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Blackstone Mortgage Trust Inc (BXMT) Q4 2018 Earnings Conference Call Transcript

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Blackstone Mortgage Trust Inc  (NYSE: BXMT)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome, everyone, to the Blackstone Mortgage Trust Fourth Quarter and Full Year 2018 Investor Call hosted by Weston Tucker, Head of Investor Relations. My name is Matthew and I'm your operator today.

During the presentation your lines will remain on listen-only. (Operator Instructions) I'd like to advise all parties this conference is being recorded for replay purposes.

And now, I'd like to hand over to Weston. Please go ahead.

Weston M. Tucker -- Head of Investor Relations

Great. Thanks, Matthew, and good morning, everyone, and welcome to Blackstone Mortgage Trust's fourth quarter conference call. I'm joined today by Steve Plavin, President and CEO; Jonathan Pollack, Global Head of Blackstone Real Estate Debt Strategies; Tony Marone, Chief Financial Officer; Doug Armer, Managing Director and Head of Capital Markets; and Katie Keenan, Managing Director of Blackstone Real Estate Debt Strategies.

Last night, we filed our 10-K and issued a press release with the 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 these statements and we will also refer to certain non-GAAP measures on this call, and for reconciliations, you should refer to the press release and our 10-K.

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

So a quick recap of our results. We reported GAAP net income per share of $0.61 for the fourth quarter and $2.50 for the full year. Core earnings were $0.69 per share for the quarter and $2.90 for the year, up from $2.55 in the prior year.

A few weeks ago, we paid a dividend of $0.62 with respect to the quarter, reflecting an attractive annualized yield of 7.2% based on yesterday's closing stock price. If you have any questions following today's call, please let me know.

And with that, I'll now turn things over to Steve.

Stephen D. Plavin -- Chief Executive Officer and President

Thanks, Weston, and good morning, everyone. An excellent fourth quarter capped an extraordinary year for BXMT. We originated $3.5 billion of loans in the quarter and $10.7 billion for the year, our most active ever. In 2018, we grew our portfolio by $4.7 billion to $15.8 billion, while maintaining an origination LTV of 62%. The portfolio growth helped drive core earnings to $2.90 per share, which produced a 117% dividend coverage.

The strong coverage reflects our focus in the quality of the dividend, which is generated solely from our pure play senior lending business and we are able to retain the excess earnings, which contributed to our increase in book value during the year. In Q4, we closed 21 loans, our highest ever quarterly loan count exclusive of the GE portfolio acquisition in 2015.

We had several originations during the quarter that highlight the power of our platform, the biggest was a 65% of costs $652 million acquisition bridge loan for Terminal Stores, a historic New York City asset acquired for redevelopment by a joint venture of two strong BX relationship clients. The large loan size and transitional nature greatly reduce competition for the loan, as is the confidence of borrowers needed and lenders' ability to execute, so a great example of our competitive advantage.

Also, during the quarter, we separately financed the purchase of the Park Central New York and the Park Central San Francisco for existing relationship borrowers that also needed a quick and definitive loan closing. The hotels were sold by Pebblebrook at the closing of its acquisition of LaSalle Hotel REIT and our loan proceeds were necessary component of the M&A deal because one of Blackstone's real estate equity investment vehicles had also pursued the acquisition of LaSalle. The hotels have been recently underwritten.

That experience along with our borrower relationships and the investment skill was critical in tying up the two loans totaling $545 million with limited competition. Also during the fourth quarter, we financed the other acquisitions in Midtown Atlanta, Washington D.C., San Francisco, Chicago, London and Sydney as well as construction in New York and Fort Lauderdale.

As this quarter exemplified, we achieve our best economic results when we can leverage our scale and real estate expertise, especially on larger loans, special situations where speed and certainty matter most, construction loans and loans in markets outside North America where Blackstone has extensive real estate holdings.

Late in the quarter the significant debt and equity market volatility led to a slowdown in real estate transaction activity. Our Q4 transactions were already well advanced. But the Q1 origination pipeline slowed. We also saw an offsetting slowing in repayments. To date in 2019, we have $855 million of loans closed during the closing process.

The capital markets are now quickly recovering and we expect transaction volume to pick up as the year progresses. Also, the real estate opportunity funds that comprise the most active segment of our client base have reported over $110 billion of dry powder in their investment vehicles with even more capital commitments being raised. The deployment of that equity should continue to help propel our business. Keeping pace with the extraordinary performance of our originations group, our capital markets team also had a fantastic year helping to drive strong BXMT returns and balance sheet stability.

To fund our 2018 portfolio growth, we raised $483 million of equity during the year at an average book multiple of 1.22 times, that is $5 billion of debt capacity. We now have 11 credit facility providers $13.6 billion of capacity and an array of great term index and currency match financing options for our senior loan originations.

Post quarter-end, we successfully completed the non-recourse syndicated financing of the senior loan component of the Spiral. The $1.8 billion construction loan for Tishman Speyer in Hudson Yards, enabling us to significantly mitigate the future funding obligations, while preserving very substantial positive economics going forward for BXMT.

We're very pleased with the result, which is consistent with our business plan when we originated the loan and our overall financing strategy. With a very significant growth in 2018 originations, BXMT's competitive positioning and market recognition have never been stronger. Majority of our loans are with repeat borrowers, the greatest endorsement of the way we do business, and our differentiated client-centric approach.

We remain focused on dividend quality and stability and continuing to introduce investors to our Blackstone sponsored senior mortgage company. Since the inception of BXMT, we have delivered a 13% return for our shareholders and stock still yields a very attractive 7.2%.

Before I turn the call over to Tony, I also want to let you know of an important step that we took at year end. We named Doug Armer and Katie Keenan BXMT Executive Vice Presidents for Capital Markets and Investments respectively. Katie and Doug worked closely with me on the day-to-day strategic management of BXMT and are great contributors to the success of the business. In addition to her BXMT responsibilities, Katie also continues to originate loans and she led the deal team for the Spiral, among many others.

And with that, I'll turn the call over to Tony.

Anthony F. Marone, Jr -- Chief Financial Officer, Assistant Secretary and Managing Director

Thank you, Steve, and good morning everyone. This quarter's result cap off an outstanding year for BXMT characterized by continued strong earnings supporting an attractive and steady dividend; growth in our loan portfolio, while maintaining healthy credit metrics; and a stable balance sheet producing solid book value. I will review each of these aspects of our 4Q results as well as BXMT's performance for the 2018 fiscal year.

We generated GAAP net income of $0.61 per share and core earnings of $0.69 during 4Q bringing our 2018 full year GAAP earnings to $2.50 per share with a record $2.90 of core earnings. Looking at 2018 fiscal results, in particular 2Q and 3Q, our earnings included a significant amount of prepayment related income totaling $0.22 per share over those two quarters, net of incentive fees. This is outside of the $0.01 to $0.03 quarterly run rate we would expect in a typical period and contributed to our earnings power during the year.

In 4Q, we experienced relatively fewer such fees as the pace of loan repayment slowed. So our $0.69 of core earnings is almost entirely driven by run rate in net interest income, positioning us well as we move into 2019. We maintained a stable high quality $0.62 dividend throughout 2018, which was well covered by our $2.90 of core earnings for the year.

During the quarter, we closed 21 loans totaling $3.5 billion of originations, our second largest quarter of direct originations bringing our 2018 totaled $10.7 billion across 52 loans, more than double our 2017 volume. We had net fundings of $2.1 billion during 4Q and $4.3 billion during 2018, bringing our total loan portfolio to $15.8 billion, up 42% from last year.

Our 2018 loan originations had an average size of $201 million, reflecting our continued focus on larger loans where we have a competitive advantage. We also funded $630 million under previously originated loans during 2018, generating additional value for our shareholders from these investments. Importantly, we have not sacrificed credit quality, as our business continues to grow and our 2018 originations have a weighted average LTV of 61%, right in line with our overall portfolio origination LTV of 62% as of year-end.

We have no loans with a risk rating above 3 with our last four rated loan repaid earlier this year and currently have fully performing loans across all geographic segments and asset classes in our portfolio. We supported this growth of our loan book by expanding our credit capacity and raising additional equity capital. We added $3 billion of credit capacity in 4Q and $6.5 billion throughout 2018, highlighted by closing six new or upsized credit facilities and the CorePoint securitization we closed in 3Q.

We remain focused on financing our assets with term, currency and index match liabilities with no capital markets mark-to-market provisions, which ensures the stability of our balance sheet throughout the course of a market cycle.

We raised $108 million of common equity during the quarter at an average price of 1.27 times our 3Q book value and a total of $483 million of equity during 2018, which drove our book value up to $27.20 per share, a 10% increase from the beginning of the year. Our focus remains on originating floating-rate assets, currently 96% of our total portfolio, which is another aspect of our balance sheet stability as these assets are not mark-to-market and insulated from any implied valuation changes due to interest rate movements. We closed the year with a debt-to-equity ratio of only 2.8 times and liquidity of $470 million available to deploy into additional loan originations.

As I mentioned earlier, we view the fourth quarter and 2018 overall as a success for BXMT, and more importantly, our shareholders. We generated consistent, reliable dividend by originating well-structured loans to quality assets with a six-year track record of healthy loan performance and a stable balance sheet supporting continued growth.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Douglas Harter of Credit Suisse. Please go ahead.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. Steve, hoping you could talk about kind of the pace of spread compression that you saw kind of -- in the fourth quarter over the second half Kind of whatever you think is the more relevant time period and kind of how -- what your outlook would be for your asset yields now that LIBOR is expected to be flat for the -- for at least the near term?

Stephen D. Plavin -- Chief Executive Officer and President

Hey, Doug. We saw -- I think we saw a moderating of spread compression in the second half of the year. We still saw some spread compression and we're still seeing Fed moves on the short end and LIBOR increasing. I do think that with the LIBOR curve flattening out and the like, there will be either no or just one or two more Fed increases that we do expect to see spread compression continue to moderate. Perhaps, we may be or at where spreads are going to ultimately run to.

As it relates to our fourth quarter originations, they've been sort of consistent from a return standpoint, what we did earlier in the year. As I mentioned in my remarks, we found some -- we did originate a number of deals that were -- that were unique opportunities for us and we were very satisfied with the economic result. So I think we're dealing with spread compression pretty well in the organization side.

On the liability side, we continue to grind a little bit tighter in terms of all of our capital. Every time we go back to our lenders, we try and reduce spread, improve terms and all those help in turn from an ROI standpoint in this sort of -- in the competitive environment.

Douglas Harter -- Credit Suisse -- Analyst

Great.

Operator

Thank you. Our next question is from the line of Don Fandetti. Please go ahead.

Don Fandetti -- Wells Fargo Securities -- Analyst

It sounds like across the industry things slowed in December and then there was this bounce back in January. Jst curious, as you talk to private real estate investors, if you think that they're sort of -- they've been shaken or was it more of a blip to where you'd expect them to continue the appetite for transactional type acquisitions. If you can you comment on that?

Stephen D. Plavin -- Chief Executive Officer and President

Yeah. So I think the impact from the debt market volatility was pretty much a blip, sort of a 60 to 90-day of that. And we're moving quickly beyond that already. As it relates to investor activity and transactions, when investors move the sidelines and then move back to the point where they're willing to transact again, there's a 60 or 90-day delay just from when somebody resumes working on a deal so one can reasonably expect it to close. So we're seeing a resumption of more active pipeline.

It has gotten a little slow in December and January. So, I think we'll -- we expect to see it continue to pick up during the year. I think there is a general view that assets in the US are more fully valued so that I think the fund sponsors are being a little bit more cautious in their acquisitions, but they also have a lot of dry powder or a lot of capital to deploy in their investment vehicles and we do expect that to happen. So we're anticipating an increasing flow of opportunities during the year and we do think that the funds will find opportunities to deploy their vehicles.

Don Fandetti -- Wells Fargo Securities -- Analyst

Got it. And then (technical difficulty)

Operator

And your next question is from the line of Rick Shane of JPMorgan. Please go ahead.

Rick Shane -- J.P.Morgan -- Analyst

Thanks for taking my questions this morning. First of all, congratulations to Doug and Katie. I did want to talk a little bit about geography. Historically, you've been highly concentrated California and New York, that's certainly made sense and been a great strategy. This is a question we're starting to ask a little bit more, with some of the tax driven shifts in terms of demographics, are you concentrating on more of some of the states where there is expected to be migration related to repeal -- or excuse me, elimination of the salt deduction?

Stephen D. Plavin -- Chief Executive Officer and President

Interesting question. I think, we're certainly mindful of the forces of demand for space, whether they're tax driven or otherwise. We did -- we have been active and Florida, one of our deals in the quarter was a construction loan that was in part for multifamily in Fort Lauderdale, which has been a very strong market and getting stronger as a result of migration of people in from the Northeast. So all this does provide some headwinds for some of the major markets.

But we're still seeing a lot of demand for space. A lot of it is driven by the technology companies and where they want to locate and we're still seeing a lot of in migration to New York. We saw Amazon -- looks like Long Island City is -- will remain HQ2 and we are seeing also California -- Southern California as well as Northern California with a lot of demand for space. And also the grace array of large-scale opportunities for our business. So we remain optimistic that the major markets is still the place to be, but we -- I do think there'll be some interesting impacts in some states that will benefit from more favorable tax regimes.

Operator

Thank you for your question. Your next question is from the line of Steve Delaney of JMP Securities. Please go ahead.

Steve Delaney -- JMP Securities -- Analyst

Good morning and congrats on the quarter. Lot of hotel activity in the fourth quarter and obviously that's an area that BX has significant expertise. I'm just curious, Steve, you're up to 23% of the portfolio. Is there any arbitrary limit there? Is there still room to grow? And also when you get into that more specialized sector, do you find that there are fewer lenders that you're competing with in the hotel space? Thank you.

Stephen D. Plavin -- Chief Executive Officer and President

Thanks for your question, Steve. I think obviously Blackstone has typically been among the largest -- one of the largest owner of hotels in the world and we have obviously great insight into -- into the markets and we have been -- we had been and continue to be a cautious hotel lender. We had -- and I think one of the things that did change a little bit in 2018 for us was that rolling into '18, we had no New York City hotels at all.

And ordinarily, that probably would have been at least 5%, maybe as much as 10% of our overall portfolio, given the scale of the market and the opportunities that typically exist in that market for lenders of our profile. As the market strengthened a little bit in '18 and we got through more and more of the supply, we did see some opportunities to add some loans that we think are great opportunities for us; low basis, a little bit higher in spreads than some in the other property sectors and it did -- it obviously increased our hotel percentage as a result.

Our hotel percentage was very low going into 2018. And generally, in our business, we see the most opportunity in office buildings and hotels. We own a lot of those all over the world and we have great insight into what we think and how they'll perform. And that really does dictate where we -- where we allocate most of our origination resources.

So, I think hotels will remain in the 20s in terms of overall percentage of our -- of allocation across property sectors, and we feel great about -- about the hotel portfolio that we have on the books today.

Operator

Thank you. Your next question is from the line of Arren Cyganovich of Citi. Please go ahead.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. So, wondering if you could just give a little more detail about the Terminal Stores bridge loan, the kind of thought process behind that. I'm not familiar with the property, but it looks kind of like an old warehouse. I would imagine good retail component to that and what the risk associated with having retail loans obviously in this kind of environment. Why that might be a differentiator in the investment?

Then the other question is on the quarter-to-quarter decline in book value. Had some investors asking questions about that. I know it's related to the settlement of the convert, maybe give a little more detail around that for investors too. Thanks.

Stephen D. Plavin -- Chief Executive Officer and President

Well. Hey listen, I'll take the first one and maybe Tony could take the second. Terminal Stores is a very cool historic structure between 10th and 11th Avenue, sort of the back door to Hudson Yards. So -- and there is obviously a huge influx of office and residential tenants moving into -- moving into Hudson Yards. We think a huge source of new demand for the retail component of Terminal.

Terminal would still be primarily office once it's transformed. Our loan is really the -- is the bridge to the construction loan. So, during this period -- during the two to three years we hope to have this loan, the sponsors are working on their final plan getting approvals and the landmarks and all the things that they need to execute their plans.

So this is 65% loan capitalized for the -- for the bridge period between acquisition and construction. Now, I'm sure we'll be vying for the construction loan when the time comes. But at the moment, it's really in the planning -- in the planning stages, and the thought of converting what now has a lot of storage space into more traditional office and then the ground floor to retail. The retail, I think, will do great. There is a ton of office around it, not a lot of retail like it, and a market where we see a ton of growth.

Anthony F. Marone, Jr -- Chief Financial Officer, Assistant Secretary and Managing Director

On the book value question, so I think you already answered it to some degree, but I'll unpack it a little bit. If we look at what happened to book value during the year and then I'll get to the quarter you know, we're up $0.27 on the year. That's driven by a couple of positive movers. We've issued equity above book, which was accretive and increased our book value. We've also been retaining earnings as we've had a great earnings year in a relatively -- or not relatively a stable dividend. That was offset by some share dilution for shares we issued under our equity plan similar to what we've done in prior years and really a one-time event of the convert premium.

What you see in the fourth quarter is really the two negatives that happened during the year happened to land in the fourth quarter and less of the positive activity around retained earnings and the accretive value of the equity offerings in the fourth quarter. So it's a little bit of a timing element. The convert overall over its five-year life was quite valuable and generated value in terms of incremental earnings. It's just the way the accounting comes through that option value really comes through the books on the last day. So it's really more of a timing thing.

Operator

Thank you. Your next question is from the line of Ben Zucker of BTIG. Please go ahead.

Ben Zucker -- BTIG -- Analyst

Yeah. Thanks for taking my question, guys, and congrats on a strong origination quarter. I have a high-level question around the WD joint venture. Would you guys -- it revolves around, do you guys have any interest in acquiring Walker & Dunlop. I know you won't go ahead and answer that outright. But what are your thoughts from a high level on the GSE origination and servicing business? And then, as a follow-up, could that business model and revenue mix fit within your REIT structure ?

Stephen D. Plavin -- Chief Executive Officer and President

Thanks for the question. The Walker & Dunlop joint venture has really been -- has really been a positive development for us and I think in Walker & Dunlop as well. We provide -- we provide capital both equity and financing -- financing capability to Walker on a pool of assets that they originate and we jointly approve. And then we've managed the portfolio. We've done about $700 million worth of volume through the program since inception.

And we're -- I think the results --- the results have been great. I mean, it provides us access to multi-family assets and borrowers that we wouldn't ordinarily -- that we wouldn't ordinarily see as they're smaller and more granular, and so -- and it's just additive to what we're doing. We're not in the GSE origination business today and they are. So it's very complementary in that we provide -- we provide the bridge to -- again to their takeout.

As it relates to the agency origination business, we have no plans to make any agency origination acquisitions or any other acquisitions. We do however contemplate all possibilities to expand our platform in all the adjacent areas whether it'd be in loan originations or other assets that would be complementary and additive to our Company. And so, again, I think the way we look at the business now is that we have the Walker & Dunlop JV, which has been very beneficial for us to take advantage of that opportunity with, in terms of agency originations.

Operator

Thank you. Your next question is from the line of Jade Rahmani of KBW. Please go ahead.

Jade Rahmani -- Keefe, Bruyette & Woods -- Analyst

Thanks very much. Could you give any color on the percentage of your loans that are -- or your originations that are bridge to bridge financings? Are you seeing that as an increasing trend and is it something you're looking to avoid or embrace as an opportunity?

Stephen D. Plavin -- Chief Executive Officer and President

Jade, I'm not -- could you -- what type of loans, you said bridge to bridge? I'm not sure I understand the question.

Jade Rahmani -- Keefe, Bruyette & Woods -- Analyst

Yeah, basically -- basically bridge lenders providing capital to take out other bridge loans, essentially business plans that have not hit their benchmarks that have reached maturity and the lender rather than granting extensions or the borrower rather than being able to have the extension granted is getting taken out -- the loan is getting taken out by another bridge lender.

Stephen D. Plavin -- Chief Executive Officer and President

I think, typically what we see in terms of the bridge lending space is, I think a little bit of the opposite end of the spectrum. We typically see as business plans that have performed and then the original loan being perhaps light on leverage or lower on spread or no longer on point relative to the real underlying real estate asset. And so most of the refinancing opportunities that we see really relate to the -- trying to maintain loans that performed very well and are very -- are far advanced in their business plans. And we do actively asset manage and try and hold on to those loans through the life cycle of the business plan.

Ultimately most of our loans get repaid with a property sale, again because our client base is primarily managers of a finite life investment vehicles that are ultimately buying, fixing and selling assets. So, we do occasionally see assets that no longer work for other lenders for reasons other than outperformance, but it's a really small minority of what we see.

Operator

Okay. Thank you for your question. Your final question is from the line of Stephen Laws of Raymond James. Please go ahead.

Stephen Laws -- Raymond James -- Analyst

Hi, good morning. Appreciate you taking my question. A lot have been hit on, but maybe could you talk about how large do you think your portfolio can grow, you continue to post significant growth, do you have an additional need for capital this year? I guess obviously that depends on your origination versus repayment expectations, but have we gotten to a point or are we close to a point where it's really a full-time job just to recycle capital into new investments or do you think you continue to post net growth on the portfolio sides going forward?

Stephen D. Plavin -- Chief Executive Officer and President

Well, I think we've had -- we've had a great run of posting really significant growth. And so, I don't think we feel that we're really at the end of the business plan. We're seeing -- we continue to see opportunities to do and more in interesting things. Platform is expanding internationally as well as increasing its penetration in the US.

We created eight new repeat borrowers in this past year, and that has been our most productive source of new transactions. We expect we'll develop more of those in 2019 and further grow the portfolio. So I'm optimistic that -- look at the magnitude of growth we had last year and I hope we'll continue at that pace, but I certainly expect that we'll continue to grow the portfolio.

Douglas N. Armer -- Managing Director, Head of Capital Markets & Treasurer

Stephen, hey, it's Doug here. On the capitalization point, I'd say, we've got great capital markets access both in terms of debt and equity products to fund future growth in the portfolio. We saw a lot of growth during 2018 and we continue to have a very efficient cost of capital and a wide array of options in terms of capitalizing a larger portfolio going forward.

Operator

Thank you for your questions, everyone. I will now turn the call over to Western Tucker for the closing remarks.

Weston M. Tucker -- Head of Investor Relations

Great. Thanks everyone for joining us. And if you have any questions, please follow up after the call.

Operator

Thank you, sir. That concludes your your conference call for today everyone. You may now disconnect. Thank you very much indeed for joining.

Duration: 31 minutes

Call participants:

Weston M. Tucker -- Head of Investor Relations

Stephen D. Plavin -- Chief Executive Officer and President

Anthony F. Marone, Jr -- Chief Financial Officer, Assistant Secretary and Managing Director

Douglas Harter -- Credit Suisse -- Analyst

Don Fandetti -- Wells Fargo Securities -- Analyst

Rick Shane -- J.P.Morgan -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

Ben Zucker -- BTIG -- Analyst

Jade Rahmani -- Keefe, Bruyette & Woods -- Analyst

Stephen Laws -- Raymond James -- Analyst

Douglas N. Armer -- Managing Director, Head of Capital Markets & Treasurer

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