Blackstone Mortgage Trust : Transcript - Q4 2021

BLACKSTONE MORTGAGE TRUST Fourth-Quarter and Full-Year 2021 Investor Call February 9, 2022, at 9:00AM ET

Moderator: Good day, everyone, and welcome to the Blackstone Mortgage Trust fourth-quarter 2021 conference call hosted by Weston Tucker, Head of Shareholder Relations. My name is Leslie and I'm the event manager. During the presentation your lines will remain on listen only and if you require assistance at any time key star zero on your telephone and a coordinator will be happy to assist you. There will be a Q&A at the end. And if you could, limit your questions to one question plus a follow-up, and then if you have any further questions, please rejoin the queue. I'd like to advise all parties that the conference is being recorded for replay purposes. And now I'd like to hand you over to your host for today. Weston, please go ahead.

Weston Tucker: Perfect. Thanks, Leslie, and good morning, everyone, and welcome to Blackstone Mortgage Trust's fourth quarter conference call. I'm joined today by Mike Nash, Executive Chairman; Katie Keenan, Chief Executive Officer; Austin Peña, Executive Vice President, Investments; Tony Marone, Chief Financial Officer, and Doug Armer, Executive Vice President, Capital Markets.

This morning we filed our 10K 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 10K. We do not undertake any duty to update forward-looking statements and we'll also refer to certain non-GAAP measures on the call, and for reconciliations you should refer to the press release and our 10K. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

For the fourth quarter we reported GAAP net income per share of $0.76, while distributable earnings were $0.78 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the 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 Katie.

Katie Keenan: Thanks, Weston. The fourth quarter's outstanding results capped off a banner year for BXMT with record originations and portfolio growth translating into one of our best quarters of earnings ever. We originated $6 billion of new investments in the fourth quarter alone, equivalent to a full year of production throughout much of our history.

For 2021 in total, originations reached a remarkable $14.6 billion, all while staying true to our rigorous credit standards and return requirements and at the same time positioning our portfolio to take advantage of our highest conviction investment themes.

How did we do it? It's all about our platform. With $279 billion of real estate AUM, Blackstone is the largest real estate investor in the world, and our access to market information, relationships, and investment opportunities is truly unparalleled. We saw the clear benefits of these advantages in 2021 as regular way lending activity resumed following 2020's uncertainty. We drew upon our market insights to provide tailored lending solutions to many of the most active borrowers in the market, with whom we've built deep, longstanding relationships through over $100 billion of loans originated in the nearly 15-year history of the Blackstone real estate debt platform.

The strongest endorsement of our approach is our repeat borrower business, which drove $11.5 billion of this year's originations. The strength of our platform enabled us to see recovery trends in real time, move with confidence early, and access unique opportunities and scale while many others remained on the

sidelines. The result was a meaningful expansion of our prime portfolio of low-leverage,well-structured loans to top sponsors, the hallmark of our business.

The quality of our loans is a powerful driver of our track record and our long-term performance, but we also built this business to succeed in any rate environment, including the one we believe is coming. We make floating rate loans. Over time, as rates move higher, we benefit. And with our disciplined focus on low-leverage lending on real assets where cash flows can grow, the credit of our portfolio is at the same time highly resilient to the impact of rate increases and the inflation driving them. Moreover, in an inflationary environment rising replacement costs heightens the barriers to entry for competitive new supply, making the collateral we lend against more valuable.

Our $6 billion of investments this quarter echo the themes we've long focused on. High quality assets with dynamic sources of demand which have the pricing power to drive rent growth. Life sciences, with a $362 million new build asset in Berkeley, California. Multifamily around the world where we closed $2.5 billion in loans for both new build and stable, cash-flowing assets in the US, Europe, and Australia. Modern, well-amenitized office, where we lent on new assets in Miami and Fort Lauderdale. And irreplaceable real estate, where we completed a $770 million refinancing of Industry City in Brooklyn, a one-of-a-kind,mixed-use asset that leads the entire city in tenant demand, with 1.6 million square feet of leasing since COVID.

Our ability to innovate and draw on our unique real estate and structured finance experience continues to drive differentiated opportunities. This quarter we acquired a $400 million portfolio of loan participations from a commercial bank with whom we have a longstanding relationship. The bank has substantial experience in real estate lending and a conservative credit philosophy focused on high quality sponsors that aligns well with our approach. But bank regulations are making commercial real estate loans comparatively less capital-efficient, creating an incentive for many banks to reduce their exposure. We have deep experience structuring customized transactions with banks all over the world and we worked cooperatively in this case to develop an innovative solution that was a win-win, adding a portfolio of bank-originated,well-performing loans to our balance sheet.

We've also identified compelling investments in sometimes overlooked sectors where we can make low- leverage loans on cross-diversified pools of cash-flowing real estate at attractive relative returns. Asset classes like select service hotels, essential neighborhood retail, and transient travel-oriented parking are appealing to a growing universe of buyers searching for yields because of their stable cash flows, high margins, and ability to benefit from inflationary growth. This quarter we found good relative value here at a well-protected basis: 57% LTV on average. And given the scale of these transactions and complexity of analysis required, we are well positioned to capture them.

In addition to our origination activity this quarter, we also saw a continuation of the year's healthy pace of repayments as our sponsors complete their business plans and find attractive executions for their assets. This quarter we had $3.5 billion of repayments, including $2.3 billion of office loans. The overall US market saw $139 billion of office transactions this year, in line with the 2018-2019 average, demonstrating strong capital markets demand for the types of high-quality office assets we lend against.

While the lingering effects of the pandemic exacerbate longer-term challenges for older vintage commodity office, we have long been focused on the segment of the office market most desired by tenants even pre-pandemic: newer, well-amenitized assets in dynamic locations that cater to growing knowledge economy businesses. These assets continue to be highly desired by users who know that in- person interaction is a key ingredient in their innovation as well as investors who recognize the long-term value of assets where demand is concentrating.

A prime example of this dynamic in the fourth quarter was the repayment of our loan collateralized by Hudson Commons, a recently built trophy asset with excellent sponsorship in Manhattan's Hudson Yards. The West Side submarket has led the city in absorption in rents both pre- and post-COVID. We made the loan in 2019 to finance the construction loan payoff and lease-up of the building. Following take-up from users in tech, life sciences, and financial services, the asset was sold in December for over $1 billion, 43% above our loan basis, to a long-term pension fund investor.

It's a similar story with another large repayment in Boston. Blackstone has been a dominant player in life sciences real estate for years, starting with the acquisition of BioMed in 2016, which grew into our more than $14 billion BPP life sciences business today. We have deep market knowledge that allows us to act with conviction on investments that address the burgeoning tenant demand we see for the right type of assets. And that's what happened in January of 2021 when a top sponsor identified the opportunity to buy an office building in a prime location in East Cambridge and convert it to life sciences use. Our team knew the building and the location, and we acted swiftly to provide our client certainty for their acquisition. With their deep local relationships and skillful execution, our sponsor was able to accomplish their business plan adeptly and well ahead of schedule and sold the asset to a REIT for over $800 million in December, more than double our $325 million loan basis.

With our significant origination activity and the continued flow of healthy repayments, the BXMT portfolio has turned over materially in the last year and today reflects a younger vintage asset base, 46% originated this year, that is even more focused on our favorite sectors and markets. Our multifamily exposure has more than doubled, with $6.1 billion of new loans in this sector in 2021, 42% of our total loans for the year. We continue to see attractive opportunities in Sunbelt markets, now our largest geographic exposure, and the newer, well-amenitized office, logistics, and resort hotels.

We've been just as busy on the capital side of our business this year, where we continue to innovate and diversify our funding sources. We raised $5.9 billion of new debt this year across the corporate and asset- level markets, all well-priced and attractively structured, completed a $1 billion CLO, added, or repriced $623 million in several term loan transactions, and entered the high-yield bond market with a $400 million issuance in October that priced at 3.75% fixed for a 5-year term. All attractive capital for our growing investment pipeline.

We accessed the equity market as well, creating book value and allowing us to accretively fund our growth. And we continue to see strong interest in BXMT products of every type from banks and other financing sources as they look to expand their relationships with our franchise.

The scale of our business and strength of our platform uniquely positions us to tap new sources of capital, break market barriers, and innovate products. The result is a best-in-class capital structure with superior scale, efficiency, and integrity. And with $1.3 billion of liquidity at year end we've put ourselves on strong footing to capture the continued momentum of investment opportunities we see ahead, including $3.6 billion of new loans closed and in closing year to date.

The growth in our portfolio drove strong earnings momentum over the course of the year. Our results this quarter contributed to annual distributable earnings of $2.62 per share, notching another year of strong dividend coverage, our seventh in a row. Our performing first mortgage portfolio continues to generate a highly attractive current income yield, which is positively correlated with rising rates.

There is today over $300 billion of industry dry powder searching for real estate investments, creating a favorable backdrop for continued robust lending activity, and BXMT is the lender of choice to many of the largest real estate investors in the world. As we move into 2022, we remain exceptionally well positioned to deliver for our shareholders. I'll now turn the call over to Tony Marone, our CFO. Tony?

Tony Marone: Thank you, Katie, and good morning, everyone. This quarter concludes a record year for BXMT with strong results across all of our key metrics. Distributable earnings, or DE, up $0.78 per share for the quarter, brought full-year earnings to $2.62, up $0.06 from 2020, and dividend coverage to 106%, reflecting the earnings power of our growing loan portfolio.

Our GAAP net income of $0.76 this quarter and $2.70 for the year nearly doubled 2020 levels and reflects the impact of a $40 million decrease in our CECL reserve this year. Our book value increased $0.80 this year to $27.22, driven by a combination of retained earnings, accretive stock offerings, and the CECL reserve reduction.

To unpack earnings a bit further, the 4Q DE of $0.78 per share reflects two particular items. First, we earned significant payment income related to a certain loan repayment this quarter, which effectively represents the accretion of the minimum amount of income we otherwise would have earned over the life of the loan into a single quarter as the loan repaid early. Prepayment income is a normal part of our business but with this transaction we saw a larger magnitude than is typical this quarter.

Separately, in connection with a 4Q modification of a loan that was impaired in 2020 we recognized a $0.07 reduction of DE which had no impact on GAAP net income due to the prior impairment. Excluding both of these items our DE for the fourth quarter was $0.66 on a run rate basis, up from $0.63 in 3Q.

Notably, our rapid pace of deployment and net $2 billion of 4Q portfolio growth absorbed the $312 million of new capital we raised in September, muting the typical earnings J curve in the quarter following an equity raise. Similarly, the ten million shares we issued in November had only a slight impact on the 4Q results as they were only outstanding for a portion of the quarter. We expect to see some modest impact on the 1Q DEPS as this new capital is deployed into the $3.6 billion of new transactions Katie mentioned earlier.

Katie discussed one of the central features of BXMT's business is our focus on floating rate loans and the general positive correlation of our earnings to interest rates. When rates dropped precipitously in 2020 our earnings did not follow because of the LIBOR floors embedded in many of our loans. Now, with rates expected to rise we're happy to report that such floor income has become substantially less material to our earnings power. We entered 2021 with a weighted average floor of 82 basis points across our portfolio, but after $7.2 billion of loan repayments this year and $14.6 billion of originations without the money floors our weighted average floor is only 42 basis points as of year-end and 73% of our loans carry floors at or below 25 basis points. We expect this trend to continue in 2022 with incremental portfolio turnover, which will further position our business to benefit from anticipated rising interest rates later this year.

As we've grown originations, we continue to target consistent asset level returns with yields of 3.7% for 2021 originations, in line with pre-COVID 2019 levels. Similarly, our average origination LTV this year of 64% has also remained consistent, showing that as we have grown the size of our business, we have maintained our disciplined focus on both return generation and conservative risk management.

On the subject of credit, performance across our entire portfolio continues to be strong, with a weighted average risk weighting of 2.8 as of 12/31, consistent with 3Q and improved slightly from 3.0 in 2020. We saw 11 rating risk upgrades this quarter and 43 for the year, with only 3 downgrades and no new watchlist loans. Our borrowers continue to execute pre-COVID business plans and collateral performance metrics continue to improve.

Our portfolio credit performance is also reflected in our CECL reserve I mentioned earlier, which was effectively flat quarter over quarter but a decrease this year overall.

Per share basis, our CECL reserve is only $0.78 as of 12/31 relative to $1.26 at the start of the year.

Katie mentioned we continue to innovate and expand our capital sources to finance the growth of our business. This year we added $5.9 billion of new financing capacity, including $3.7 billion of new credit facilities, a $1 billion CLO securitization, and $1 billion of financing across our corporate level term loans and secure notes. We've also been successful in driving down our costs of capital as we continue to scale, increasing the net interest margin on our asset level financings and reducing our corporate level financing costs by 43 basis points.

Our debt-to-equity level remains conservative at 3.2 times, in line with pre-COVID levels, and we have $1.3 billion of liquidity at year-end, providing ample room for continued growth within our current capitalization.

Reflecting on this record year for originations earnings and portfolio growth, we are proud of the performance we have delivered to our stockholders, and we are focused on delivering continued, strong, reliable results in the future.

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

Moderator: Thank you. And thank you, everyone. Your question-and-answer session will now begin. If you wish to ask a question, it's just star then one on your telephone. If you could, limit your questions to just one question plus a follow-up, and then if you wish to ask any further questions, please rejoin the queue.

And your first question comes from Rick Shane from JP Morgan. You're live in the call, Rick. Please go ahead.

Rick Shane: Good morning, everybody. Thanks for taking my question. Two things: One is that when we back out the prepayment income - and it sounds like it was about $0.05 - what should we see as the run rate on interest income exiting the fourth quarter?

Tony Marone: Sure. What we would focus on, which I mentioned, is the run rate earnings of $0.66, which compares to $0.63 last quarter. And that's net of all the - the two one-off items I mentioned earlier.

Rick Shane: Got it. Okay. And second question: When we compare the interest rate sensitivity chart from the third quarter to the fourth quarter, there's been a very significant impact on your NIM compression related to a 50-basis point increase, and you guys have done a great job articulating that. I am curious, you basically shaved $0.06 a year of compression with the portfolio rotation. The chart goes out 25 and 50 basis points. At what point does the portfolio because fully asset-sensitive again? Is it around 75 basis points?

Douglas Armer: Rick, it's Doug. I'll take that one. That chart, to your point, is a backward-looking chart, or a point in time for year-end, and I think it's important to think about it in the terms that you are with respect to the prospective. And we feel very good about our positioning on rates today, and that's really for three reasons. The first is the decrease in the proportion of floor income that - in our portfolio that Tony referred to and that you've referred to. That's a function of portfolio growth and turnover. And that trend will continue very significantly in 2022. It has continued very significantly in 2022, and so that's a big differentiator versus the 12/31 number.