floating rate assets matched with floating rate liabilities, creating a positive earnings correlation to rising interest rates.

We have discussed on previous calls that the floors embedded in many of our pre COVID-19 loans modified this direct correlation and contributed meaningfully to our earnings over the past two years following the precipitous decline in interest rates in April 2020.

As of March 31.

A weighted average floor on our portfolio was only 37 basis points down from 81 basis points in March 2020, and materially below current USD LIBOR.

Therefore, we are now once again positioned for earnings growth as rates are expected to continue to rise this quarter.

We provide more data in our earnings release and 10-Q, but as an example, a 200 basis point increase in base rates, implying USD LIBOR of about two 5% would add roughly $44 million to our annual earnings.

<unk> <unk> per quarter on a run rate basis.

One of the key contributors to our rate sensitivity is the growth of our floating rate senior loan portfolio, which had another record of $25 6 billion at quarter end.

Loan fundings of $3 billion outpaced repayments of $1 3 billion.

Force grow.

And our portfolio must be accompanies a strong credit underwriting and we are happy to report another quarter of stable performance on that front.

Our portfolio origination LTV remains at a modest 65% level with 100% interest collections and we upgraded the risk ratings of 15 loans this quarter.

With no new downgrades impairments were non accrual loans.

Lastly, our seasonal loan loss reserve, which impacts our GAAP EPS and book value, but not our distributable earnings was effectively flat for the quarter at 75 per share.

Although about one quarter of our portfolio secured by assets in Europe , we have no exposure to Russia or eastern Europe , and so the seasonal reserve on our European levels would not impacted by the warrant grants.

This quarter, we saw some turbulence in the capital markets of the world by adjusted expectations around rates and inflation as well as the evolving geopolitical situations.

With DSM to use reverse capitalization structure and blackstone's broad banking relationships, we continue to efficiently capitalize our business this quarter, despite a more challenging market generally.

Notably this quarter, we closed $2 $1 billion of credit facility financing nearly.

Nearly three quarters of which priced at a spread of 150 basis points or less.

Excluding $548 million financed under a new $1 billion credit facility.

This brings us to 14 credit facility Counterparties further diversifying our access to capital and improving our ability to drive the best execution for each of our loan financing.

We also closed two syndications totalling $445 million this quarter, providing another source of financing at attractive levels for these assets.

Lastly, we issued $300 million of convertible notes in March effectively refinancing the notes maturing in may are only corporate debt maturing this year.

Other than our $220 million of convertible notes due 2023, we have no corporate debt maturing until 2026.

This combined with our term matched asset level financing translates to a stable balance sheet designed to endure any potential turbulent market conditions.

Taken together, our financing activities increased liquidity to $1 2 billion at quarter end net of the upcoming May convertible note repayment.

Finally, given the attractive investment environment and robust pipeline as Judy mentioned, we also launched a new seven year term loan. This morning, Tad further flexibility to our balance sheet.

With our current liquidity and access to diverse capital sources, we are well positioned to invest in today's dynamic market conditions.

And with our floating rate portfolio, we are poised to organically grow earnings in a rising interest rate environment.

For these reasons, we believe <unk> is in a strong position as we move into 2022 to generate robust high quality earnings for our stockholders.

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

A question answer session and I will begin and just see reminder, if you would like to ask a question. Please press star one.

We request that you ask one question and only one follow up if you'd like to ask additional questions. Please press star one to be re entered into the queue.

Our first question comes from Don on Dirty, We divest Fargo. Please go ahead.

Hi, good morning.

If you could talk a little bit about are you positioning the portfolio for a refresher and it feels like Youre Bob.

And if you did feel like the assumptions was imminent what kind of actions would you take.

Thanks, Todd I think we feel that it's a little early to be focusing too much on a recession record low unemployment, 6% wage growth, we see strong demand for the types of real estate, we invest in on the ground, but I think as I mentioned in my remarks, the critical piece to our portfolio, which we've really been focused on for you.

Years is low leverage lending, it's a very well capitalized experienced sponsors who can withstand volatility. So we feel that our portfolio and our overall investment strategy, which has been consistent over time puts our part put it puts our loans in a position of being really insulated from any market volatility.

I think that strategy was really validated during COVID-19 when our credit performance was very strong and we think that it continues to put our portfolio in a strong position.

Okay and then.

It sounds like do you think this is a good environment, where some of the marginal players.

The bottom line through the volatility.

Does that mean that you think you can have pretty strong asset growth again this year.

With loan growth, yes, I think that.

Sure.

Seen asset growth every year in the history of the company I think in strong environments and less active environments and I think that the key part of our business is that originations and repayments tend to be correlated so over time, we've been able to very consistently grow the portfolio in.

In various market environments, and I think that yes, right now.

The competitive dynamic is such that scaled well capitalized platforms with diverse access to capital.

I think we'll be in about our position and Thats what were seeing out there in the market. So I think that will result in us being able to be very discerning on credit very selective on the assets that we're doing and capture a broader market share of the opportunities that we find most interesting.

Thank you.

And next we have Steve Delaney.

J P M Securities. Please go ahead.

Good morning, Thanks for taking the question Katy you made positive comments I thought about office.

And obviously rent escalations.

Four years ago Blackstone.

Pretty large one and Hudson yards.

Construction lending I believe two related.

Property I think was the spiral.

One number six it appears in your deck just using that as an example to how you view the office market and you used the term opportunistic when you were talking about the U K.

How does this how does this loan playing out.

And do you see this is why can example of what Blackstone with its relationships with sponsors is able to consistently accomplish thank you.

Yeah, I think that the spiral is a great example of our philosophy and CSS on Opex that is a sub 50% loan to cost construction loan to Tishman Speyer actually is one of our strongest most experienced and most.

A strategic set of developments sponsors we've been in that loan. The leasing has been very favorable theres been a couple of recent news articles about it construction has proceeded as expected and overall our thesis about newer higher quality office in the right locations really outperforming.

Much been borne out by that asset and we feel great about that exposure and we actively look to make more loans like that I think that thesis as we've talked I've.

Spoken about consistently is really true throughout markets.

We see that the newer well and monetize the office. It provides an office environment for our employees for users that is really differentiated and really fosters the type of collaboration that drives company has ahead being an office in south.

We are looking for those opportunities as lending opportunities, we like being in best in class assets, we like being at very low leverage points, obviously, and we're seeing a lot of those types of opportunities around the world.

Great well I appreciate that color and I will just leave it with that thank you.

Yeah.

Next can you turn them on me.

BW. Please go ahead.

Thank you very much for taking the questions.

Do you agree that mark to market portfolio, LTV ratios would be lower than the 65% you are selling.

Considering that.

In terms of your recent originations.

Still probably at least half the portfolio might be.

Originated prior to the middle of last year, and we've seen a big run up in commercial real estate prices. So do you think something in the mid fifties is reasonable to assume.

I think Directionally. Your philosophy is right I think that a there has been an increase in real estate values driven by demand fundamentals driven by lack of new supply rising replacement costs, especially in the markets and assets were focusing on and even more importantly, it's a transitional lender.

We're lending into value add business plan. So the value of the assets, we lend on by virtue of the capital going into them.

The repositioning that our sponsors are typically doing should increase value in assets over time in terms of the magnitude I am not sure exactly where that would land, but I think directionally you're on the right track.

Thank you.

Secondly, do you believe that the overall commercial real estate market is positioned to absorb the higher rate environment without experiencing an uptick in loans default will be experienced during COVID-19 was a shock to the system with an immediate spike in loan.

Fee rates and defaults and then a lot of government.

Systems as well as forbearance that mitigated that impact and then of course, the improving economy.

Delinquency rates have continued to improve.

But at this point, we will have a substantial amount of debt maturing this year that will be refinancing into likely a 5% coupon potentially higher depending on term. So do you think that the market can absorb that coupon rate based on the fundamentals or do you expect.

The market rate of delinquency and default to increase.

I think it's important to think about the fact that we see the market is not monolithic and we're most focused on the parts of the market. Obviously that we think are well positioned to absorb the <unk>.

Types of rising rates, we're looking at our borrowers are sophisticated theyre investing in assets as I mentioned that have value add plans that should increase cash flow over time, and importantly, rising rates, obviously very driven by the inflation that we're seeing which when youre investing in hard assets.

It's really a place that can realize the benefit of increasing income in the face of inflation I think the other thing to really focus on is that leverage in the system, it's still quite low generally so.

Looking at the refinancing opportunities for assets that are in the market if.

If we were in a position like pre last GSE when leverage was 80% to 85% that's a completely different story than today when leverage really has been more in that mid <unk> level across all markets and asset classes, it's a much lower level.

And in particular, obviously in our portfolio, we think that the combination of low leverage assets that can grow their incomes in the face of rising inflation to outpace rates and importantly sponsors that are sophisticated and have been preparing for the prospect of rising rates for a long time really should enter to the benefit in terms of the performance of the assay.

And the loans that we're making.

Thank you.

And the next question is coming from Rick Shane with Jpmorgan. Please proceed.

Thanks, everybody and hope you're well.

Just wanted to talk a little bit about.

Execution on the loans given the transitional nature.

I am curious if you were seeing any delays in terms of build out or construction and then are you also seeing any delays in terms of.

In terms of absorption.

All properties.

Thanks, Craig that's a great question.

I think that we talk a lot about sponsor selection and that's important from a financial perspective, but it's also really important from an execution perspective, and as far as value add business plans. When we're lending to some of the most active and experienced developers in the world that really creates a difference in their ability to source material.

<unk> and their relationships with the trades with GC is and their ability to really get their projects done. So on the margin have we seen one off examples of one particular material that's been a little bit delayed of course, I think no one's immune from that but I think that by and large because we're lending to sponsors that are really the.

Best able to manage these pressures we've really seen very on track performance for our assets in terms of the execution of the value add business plan.

I think on the absorption side it really depends on the.

The asset in the market, obviously, I think the growth markets have exceeded all expectations in terms of <unk>.

Occupancy rent growth absorption really across all sectors multifamily. It's most obvious example of that but we're seeing it in all sectors and I think that in some of.

The New York and San Francisco to the World I mean, those markets has been a little bit slower, but we're still seeing positive trends for the types of assets that we lend on.

Great. Thank you very much.

And next we have Derek <unk> Bank.

Bank of America. Please go ahead.

So excluding the prior quarter I believe prepayment fees were still remained well below pre COVID-19 levels. So could you provide any additional color when prepayment fees could potentially normalize.

Okay.

Hey, Derek its Doug.

Prepayment fees are lumpy.

And of course in the fourth quarter, we did have an outsized amount of prepayment income this quarter, we happened to have Vanishingly little iffy.

<unk> none.

Typically we've had.

Close to <unk> on average if you look back over over over the last three years to four years. It does fluctuate quarter by quarter I think with the velocity that we've seen returned to the portfolio in 2021.

Which is maintained through 2022, thus far we would expect to see that two to four cents of.

Prepayment income on an normalized or annual basis going forward. So I think we're I think we're through the slowdown in prepayment income that we saw due to the.

The spaces in the portfolio during COVID-19 , but.

We're never going to be away from the fact that it's generally very lumpy and it can fluctuate quarter to quarter.

Okay, Great and then my.

My follow up is just given the asset sensitivity disclosures are there other factors that we.

Investors need to potentially consider.

In terms of either maybe tighter credit spreads to mute.

Those higher rate resets.

Maybe even the higher delinquency rates.

That could potentially offset at least a portion of that asset sensitivity.

Hey, Derrick Doug again that is that is a good question.

No doubt this is an all else equal analysis that we've included in the earnings release and that Tony was alluded to and there are lots of variables that go into our earnings.

Certainly don't expect in our portfolio any drag from nonperformance, there are no signs of that.

With regard to the loans that are currently on the books, obviously the spreads are locked in our financing spreads are locked in as well. So we wouldn't expect a lot of variability in that in the timeframe that we're expecting these rate changes.

To happen is there a correlation between an inverse correlation between rates and spreads generally.

Think there probably is it's not necessarily one for one.

So.

I wouldn't read too much into that generally speaking were able to maintain the net interest margin that ultimately drops to the bottom line by moving the spreads on our debt and our assets in tandem.

<unk>.

An interesting sort of beneath the surface.

Layer.

The interest rate sensitivity is really the sensitivity to the different rates in the different currencies.

For example, LIBOR U S dollar LIBOR moved further faster than Euribor.

We would see significant upside in these numbers due to the way our FX hedges work.

So there is a lot to it in terms of variability as you suggest we think theres probably variability to be upsides.

To these numbers, which we presented.

Thank you.

And our final question comes from Doug Harter.

<unk> Suisse. Please go ahead.

Thanks, following up on that last question about about the rate sensitivity. How are you thinking about the dividend given the potential for for meaningfully higher earnings coming from higher short term rates.

Sure. Thanks Jack.

We obviously review the dividend with our board quarterly.

It's a discussion every quarter around our thoughts on earnings and the sustainability of the earnings profile, the increasing earnings and creating the most attractive stable stream of dividend income for our shareholders is our key priority and we also like the benefit of building book value through retained earnings along the way we.

Feel very good about the trajectory of our earnings we've talked a lot about that today, especially given interest rate sensitivity and our ability to continue seeing portfolio growth and I think without contracts. Yes, we will continue to reevaluate the dividend on a quarterly basis.

Great and just on that how much or how do you view your flexibility.

How much capital or how much earnings you could retain versus kind of needing to pan out for the REIT test.

We pass our retest pretty cleanly. So the 62 dividend level that we have today I would say from a technical perspective isn't isn't in jeopardy.

It is something that we are regularly.

What I'm, saying in jeopardy, meaning that we would need to increase the dividend just for compliance purposes.

At this point, we do reassess this quarterly and at some level. If you started to get really far out.

Along the table you may at that point, but at present, we don't have a lot of technical pressure on the dividend level.

Great I appreciate it.

And we did I would like to turn the call back to Weston Tucker for closing remarks.

Great well. Thank you everyone for joining us and if you have any questions. Please follow up with Tim or myself after the call. Thank you.

Yes.

Goodbye.

Okay.

Okay.

Okay.

Yes.