Q2 2022 Blackstone Mortgage Trust Inc Earnings Call
Welcome to the Blackstone mortgage trusts second quarter 2022 Investor Conference call. During the presentation. Your lines will remain on listen only you would need to happen at any time. Please press Star then zero on your device and then operator will be happy to assist.
Ask a question during the conference call. Please press star and one on your device to read third question best start to I would like to advise everyone that this conference is being recorded and beat that I am handing over to Weston Tucker head of shareholder relations.
Perfect. Thank you and good morning, and welcome to Blackstone mortgage trusts second quarter Conference call I'm joined today by Mike Nash Executive Chairman, Katie Keenan, Chief Executive Officer, Austin, Pena Executive Vice President investments, Tony Marone, Chief Financial Officer, and Tim Hayes shareholder relations.
This 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.
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.
Also refer to certain non-GAAP measures on the call and for reconciliations you should refer to the press release and our 10-Q.
The audio cast is copyrighted material of Blackstone mortgage trust and may not be duplicated without our consent.
For the second quarter, we reported GAAP net income per share of 55 cents while.
While distributable earnings were 67 per share.
A few weeks ago, we paid a dividend of 62 per share with respect to the second quarter.
If you have any questions. Following today's call. Please let tim or I know and with that I'll now turn things over to Katy. Thanks, Weston <unk> standout results. This quarter are a testament to the resilience of our business model even in turbulent markets. Despite a backdrop characterized by widespread volatility tighter financing availability and slowing real estate.
Transaction volume, we generated higher distributable earnings grew our portfolio and increased our liquidity position all while maintaining our strong credit quality.
These results underscore the four key advantages I outlined last quarter, which position the SMT exceptionally well to outperform in today's environment.
First as a floating rate lender our earnings our enhanced not pressured by rising rates.
We have defensive assets, our low leverage senior loans have strong downside protection and well capitalized sponsors supporting credit performance in a wide range of macro scenarios.
Third Blackstone's unparalleled real estate platform gives us access to the broadest pipeline of investment opportunities globally, and the tools to select the most compelling among them.
And fourth our continued access to a wide variety of capital sources across asset level and corporate markets allows us to capitalize our investments accretively and continuously enhance the diversity and stability of our balance sheet.
The real World impact of these dynamics proved out in our results this quarter and we expect they will continue to power our business forward.
Starting with earnings we achieved 67 per share of distributable earnings for the second quarter up from 62 last quarter. The combination of a fully scaled portfolio and higher interest rates is yielding a strong growing earning stream covering our dividends by 108%.
Our business has several inherent benefits that support the stability and expansion of this income.
Our portfolio is match funded we lock in an attractive levered spread but also benefit as base rates increase and drive earnings higher in our floating rate loan portfolio.
And our income generation is not dependent on the pace of new deal activity in periods when transaction volume flows like today, we see fewer originations, but also fewer repayments, allowing us to remain optimally invested.
The reliability of this income stream is further underpinned by our continued credit performance a function of our rigorous asset selection and underwriting process informed by the deep knowledge and experience of the Blackstone real estate platform.
We have long been focused on constructing a portfolio of assets that would be resilient in periods of inflation and volatility.
We did this by creating multiple layers of protection for our senior loan investments first lending on hype.
Second lending at low leverage points, well insulated in a variety of performance scenarios.
And third lending to sophisticated well capitalized sponsors with the experience to execute plans that grow cash flows over time and the wherewithal to financially support their assets further if needed.
CAGR that was clearly demonstrated during the call.
Sponsors invested over $500 million in new cash equity to weather the storm.
At present, so we are far from the disruption of two years ago.
While the capital markets are challenged on the ground real estate fundamentals remained strong.
Dias downturns were characterized by over leverage and overbuilding today we.
Demand in our high conviction sectors is that historically strong levels and supply is ever more constrained by rising replacement costs.
In our multifamily portfolio, which represents seven $6 billion of our post Covid originations income growth continues to be driven by a pronounced supply demand mismatch, which is only widening in the face of rising cost to build and higher mortgage rates for potential homebuyers and.
In our portfolio. This has translated to a 90 basis point increase in that yield on average between closing and today, indicating robust growth and cash flows which support property values despite cap rate widening.
For hospitality assets, we continue to see improving fundamentals for drive to and fly to resorts with Revpar, well above 2019 levels in our loan portfolio consistent with broader market strength.
While urban hotels still lag the acceleration in international and corporate travel has driven revpar in those assets nearly back to 2019 levels.
Creating largely positive debt service coverage in recent months.
And while headwinds in the office sector are apparent so too is the clear outperformance of the newer well and monetize assets we focus on.
And just one example, CBRE data shows that class a properties nationwide have posted positive six 7% net effective rent growth year to date versus negative one 1% for class B and C. R.
Our 91% class a portfolio is seeing continued tenant demand and leasing activity with business plans progressing.
This performance is also apparent on the capital market side with $3 $6 billion of office loan repayments over the last 12 months of which $2 2 billion were in New York City, San Francisco, Chicago L. A R D C.
Core urban markets that while challenged continue to show tenant and investor demand for high quality office assets.
The impact of these dynamics came through in our portfolio. This quarter as we upgraded 19 loans and had no downgrades.
From an interest coverage perspective, 90% of our loans have in place cash flows that cover debt service at second quarter rate levels or have structural enhancements to provide further support like Terry guarantees or significant interest reserves.
More notably in a scenario where rates rise another 200 basis points. This figure is still 77% conservatively, assuming no incremental NOI growth.
And from a value perspective, we started at a well insulated basis of 64% LTV.
Implying 36 points of cushion going in with the added benefit of lending on transitional value add business plans that should further de risk our position over time.
Indeed for 15 loans that repaid over the last six months exit valuation implied an average reduction of about 14 points and our LTV over the $3 six year average period of our loans.
While rising rates inflation and continued macro pressures will create headwinds for overall real estate performance. We believe our portfolio of senior loans is well positioned to withstand this turbulence.
Turning to new investments the market environment today has changed considerably since our last call, but remains attractive for strong well capitalized lenders like <unk>.
Capital markets dislocation has pushed the MBS originators midsized debt funds and even many banks out of the market clearing the field and creating a compelling competitive dynamic.
This backdrop, we have drawn on our global platform to identify investments that fit our stringent risk and return criteria.
Based on this approach we originated $3 billion of new loans. This quarter headlined by two large scale low leveraged transactions on trophy quality real estate.
The first was a 913 million senior loan representing 24, 5% of our 4 billion, 54% loan to cost financing for Blackstone's acquisition of Crown resorts, which owns the market dominant highest quality hotel casinos in Australia.
As the world's reopened following COVID-19 leisure travel rapidly recovered resuming the long term positive trend of growing travel and experienced spending globally.
Blackstone has tremendous experience, bringing both investment and human capital to drive hospitality assets to their full potential.
Recently with the Cosmopolitan in Las Vegas and.
And crown represents a similar opportunity to materially improve operations and performance.
The credit of the loan is similarly compelling senior to $3 5 billion of new cash equity and a 56% discount to replacement costs and irreplaceable a plus assets.
Our second large loan of the quarter also reflects our focus on top sponsorship and asset quality.
In June we closed a 62% loan to cost $675 million financing for Walnut Creek a batch.
First in class New development in Austin, Texas, the fastest growing major metro area in the U S.
The mixed use property, including multifamily office and hotel components will feature best in market amenities and strong ESG characteristics, including LEED gold at well brand standards in a carbon neutral commitment from the hotel, operator, and important differentiator for tenants and institutional investors.
Our loan sponsor as a partnership between PSP, a top Canadian pension fund and repeat construction loan borrower as well as Lincoln property company in Taiwan residential experienced best in class developers.
Our expertise in large scale complex developments, we were able to structure an attractive low leveraged loan on this flagship real estate projects.
Altogether this quarter, our loans reflected our high bar for new investments in the current environment targeting lower risk at compelling returns.
Quarter, new originations averaged 59% LTV and a $4 40, all in yield over base rates concentrated in sector is well positioned to outpace inflation, such as hospitality multifamily industrial and Newbuild office.
Going forward, our approach remains patient and selective as we weigh current opportunities against those in the future and preserve our dry powder for particularly compelling investments.
As a result, we expect the pace of our investing to slow in the near term given our investment outlook, coupled with the overall reduction in market transaction activity.
Fortunately our earnings power is amply supported by the well invested portfolio, we have in the ground today.
Moving to the right side of our balance sheet as always our investing activity was supported by our strong access to asset level financing as well as corporate capital, where we continued to execute efficiently despite significant dislocation across the market as a whole.
Through our track record of credit performance and responsible borrowing we have developed deep relationships with large banks around the world who continue to support our business as they consolidate lending activity to their strongest clients.
This quarter, we added $1 $9 billion of financing capacity with both new and existing core relationships across credit facility and syndicated execution.
Now have 14 credit facility lenders as well as numerous syndication partners a diversification of financing sources that is particularly valuable in a market where liquidity is scarce.
On the corporate side, we have been active raising capital over $800 million in the first half of the year, while also extending the overall tenor of our liability structure.
In May we retired $338 million of converts and raised $500 million of seven year duration term loan b.
As a result of our forward looking approach we ended the second quarter with over $1 $5 billion of liquidity and no material corporate debt maturities until 2026.
Putting us on strong footing to manage our portfolio and address investment opportunities as they arise.
In closing in an uncertain environment <unk> remains a steadfast partner to our borrowers who trust us with their most important transactions are.
Our lenders, who know us as a reliable steward of their debt capital and our shareholders for whom our commitment to preservation of capital and responsible investing has produced a strong consistent and well covered dividend for nearly a decade.
Our low leverage performing loan portfolio continues to generate strong income with tailwind for growth.
Tractive current return, which is ever more valuable amidst today its volatility.
And though the backdrop will likely remain uncertain for some time, our business is sound with well protected assets strong liquidity, a stable balance sheet and a powerful earnings stream.
Before turning it over to Tony I would also like to thank Doug Armer, who will be leaving us shortly to pursue other opportunities.
Doug has been instrumental in building and building the <unk> business and operations since inception and has been a wonderful partner to me and the rest of the <unk> team over the years.
Thank you Doug for your tremendous contributions to <unk> and we wish you all the best in your future endeavors Tony.
Thank you Katie and good morning, everyone.
This quarter's results reflect a strong tailwind to <unk> earnings in the current rising rate environment.
Set against the backdrop of portfolio and balance sheet stability as we enter more challenging market conditions.
We reported GAAP net income of 55 per share and diluted GAAP earnings of <unk> 54 per share.
As we discussed last quarter. This diluted earnings metrics as a result of the new accounting standard that requires us to assume all convertible notes will be settled in shares and therefore dilute earnings prospectively.
We continue to believe that basic EPS is a better indicator of our performance and our diluted earnings.
Our distributable earnings per share for the quarter was <unk> 67, which.
Which is up <unk> <unk> from <unk> as a result of incremental portfolio growth in the early stage impacts of rising interest rates on our portfolio.
Of an index matched floating rate lender, we will continue to benefit from rising rates with an incremental 100 basis point increase in base rates translating to 15th annual earnings assuming all else equal.
Of course underpinning the earnings growth. This quarter is the stable credit performance of our loan portfolio.
We have no new impairments non accrual loans or risk rating downgrades this quarter.
And our portfolio LTV of 64% and average risk rating of two eight remaining.
<unk>.
<unk> noted earlier the types of assets, we lend against.
Transitional business plans that can adapt to changing conditions.
Ill suited to perform in the current market environment.
Another point of consistency this quarter as our book value per share which is effectively.
Subsequent reflects incremental uncertainty in the macro environment, but as forward leaning life of loan loss reserve calculation.
This is not reflective of any particular credit concerns in our portfolio.
A more conservative seasonal reserve was offset by retained earnings generated by our strong dividend coverage, which contributed to book value.
In addition, despite significant turbulence in foreign currency markets. This quarter, we experienced virtually no impact on our earnings or book value.
This is a result of our consistent approach to programmatic finance our investments in local currency hedge our net foreign currency investment in each one.
On the investment front, we closed $3 billion of new loans funded $2 8 billion.
Outpacing repayments of $1 4 billion.
Both metrics are roughly in line with <unk> levels fell below our 2021 run rate as we have seen a decline in transaction volume generally and have been more selective in deploying our capital in recent months.
It is important to note that our pace of originations and repayments generally trend upward or downward together.
Wowing us to maintain the earnings power of our large scale portfolio.
Similarly.
Our asset yields and borrowing costs, while a similar market trends producing stable attractive net rois for our stockholders.
This quarter, we closed $2 $5 billion of asset level financings, including $1 6 billion through our credit facilities and $897 million of securitization.
Despite a generally less liquid banking sector, our credit facility lenders continue to finance new investments given our proven track record as a strong partner for lenders.
Looking at our <unk> financing banks are effectively lending at a 49% look through LTV to the underlying real estate, providing an attractive low risk investment opportunity for them.
Our incrementals indications this quarter, bringing us to $1 $3 billion of syndications year to date, which are inherently stable nonrecourse non debt financing structures that provides structural leverage towards senior mortgage loan positions.
BT noted, we repaid $338 million convertible notes that matured in April .
Our remaining corporate debt maturities out to 2026 and beyond.
Then a small $220 million of convertible notes maturing next year.
Combined with our asset level financings that are term matched by design. We therefore have very little duration risk on our liabilities as we enter a period of potentially reduced market liquidity.
Running a reliable overall capitalization for our business.
In addition, we borrowed an incremental seven year $500 million term loan B in may which contributed to a $1 5 billion of liquidity at quarter end.
This capital provides further installation against potential market volatility.
More importantly, as available to deploy into an attractive lending environment.
We see an advantageous backdrop to achieve premium risk adjusted returns.
Our growing earnings more than support our 62 cent dividend.
With the stability of our portfolio and capital structure, we are well positioned as we move into the latter half of 2022.
Today's tougher market conditions, we believe businesses with a strong track record and positive fundamentals will outperform.
Look forward to be FMT generating strong reliable returns for our stockholders.
Lastly, I would like to Echo <unk> comments in thanking Doug for his partnership over the years.
Best of luck to you in the future for the entire <unk> team.
With that I'll ask the operator to open the call to questions.
Just a reminder to ask a question. Please press star one to withdraw your question Press Star two please make sure to ask one question on the if you would like to have a follow up question Press Star one again to get into the queue.
Our first question is coming from Stifel loss from Raymond James. Please go ahead.
Can you appreciate the comments around the pipeline and originations.
No.
Wanted to see if you could touch on kind of the relative attractiveness.
In the states versus in UK and Europe , maybe.
Maybe how that's shifted.
Respectively over the last few.
A few months and how you guys have responded what's your what's your originations reached.
Regions.
Alright, Thanks Steven.
I think generally we're taking a very high bar sort of collective approach globally and our goal is to create the <unk>.
<unk> pipeline, we can and be very selective within that pipelines are down the most compelling opportunities.
In terms of relative value. The us has become perhaps a little bit more attractive on a relative basis versus Europe as compared to years ago.
I think that really speaks to the competitive dynamic <unk> dislocation and the sort of broader impacts of that in the U S financing market are more pronounced because <unk> is such a more relevant part of the U S market as compared to Europe . For example, so I think that's created a lot of dislocation on the competitive side, which is.
As I said in the remarks sort of cleared the field for lenders such as ourselves who are active and well capitalized.
Great and as a follow up to touch on your comments about it's pretty competitive out there financing you guys soon.
Recently been able to put more in place can you talk about.
Kind of opportunities to continue growing the non mark to market financing facilities.
While certain securitization markets are really not an option at this point.
Yeah, absolutely I think that we have been evolving the structure in terms of our financing structure over time with each new deal. We do we improve the terms, that's just sort of in our nature.
Just trying to strive for better so I think that given our track record as a borrower given our bank relationships, we've really been able to sort of push the envelope in terms of structure.
As a result of the fact that we have is very high quality well performing diversified facilities that we can use in different ways to create advantageous financing structures that are really attractive to the banks and also attractive from our balance sheet perspective.
Great I appreciate the comments this morning.
Okay.
Thank you.
The next question is from Dolphin Dirty from Wells Fargo.
Hi, good morning.
Talk a little bit about the it looks like the allowance went up can you maybe provide some color on what assumption youre, making with Stifel.
Trend quite scenario and then secondarily what are you seeing on property values in commercial real estate it seems like.
While some coming down at a decent clip in certain markets.
John I'll start on your seasonal question so.
Covered in their remarks.
When we were going through our seasonal process this quarter and you're sort of looking at the market. We felt that it was prudent to nudge up the general reserve to reflect the incremental uncertainty.
We're not per se.
Modeling a recession when you think about the different qualitative judgments you make and starting to see some reserve and you compare what we are doing this quarter to Covid for example.
Yeah.
Making more conservative assumptions around the macro environment in 2020 and sort of transitioning into early 2021.
In this quarter as we sort of looked at the world. We felt like it made sense to move back.
A partial step so not anything super Super Conservative like a recession, but.
We didn't think it made sense to notch up the macro conservatism all of it.
I think on property values, if you look across the overall market clearly the impact of rising rates is going to have an impact on property values, but I think the key is the impact isn't felt evenly right across all different types of assets. If you think about where you want to be in this environment, it's hard assets with short duration leases where you.
Can see growth and that growth is really sort of the third variable when you think about the impact of rising rates.
Rising cap rates and property values.
We're not lending on the market, we're lending on individual assets that we have selected with a view towards inflation and I think that combined with the installation that are 64% LTV credit position provides it makes us feel very good about whatever volatilities happening in property values being removed from our basis in the assets, but I think in.
General across the market clearly, particularly for assets that have more long duration cash flows with less growth the impact in cap rates is certainly going to be negative for property values.
Thanks, guys.
The next question is coming from Jade Rahmani from K B W.
Please go ahead.
Thank you very much good to speak with you Katy as Youre approaching managing this $25 billion portfolio can you give us some sense as to what your dashboard looks like what your primary focus is at this point in time is it defense is it opportunistic which was mentioned a couple of times in the.
Slide deck is it even portfolio rotation into those resilient asset classes with favorable rent growth characteristics and finally as it also engagement with borrowers to make sure that the asset management function is performing up to your expectations. How do you approach that.
Sure I mean, I think it'll it'll probably come as no surprise that the answer is all of the above.
We are really fortunate to manage this business with the backbone of a tremendously talented and deep team on the origination side the asset management side portfolio management data analytics, and we have invested tremendously in those areas over the last several years to really make sure that we have.
Great real time information as to what's going on in our portfolio both to inform our new investment decisions and make sure. We're accelerating in those areas, where we see more growth as well as be proactive and really understand exactly what's going on in our existing portfolio in real time, So I think that having the information and the <unk>.
Organization of the information within our.
Within our platform here, both on the <unk> portfolio, specifically, but also more broadly across the overall Blackstone real estate platform puts us in a tremendously advantaged position as things are changing because it allows us to be really up to the minute in terms of what's going on in the market and manage our investment decisions and our borrower.
Discussions with that information in mind.
Thank you in terms of the transitional lending business.
You did mentioned CBS to dislocation there, but is there a loan yield of treasury yield or a spread you think is most insightful at this point in time see MBS spreads are near record highs expressing dislocation in that space. The CLO market is also in turmoil Avalon.
And by excess supply, but also demand is weak in that space.
There is some flow through pricing impact to the transitional lending market that we should be aware of but what do you think we should be looking at in terms of a yield in terms of the spread.
As indicative of the health of this business.
Yeah, I think that if you look at public markets generally relative to private markets. They tend to be a lot more volatile for obvious reasons. It's just a market that has more technical aspects around supply demand. It creates more volatility in terms of the prince of deals one after that.
That's true in the REIT market, it's true in the CLO market, the <unk> market and I think the private markets really are generally just a lot more stable on both sides of the coin.
So I think that looking at private market.
Dynamics, whether it's where we've been originating loans for our peers.
Our other private market data points is probably more indicative of the broader health of the real estate that market and again I think it really when we think about sort of credit performance. It really comes down to LTV as values I think that when we're talking about transitional lending there has been spread moves, but when you think about the ability of business plan.
That are creating value and cash flow growth over time to withstand the type of spread movements were talking about.
We provided some information on that in our portfolio, but I think in general. These are sophisticated borrowers who are creating value and I think that that is really what matters over the long term.
I think that's sort of the way I look at it when I look out over the market.
Thank you.
Alright last question is coming from Rick Shane from Jpmorgan. Please go ahead.
Hey, everybody. Thanks for taking my question and before I forget Doug. Thank you for.
All of the help over the years, we're going to Miss you.
When we look at the investment opportunity in <unk>.
Think about both.
Funding about.
Loan originations and funding.
We all understand the NIM implications, but I'm curious given your funding structure, whether or not there is opportunity.
To enhance spreads so let's imagine for a minute that loan yields loan spreads are widening a little bit.
I'm curious within your funding structure, if you have.
Sources that have tighter spreads so that you can increase financing efficiency and.
<unk> spreads widen in addition to NIM.
Yeah. That's a great question I think that's we're looking at the diversity of our lending base really comes in handy.
Having 14 different credit facility providers all of them like sort of different flavors of assets at a given time, they're all in different places in terms of their desire to grow their portfolios their funding costs, we have different counterparties globally. So obviously, what's happening with banks.
In the U S might not be the same dynamic in Europe and that really allows us to match with whoever is most interested in extending credit to us that given time and having a broad based approach really allows us to find that best match point and I think that extends even further to our syndications, which Tony mentioned we haven't.
Big and growing stable of different syndication relationships as well everything from insurance companies to sovereigns to the much broader group of potential senior lending counterparties. So all of that I think it's really about looking across the market to where the capital is most available and using that to drive.
The benefit in terms of our balance sheet and providing product that's attractive to those different banks and other lending Counterparties I think the other interesting part of your question or answer to your question is this is also something that happens over time.
When we finance new assets, we obviously do term matched financing at the time of closing, but we do have the opportunity to Opportunistically go to the CLO market over time, that's obviously not something that we're doing at this moment because of the dislocation in the CLO market, but I think we've proven in the past history and I would expect that some.
Point again, we will come back to the CLO market. When the market is healthier we will still have the loan spreads on our asset side and to the extent, we're borrowing at somewhat wider spreads today versus historical levels, we may be able to recapture some of that in terms of doing a refinancing into the CLO market.
Got it and I think I mean like when I look at the spread chart on page 31 of the queue.
It looks like you guys picked up a couple of basis points in terms of spread.
Year to date, nothing nothing huge but again directionally, it's moving in the right way.
Do you think.
Your brand your relationships.
Do you view that.
This is the opportunity to leverage all of that.
I mean, I, certainly think that our relationships that the overall scale of our platform of our counterparties in the market.
The information we have all of that just puts us in a tremendously.
<unk> position in this market that applies to you the deals we're able to source our relationships with borrowers who are much more likely to trust.
Someone that they know is going to act with high integrity in a market like this our lenders who are trying to lend more to their best relationships all of that <unk> to the benefit of our platform I think this is an environment where.
This sponsorship really matters and we have the the various sort of tools in the toolkit between the experience our investment acumen and the relationships I think that's all going to allow us to navigate this period.
And a very strong end manner that allows us to outperform.
Got it okay.
You so much.
And now I am trying to get back to Weston Tucker for closing remarks.
Great. Thank you everyone for joining us today and look forward to following up after the call.
Goodbye.
Yes.
Okay.
Yes.
Okay.
Okay.