Transcript - Q3 2021

BLACKSTONE MORTGAGE TRUST Third Quarter 2021 Investor Call

October 27, 2021 at 9:00AM ET

Moderator: Good day, everyone, and welcome to the Blackstone Mortgage Trust third quarter 2021 investor 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, please key star zero on your telephone and a coordinator will be happy to assist you. If you wish to ask a question during the Q&A session, please press star, then one, on your telephone. And now I'd like to hand you over to your host for today. Weston, please go ahead.

Weston Tucker: Great. Thanks, Leslie, and good morning, and welcome to Blackstone Mortgage Trust's third quarter conference call. I'm joined today by Mike Nash, Executive Chairman, Katie Keenan, Chief Executive Officer, Jonathan Pollack, Global Head of Real Estate Debt Strategies, Tony Marone, Chief Financial Officer, and Doug Armer, Executive Vice President, Capital Markets.

This morning, we filed our 10Q 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 factor section of our most recent 10K. We do not undertake any duty to update forward looking statements. We will also refer to certain non-GAAP measures on this call, and for reconciliations, you should refer to the press release and our 10Q.

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

For the third quarter, we reported GAAP net income per share of $0.56, while distributable earnings were $0.63 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the third 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. In the first quarter of this year, we highlighted emerging portfolio growth as a leading indicator for earnings growth, and we saw the momentum building in the pace of our originations. Today, it's clear that we've delivered. This quarter, we originated a record $4.7 billion of new loans, bringing us to $8.6 billion year to date, solidly on pace with our long-term upward trajectory.

Our strong investment activity drove $3.8 billion of net portfolio growth for the year thus far, taking our portfolio to a record $22 billion. And as our deployment has increased, the earnings power of our business is accelerating. We generated distributable earnings of $0.63 per share in the third quarter, more than covering our longstanding dividend.

Our performance this year is reflective of the core advantages that continue to differentiate BXMT. Deep, established relationships with the largest sponsors in the market mean that as they become more active, we have more opportunities to find our target investments - low leverage first mortgage loans on institutional assets. It's a virtuous cycle - the more we participate in the market, the more sponsors experience the advantages of borrowing from BXMT, the more activity we see going forward, further growing our pipeline.

We're lending in more markets across the US, Europe, and Australia, and continually build upon our deep local knowledge and sponsor relationships within each region. And our scale and expertise allow us to be

a single source solution for top tier global sponsors, bringing the same creative, innovative, and knowledgeable approach that BXMT is known for all over the world.

This quarter, we closed three loans with Brookfield on assets in New York, Spain, and across Europe, three with Morgan Stanley across multiple US markets, and new transactions with Tishman Speyer, Shorenstein, Rockpoint, and Northwood, all repeat borrowers many times over.

And for first time borrowers, their experience with us, both at the origination stage and over the life of the loan, often turns them into core repeat relationships. This quarter, we closed nine loans with borrowers that were new to us earlier this year, who are now making us their lender of choice as they ramp up activity.

And our pipeline of compelling lending opportunities continues to build. Today, we have over $4 billion of additional loans closed or in closing post-quarter end, supporting continued portfolio growth as we look ahead.

Given our productivity this year, post-COVID originations represented 31% of the portfolio at quarter end, overlaying a significant component of newer vintage originations atop our stable pre-COVID base.

We continue to find strong credit opportunities in our tried-and-true sectors and markets, and within these areas, we've further accelerated activity in segments where we see the strongest growth in today's economy.

Multifamily represented 54% of our third quarter originations. Market fundamentals in that sector continue to shine. Strong rental demand led to nationwide occupancy of 97%, and year over year rent growth of over 10% in the third quarter. Sunbelt markets, where in-migration is driving rents and absorption across sectors, were nearly 40% of our originations this quarter.

As a result of this robust activity, our multifamily investments have nearly doubled, from 10% of the portfolio at the end of 2020 to 20% today. And our Sunbelt presence has increased from 19% to 25% over the same period.

As always, we're sticking to our core credit principles, including never reaching for yield - our originations this year have averaged 66% LTV, in line with our overall portfolio and our long-term strategy.

Our new loans this quarter exemplify our disciplined credit criteria, targeting low leverage loans to top quality assets and sponsors in strong markets. In July, we closed a $500 million, 58% LTV loan to a premier global sponsor on a new construction apartment project in Brooklyn, part of the Affordable Housing New York program. Our unique access to information drove our investment thesis here, and allowed us to act with confidence while others remained uncertain.

We began underwriting the loan in February, when New York City was just emerging from the depths of COVID's second wave. Inventory was elevated, and concessions were widespread. But with a portfolio of over 10,000 units in the city across our platform, we saw leading indicators of leasing activity reemerging, concessions beginning to inflect, and demand building. Ultimately, New York had its strongest summer of leasing in over a decade, a performance we saw reflected across our portfolio of city multifamily assets, and which proved out our thesis on this high-quality lending opportunity.

Multifamily has been a consistent area of expansion for us this year, as we continue to see strengthening fundamentals across the country. We closed 24 multifamily loans this quarter, $2.6 billion, including

$600 million in Texas, $200 million in South Florida, and another $500 million elsewhere in the Sunbelt. And we continue to see a steady stream of compelling opportunities to land on stable cash flowing assets with upside in today's rent growth environment.

We've established a differentiated process for multifamily flow business, where we provide certainty and ease of execution to active, top-quality borrowers, and see them come back to us again and again. In a sector where transaction volumes are up 50% over 2019 levels, this efficiency matters - our sponsors can focus on closing and executing their business plans, knowing they'll have reliable, consistent performance on the financing side.

Elsewhere in the portfolio, we continue to be focused on newer vintage, high quality office, well- amenitized buildings that foster culture, talent retention, and ingenuity. These buildings are particularly appealing to tenants who are growing, like creative tech-based companies, content generators, life science firms, and they are outperforming in today's leasing market.

This quarter, we closed a $312 million loan on a portfolio of recently completed, LEED silver office adjacent to the new metro line in Northern Virginia. It's a market driven by technology, information, and digital infrastructure, one of our highest conviction investment themes. Our collateral assets are 84% leased on a long-term basis to an institutional rent roll, including Google, ICF, and Neustar, data driven, knowledge economy tenants who need a workplace environment that supports connectivity and innovation.

Our asset selection over time continues to be validated by the performance of our portfolio. This quarter, we saw additional positive credit migration building on the year-long trend. Occupancies of our collateral continue to rise across asset classes. For example, our New York City multifamily collateral assets are currently 88% occupied, up 30 points from one year ago. We counted over 1 million square feet of leasing in our office assets this quarter, and our hotel portfolio continues to improve, with the majority of our assets now covering debt service, and several exceeding 2019 RevPAR levels.

While we are mindful of broader economic impacts of inflation, for our portfolio, it translates to rent and NOI growth, further supporting the low basis and insulated credit position we have in our loans.

The scale and growth of our portfolio allows us to continue the innovation and sophisticated execution that is the hallmark of our balance sheet strategy. We have consistently achieved best in class terms across both our corporate and asset level financing, reflective of the quality of our track record, investments, and Blackstone management.

Last month, we issued our first secured bond, a $400 million transaction that adds favorably priced and structured corporate capital to our already well-diversified balance sheet.

Along with the debt capital raised this quarter, we also funded our growth with an equity issuance that was meaningfully accretive to book value per share. Over the last year, we have tapped the full array of corporate and asset-backed capital markets for our business - term loan, bond, CLO, credit facility, and premium equity - and our ready access across these diverse sources ensures that we can be opportunistic with achieving the best structure and cost of capital for our company.

Our performance this quarter and throughout the year continues to underscore the stability and strength of our business model. We are growing, capitalizing on the ever-expanding reach of the Blackstone Real Estate platform, and generating strong lending opportunities in our highest conviction asset classes.

Our portfolio is performing, with excellent credit metrics and continued business plan progress. We are innovating with new sources of accretive capital. We are driving earnings growth, supporting the attractive cash dividend we have held consistent through the COVID period. And we see great prospects for continued momentum to come. And with that, I'll turn the call over to Tony.

Tony Marone: Thank you, Katie, and good morning, everyone. This quarter's results illustrate the positive dynamics of our business in 2021, as BXMT deployed capital into new loans, driving increased earnings as our portfolio grows. Distributable earnings increased to $0.63 per share from $0.61 last quarter, exceeding our quarterly $0.62 dividend paid earlier this month.

Growth in earnings this quarter is a direct result of the strong origination pace Katie highlighted earlier, and does not reflect any material prepayment income or nonrecurring items. The tailwind from loans closed in the latter part of the third quarter will further support our near-term earnings trajectory.

In the third quarter, we originated $4.7 billion of loans across 38 transactions, driving our total portfolio to a record $22 billion, an increase of 15% for the quarter. This portfolio growth is net of $886 million of repayments, reflecting a return to more typical market conditions, as our borrowers complete their repositioning plans, and either sell or refinance assets.

These dynamics bring the proportion of our portfolio originated since 3Q 2020, the first quarter following the trough of the pandemic, to 31%, providing greater potential to earn prepayment income on these newer vintage loans in future quarters, similar to our experience in 2019 and prior.

Apart from our active origination pace, the third quarter reflected another period of stable credit metrics in our portfolio. We upgraded the risk rating on ten loans, with only one downgrade, and no changes to our four rated watch list loans.

Overall, our weighted average risk rating of 2.8 declined from 2.9 last quarter, reflecting the continued fundamental strength of our portfolio. These rating upgrades, among other factors, contributed to a four basis point reduction in our general CECL reserves to 27 basis points, equal to $0.42 per share of book value.

We continue to receive 100% of interest due, with virtually no interest deferral, and no changes to our non-accrual or non-performing loans. Our weighted average origination LTV of 65% has remained consistent over the last year, and reflects the significant equity capital our borrowers have invested subordinate to our loan.

We had an active quarter on the right hand side of the balance sheet, and continued to benefit from attractive executions of our asset level financing. This quarter, over two-thirds of our $2.8 billion of asset financing priced at the L+ 125 to L+150 range, reflecting the premium credit profile of our loans, the strength of our balance sheet, and our deep relationships with credit providers.

In addition, we priced our debut $400 million senior bond offering in September, which closed shortly after quarter end. The transaction priced at a fixed 3.75% for 5 years with no OID, very attractive level to lock in ahead of what will likely be a period of rising interest rates.

Lastly, we issued 10 million new shares of premium equity this quarter, raising $312 million, and adding $0.25 to book value.

We closed the quarter with liquidity of $1.1 million, including the bond proceeds received in early October, and a debt-to-equity ratio of only 3.1x. We look forward to closing our $4 billion loan pipeline,

which will continue to increase our earnings power as we focus, as always, on discreet credit selection, maintaining the strength of our balance sheet, and delivering consistent, compelling returns to our stockholders.

Thank you for your support, and with that, I'll 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 is star, then one, on your telephone. If you want to withdraw that question, it's star, two. If you could just ask a question plus a follow-up question. If you have any further questions, if you could just dial back in. Thank you.

The first question comes from Tim Hayes from BTIG. You're live in the call, Tim. Please go ahead.

Tim Hayes: Good morning, guys. Congrats on a nice quarter. First question here, just about the all-in yields on the portfolio. You had a very strong quarter from an origination standpoint, but only saw a modest degradation in the all-in yield, while also focusing on kind of more defensive assets, multifamily, Sunbelt, where I'd expect competition is a little bit more intense than other parts of the market. So can you touch on - and I think you did touch on it a little bit in terms of the power of the broader Blackstone platform, and being able to be a consistent, efficient capital provider, but maybe if there's anything more to that, like how you're able to sustain these all-in yields. Are you focusing on heavier transitional assets now? Have we seen construction pick up a little bit, or is that where you're getting a little bit of spread? Any comments around that would be helpful.

Katie Keenan: Sure. Thanks, Tim. I think your point is exactly right, in that we've seen real consistency in the yields in our portfolio, including as we kind of expand into multifamily, Sunbelt, and I think it really does get to exactly as you pointed out, the differentiation in terms of our origination efforts, scale, larger loans, deep relationships with our counterparties, the ability to provide speed and certainty and move quickly, leveraging all the information we have within our platform, that really allows us to continue finding what we see as compelling lending opportunities.

I wouldn't read too much into any individual quarter, but I think if you look over time, including this quarter, the yields have really been very consistent, as have our LTVs. And I think that just speaks to our ability to find the compelling lending opportunities that are a good fit for our portfolio.

Tim Hayes: Okay. Got it. So it doesn't sound like any real change in strategy, or at least more concentrated focus on different asset types that might get you a little bit more spread there?

Katie Keenan: No. To your point, if anything, 54% of our originations this quarter were multifamily, so it really is a very consistent theme.

Tim Hayes: Yeah. Got it. And then just my follow-up there, I know you mentioned some comments about the fuller pipeline. It sounded like obviously you have a lot of activity going on still in the fourth quarter. And I know repayments are lumpy and not always easy to predict. But I would say broadly across the sector we're seeing repayments pick up. This past quarter was certainly a step back from what you saw in the second quarter. But just curious what your outlook is for repayments in the near/intermediate term, if you think that you might see some elevated activity there, and if that might be a source of kind of prepayment income for you guys over the next couple of quarters. Thanks.

Katie Keenan: Sure. Yeah. I do think we'll see a return to a normalized level of prepayments or repayments, because it is all correlated with the activity in the capital markets. I think that's certainly a possibility.