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Edited Transcript of BXMT earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Blackstone Mortgage Trust Inc Earnings Call

NEW YORK Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Blackstone Mortgage Trust Inc earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony F. Marone

Blackstone Mortgage Trust, Inc. - CFO, Principal Accounting Officer & Assistant Secretary

* Douglas N. Armer

Blackstone Mortgage Trust, Inc. - Executive VP of Capital Markets & Treasurer

* Katharine Keenan

Blackstone Mortgage Trust, Inc. - Executive VP of Investments & MD

* Stephen D. Plavin

Blackstone Mortgage Trust, Inc. - CEO, President & Director

* Weston M. Tucker

Blackstone Mortgage Trust, Inc. - Head of IR & Senior MD

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Conference Call Participants

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* Arren Saul Cyganovich

Citigroup Inc, Research Division - VP & Senior Analyst

* Donald James Fandetti

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Jade Joseph Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Blackstone Mortgage Trust Third Quarter 2019 Investor Call. My name is Leslie, and I am your event manager. (Operator Instructions) 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, Weston Tucker, Head of Investor Relations. Please go ahead, Weston.

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Weston M. Tucker, Blackstone Mortgage Trust, Inc. - Head of IR & Senior MD [2]

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Great. Thanks, Leslie, and good morning, everyone, and welcome to Blackstone Mortgage Trust's Third Quarter Conference Call. I'm joined today by Mike Nash, Executive Chairman; Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; Doug Armer, Executive Vice President, Capital Markets; and Katie Keenan, Executive Vice President, Investments.

Last night, we filed our 10-Q 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 forward-looking statements. We will also refer to certain non-GAAP measures on the call. And for reconciliations, you should refer to the press release and our 10-Q. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

So a quick recap of our results. We reported GAAP net income per share of $0.56 for the third quarter, while core earnings were $0.64 per share. Last week, we paid a dividend of $0.62 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 Steve.

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [3]

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Thanks, Weston, and good morning, everyone. The third quarter was one of our most productive ever as we closed $3.7 billion of loans and again demonstrated the power of the Blackstone real estate platform. With the strong origination pace and $200 million of fundings on existing loans, we grew the portfolio by $730 million in the quarter to $16.4 billion. The 2 largest originations accounting for about $2 billion of the quarterly total are secured by office properties that are almost fully leased or pre-leased. We do not typically originate loans for fully leased office buildings, that's the domain of banks and insurance companies that lend at lower rates. But for these very large loans, the borrowers need quick and definitive commitments. So our speed, certainty and ability to commit large size are the keys to winning versus our bank competition.

The biggest origination of the quarter was a EUR 1.2 billion, 70% of cost loan commitment to back Henderson Parks acquisition and take private of Green REIT, the leading owner of office properties in Greater Dublin. Henderson Park, a repeat BXMT client needed a financing commitment to bid and satisfy Irish regulatory requirements for public M&A transactions. By leveraging Blackstone's experience in public to private real estate transactions and market knowledge from property ownership experience in Dublin, we were able to quickly and definitively commit to the loan and support our client's bid, which subsequently won the support of the seller and it's public shareholders. We expect the full funding of this commitment to occur in the fourth quarter when the acquisition closes.

The second largest origination of the quarter was a $746 million construction loan for an office development in the Greater L.A. market, 100% pre-leased to an investment-grade tenant. Our experience and execution capability in large-scale major market construction lending was key to capturing this opportunity. The borrower was very focused on closing quickly to establish maximum schedule flexibility to complete the buildings for the tenant. And we were best positioned to facilitate that timely closing. Our underwriting of this loan was further validated by the positive experience and outlook of the Blackstone equity real estate funds, which are a significant owner of assets in this strong performing submarket. With these very large loans, came very large financing and syndication requirements. For the L.A. construction loan, we have already syndicated the senior components, one of our strongest bank relationships. For the Dublin loan, we have agreed terms for euro financing 2 of our largest lenders that will cover the entire senior execution. In both cases, the efficiency of the senior execution reflects the strong leasing and will enhance our expected returns.

Also during the quarter, we originated additional loans secured by properties in major markets, including Los Angeles, New York, Chicago, London and Spain. And our closing pipeline remains robust with about $3.3 billion of loans closed post-closing or are currently in the closing process, which should lead to more portfolio growth in Q4. Through all this pipeline activity, lending spreads have remained generally stable, despite a very competitive market environment. This is explained in large part by lower LIBOR and the possibility of further declines that reduce lender ROAs. To mitigate this impact on BXMT, we have been requiring rate floors in almost all of our originations. At quarter end, we had $3.5 billion of loans with -- in the money LIBOR floors. These floors meaningfully reduced the impact on our earnings from declines in LIBOR, which we've further described in our earnings release.

To keep pace with our portfolio and pipeline growth, we continue to expand our credit facility capacity in multiple currencies. During the quarter, we closed facilities with 2 new lenders and established more low cost capacity. Lower borrowing rates enabled us to add higher credit quality loans to our portfolio and still achieve our target ROI. The lower credit facility pricing, along with the premium equity we have raised and the enhancement to our capital structure from our term loan also helped offset the impact from vintage higher-spread loans repaying and being replaced by lower-spread originations. We continue to have 100% credit performance across our 129 loans and had 6 rating upgrades and no downgrades during the quarter. Our weighted average origination LTV remains very calm, 62%. And the major property markets where we're most active continue to generally perform well with healthy tenant demand. Our originations this quarter again reflect the ability of Blackstone management to source and close on differentiated lending opportunities. Our stock at yesterday's closing price yields a highly compelling 6.8%, which we believe is even more attractive, given lower market interest rates and asset yields. Our focus for BXMT remains on dividend quality and stability.

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

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Anthony F. Marone, Blackstone Mortgage Trust, Inc. - CFO, Principal Accounting Officer & Assistant Secretary [4]

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Thank you, Steve, and good morning, everyone. As Steve mentioned, we had a strong origination quarter, with $3.7 billion of new loans closed as we continue to deploy the capital we raised last quarter. We funded $1.4 billion under new and existing loans this quarter, generating $730 million of net portfolio growth after modest repayments of $682 million.

Notably, the EUR 1.2 billion loan to finance the Green REIT acquisition we originated this quarter will fund entirely in Q4. So it had a limited impact on our earnings during the quarter. We closed the quarter with a record $16.4 billion loan portfolio, which is fully performing with no nonaccrual defaulted or impaired loans and a stable weighted average origination LTV of only 62%. We upgraded 6 loans during the quarter with no downgrades, resulting in a weighted average risk rating of 2.7%, consistent with 2Q. The only risk-rated 4 loans in our portfolio are the same 3 loans we highlighted last quarter, which we downgraded conservatively at that time in response to changes in New York City rent control laws. These loans have been stable since the second quarter, and borrowers continue to make all payments due and otherwise comply with the terms of their loan agreements.

We were also active on the right-hand side of the balance sheet this quarter, closing 2 new credit facilities with total commitments of $577 million, with attractive pricing terms on our standard term match structure with no capital markets based mark-to-market provisions. In addition, we closed a $594 million senior loan syndication and completed several upsizes, term extensions and rate cuts on existing financing agreements. As of quarter end, the blended cost of our credit facilities was LIBOR plus 1.67%, down slightly from 2Q as some of our legacy borrowings with higher rates repaid and were replaced with lower-cost advances on new loans. In addition to our asset level credit facilities, we continue to benefit from the attractively priced and structured $500 million term loan B we issued last quarter, providing another form of stable capital for our business. We closed the quarter with debt-to-equity of only 2.6x, up modestly from 2.5x as of June 30 and liquidity of 760 -- excuse me, $796 million available to fund the pipeline deal as Steve mentioned earlier.

Our originations and financing activity this quarter produced GAAP net income of $0.56 per share and core earnings of $0.64, both down slightly from 2Q levels. We expected some reduction in EPS this quarter from the capital we raised in 2Q and the decline in LIBOR. However, these were offset by our strong origination pace in 3Q and the active interest rate floors of $3.5 billion on loans in our portfolio. In addition, I would note that with modest loan repayment volumes, we did not generate material prepayment income or fee acceleration this quarter. While such fees are variable, they generally provide a few cents of earnings in any particular quarter.

I would like to close with some brief remarks about a new accounting standard, the current expected credit losses or CECL standard, which will be effective for BXMT and similar-sized public companies January 1 of 2020. CECL has received a fair amount of attention in banking industry and specialty finance industry as it will effectively require all lenders to record an estimated life of loan loss reserve against all loans in their portfolio other than those carried at fair value. Importantly, with very few exceptions, the CECL reserve cannot be 0 even for well-collateralized, low-risk loans. As a result, we expect that we will record a modest CECL reserve on January 1, which will run through our balance sheet as a reduction to book equity. The CECL reserve will modulate in future periods through an adjustment to net income as our portfolio expands or contracts, the credit quality and risk attributes of our loans improves or declines, or overall market conditions strengthen or weaken. We will provide more details on our CECL reserve amount and methodology next quarter, but anticipate a relatively modest reserve, reflective of our senior lending strategy focused on quality assets in major markets.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Doug Harter from Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [2]

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Given -- can you just talk about how you kind of view your capital position in light of kind of the large fundings for this quarter's originations and kind of expectations for the ability to continue to drive pipeline with kind of your existing capital base or kind of the thoughts around raising additional capital?

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Douglas N. Armer, Blackstone Mortgage Trust, Inc. - Executive VP of Capital Markets & Treasurer [3]

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Yes, Doug, it's Doug Armer here. Tony referred to the roughly $800 million of liquidity that we currently have on the balance sheet. I'd say in addition to that, there are probably a couple of hundred million dollars, maybe a little bit more in terms of shadow liquidity in potential changes to asset-level leverage in our existing portfolio, and that could be around CLO execution or further optimization of our credit facilities. So we feel very good in terms of our ability with our existing capital structure to fund portfolio growth through the fourth quarter and really into 2020. That said, we'll remain opportunistic, particularly about additional corporate debt capital. We were very pleased with the term loan execution in the first half of the year. The no call on that piece of paper has expired. And so market conditions are generally favorable for us to revisit that execution, perhaps improve it. So I would say, we'll continue with the fine-tuning, but we feel very good about our capitalization with regard to the existing pipeline and prospective portfolio growth in the near term.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [4]

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Great. And then, I guess shifting -- shifting gears here. Can you just talk about your view of kind of the office market and kind of major markets, kind of with the pullback of WeWork and how that might impact kind of leasing trends and leasing rates and values for office properties?

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Katharine Keenan, Blackstone Mortgage Trust, Inc. - Executive VP of Investments & MD [5]

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Sure, Doug, it's Katie. I think our view continues to be consistent. We're obviously very focused on the fundamentals of each individual market. And we're not buying the market. We're very selective about which markets have positive fundamentals, which submarkets in those locations, which buildings, looking carefully about whether the characteristics of the building appeal to the types of tenants that are using space in the market. I think our focus on West L.A., where we're seeing very positive fundamentals driven by content creation is a good example of that. Our direct exposure in the portfolio to WeWork is extremely minimal. It's less than 1% of the square footage in our office portfolio. So I don't think that's a factor really for us in the portfolio. But we're closely looking at the overall impact. But I think, really, it does come down to asset and submarket selection. And then also, importantly, our low leverage lending strategy. So when we lend, we're focused on making 60% to 70% loans on high-quality assets with high-quality sponsors, and I think we'll continue to do that. What we've seen in the markets for WeWork and other tenants like that is they tend to take space that is a little less desirable, maybe buildings that are a little less desirable. So while I think there may be broader market implications that we're focused on for the assets that we're lending on, we'll continue to be focused on low leverage, good real estate, good sponsors.

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Operator [6]

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And your next question comes from the line of Don Fandetti from Wells Fargo.

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Donald James Fandetti, Wells Fargo Securities, LLC, Research Division - Senior Analyst [7]

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Steve, can you expand upon a little bit on the Dublin deal. I mean, I understand that speed is important, and that's something we hear a lot, but were banks really not able to sort of move that quickly? Was there some type of unique structure around this that made that the case? And then also, the yield or the spread of over LIBOR on the Dublin loan seems a little bit lower. Can you talk about how you view the credit and this and the L.A. deal, since they're sort of -- I think you'd mentioned that at least the L.A. deal was highly leased or 100% leased? Are they shorter duration-type loans? And can you talk about kind of the levered return around Dublin? Just a little more color.

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [8]

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First, I would start off by saying, in both cases, the levered return is consistent with the returns that we generate on our portfolio overall. They in each case have spreads that reflect the very strong leasing for each of the properties. But gives us a corresponding liability side as well, which also reflects the strength of the assets. So we just are able to finance those more efficiently than we otherwise would have, if they were more leasing risk, and generate very similar returns.

In the case of the Dublin deal, the portfolio is almost completely leased, produces a very strong cash flow debt yield. The asset quality is very good. And so was a portfolio that we knew because -- again, because we have a large office in London that buys properties. And so we knew the market, we knew the sponsor very well from prior loans that we've made to them. So when they wanted to proceed in trying to buy this company, we were in regular dialogue with them, sharing our view on the properties. And we thought it was a great lending opportunity for us. It was a large deal, top sponsored, a market that's performing very well in top-quality assets. And it was a unique opportunity for us to make a large loan, leverage our banking relationships as well in terms of what we think we'll ultimately execute on the financing side of this. And so just a special situation where we could generate a high return on a great pool of assets with a sponsor we knew well. We competed with the banks, but we were very aggressive, and we were very confident that we could get this done quickly and definitively, and that having a Blackstone commitment supporting his bid for the company would be well received by the seller and the shareholders. And that proved to be the case in that bid with the support of our funding commitment, it did prevail on the M&A process. So great deal for us and for the REIT, we're really excited about it.

On the L.A. construction loan, again, another special situation in that a property that was fully leased to an investment-grade tenant in a market that we knew very well. We're very active in the market. The developer wanted to close very quickly. Just to create as much scheduled cushion as possible for the tenant and all these build-to-suit-type transactions. The developers are very focused on delivering buildings quickly to the tenants, there's typically penalties if they don't. In this case, there was a lot of scheduled cushion, but they still was very focused on getting the loan closed quickly and definitively. We've done a lot of large construction loans, and we did the spiral loan here in L.A., which is meaningfully larger than this. So I think we had a lot of credibility in terms of being able to commit on a great asset and great market and large size. The underwriting was very straightforward because the economics of the lease were strong. It was very good real estate. And we did compete primarily with banks, but we could provide the highest degree of confidence that we could be there very quickly for a closing and able to develop where it gets started sooner. And so -- I think that was the primary benefit. And we ultimately ended up syndicating the senior to a bank and providing a great return for the transaction and also a great execution for the borrower.

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Operator [9]

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Your next question comes from the line of Rick Shane from JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [10]

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Steve, you made comments about potential syndication of the Dublin in L.A. loans. I'm curious how we should think about that in terms of the potential carrying value on your balance sheet? And also whether or not there will be syndication fees and the timing of how we should be thinking about those? Is that a fourth quarter event?

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [11]

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I'm going to have Doug give you a sort of a bit more detailed answer. On the L.A. construction loan, the loan and the syndication, both are already closed. In the case of the Dublin loan, we have agreed terms on the financing, but the loan hasn't funded yet. So the lenders to us haven't funded yet as well, but maybe Doug you can give, like, a little bit more color.

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Douglas N. Armer, Blackstone Mortgage Trust, Inc. - Executive VP of Capital Markets & Treasurer [12]

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Yes. So in both cases, we've executed a financing strategy and so in terms of our total loan portfolio and control of the transaction. We own the whole loan. In the case of the Dublin loan, we're going to use, at some existing credit facility, technology with existing credit facility counterparties. So that will show up just the way the majority of our loan portfolio shows up in our financial statements with on balance sheet limited recourse leverage that's very efficiently priced, as Steve mentioned, which will drive an accretive or in line ROI on that transaction. Same story, a slightly different variation on the theme with regard to the L.A deal, where we've done a mortgage net syndication that's more typical in the construction loan context, limited recourse, which may actually result in a unconsolidated presentation on our financial statements. So that balance sheet or leverage would be off-balance sheet. But in both cases, the economics are consistent with our financing strategy generally and will drive ROIs that are consistent with our investment strategy generally for the senior whole loan product that dominates the portfolio.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [13]

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Got it. Okay, great. And then in terms of the Dublin loan, generally speaking, and again, this is domestic. So this may be a international issue. But generally speaking, I would think that, that would be a 10-year fixed rate-type loan, given the type of collateral. I'm curious, obviously, you guys have structured this more consistently with your floating rate product. I'm wondering what the borrowers' incentive is? And is there a high refinance risk ultimately?

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Katharine Keenan, Blackstone Mortgage Trust, Inc. - Executive VP of Investments & MD [14]

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Yes. So I think with all the loans we do, one of the reasons borrowers come to us is because we can be a little bit more flexible with their general strategy. This is a portfolio of very high quality, well leased, but there are also some elements of value-add that they'll pursue, whether it's looking at selective sales for assets that may be appropriate at this time, whether it's trying to move some tenants around and drive additional revenue, whether it's small amounts of potential additional development potential. And working with a lender like us, gives them the flexibility where they can pursue those business plans without needing to do a lot of gymnastics with sort of a long-term fixed-rate loan. So I think our ability to develop more of a floating rate loan with a little bit more flexibility is what they needed to implement their business plan.

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [15]

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And Rick, the sponsor of the deal is a real estate opportunistic fund, [life] funds. So I think they're thinking that they're holders of these assets. I mean, as Katie mentioned, some of the assets that are leased long term and stabilized, they're more likely to sell earlier in the transaction, but I think they'll ultimately exit the entire transaction in sort of that 3- to 5-year time frame, as is typical with that profile of borrower.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [16]

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Got it. Okay, that makes sense. When you were talking about your -- the advantages of your positioning, I was thinking, being able to bid as a principle as opposed to an agent, and I suspect that's a big element of it, but it's also structural on the back end as well.

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [17]

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Yes, as Katie mentioned, this sort of -- well, this a very large version of what we do all the time. And the difference being that it's bigger, it's in Ireland, and the properties are almost fully leased. But we're still providing a flexible loan for interim holder who is going to -- on some of the assets, there's some improvement plans and on others, it's just -- I think they'll sell over time into what is today a very, very strong Dublin market.

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Operator [18]

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And your next question comes from the line of Jade Rahmani from KBW.

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [19]

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You might have us on mute there.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [20]

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Can you hear me?

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [21]

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Yes, we can hear you.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [22]

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Okay, great. Just thinking about the earnings and dividend outlook and the dynamic that you spelled out with potentially some higher-yielding loans repaying and replacing those with lower-yielding assets potentially being able to offset that with either higher leverage and/or lower financing costs, do you think something around the third quarter's earnings level should be viewed as sustainable? Which equates to roughly a 9% levered return or, in fact, our levered returns in the transitional lending business declining, as some have commented in the media and at conferences.

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Douglas N. Armer, Blackstone Mortgage Trust, Inc. - Executive VP of Capital Markets & Treasurer [23]

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Jade, it's Doug. I think you put your finger on all of the relevant dynamics. Obviously, LIBOR is moving around as well. And there are some implications around that. We've maintained the dividend at $0.62. I think we are very confident that, that dividend coverage is sustainable. And so the mid-60s level that we've seen in the third quarter, I think, stands to reason as a level that we'll be able to maintain going forward. I think there's the potential for growth around additional portfolio growth, future changes in LIBOR and as you mentioned, additional balance sheet leverage and deploying additional efficiency at the corporate level, which has driven growth over the past year or 2, in spite of all those dynamics that you referred to. So we feel very good about where the dividend is set. We feel very good about where our core earnings are coming in and the prospects for growth in core earnings going forward.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [24]

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And what kind of leverage should we think about, all-in-leverage, including nonconsolidated senior interest, corporate leverage, CLOs, but even though some of those may be non-recourse, non mark-to-market, still in terms of target leverage, I mean, I think in the second quarter it was around 2.9x and -- including all those things and what you disclosed is 2.6x. So something in the 3 turns of leverage? Or do you think something higher than that?

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Douglas N. Armer, Blackstone Mortgage Trust, Inc. - Executive VP of Capital Markets & Treasurer [25]

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Well, first, the difference between 2.6%, and the total leverage number is exactly what you referred to in terms of the exclusion of the off-balance sheet or non-debt leverage in the portfolio. I think, including all that and sort of looking at the total loan portfolio and total leverage, which from a risk management point of view is a different number. But from a deployment and earnings point of view, I think is a relevant metric. We would expect to be running in between 3 to 4x in terms of total leverage. I think and this is a little bit different than the number that you cited. So we can work off-line to close that disconnect. But I think we're currently in the roughly 3.4x. And as we continue to deploy the capital that we have on balance sheet and grow the portfolio, that could tick up to the high 3s, but we'll be in that zone, I think, going forward, given the mix of debt and equity capital that we've been raising on the balance sheet over the last couple of years.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [26]

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Just a couple of quick ones. The Dublin loan in the 10-Q shows an April 2020 maturity. And -- but it sounds like you're anticipating a longer duration than that. Can you just comment on that nuance?

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [27]

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Yes. I can do that, Jade. The way the loan is meant to work is there is an initial bridge period, which will ultimately be replaced by some longer-duration loans, we're still working on the refinement of that. But meant to facilitate the sponsor's flexibility with holding and improving some assets and selling others. But we ultimately expect this to be sort of a 3- to 5-year total term financing.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [28]

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Okay. Just also wanted to revisit WeWork co-working again, I mean, their market share was dramatic, especially in places like New York and San Francisco, London as well. And in the transitional lending space, where you're really targeting that last mile of occupancy, I think a lot of players may have viewed them as sort of a tenant of last resort. And in fact, I think they were actually setting the rents in certain asset classes in certain markets. So broadly speaking, do you think that underwriting assumptions are going to change, and there will be an impact on either what people think effective rents should be or overall office valuations in the transitional lending space?

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Stephen D. Plavin, Blackstone Mortgage Trust, Inc. - CEO, President & Director [29]

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Jade, obviously, they were a major tenant and influenced the market. Our experience in most of their -- in most of your locations would have been open for a period of time as they're highly utilized. I think they've been successful generally as an operator of co-working space. And so I would be much more concerned if I saw a lot of co-working spaces where were no -- where there was no one inside working. And it looked like the model wasn't executing well. So I think you'll see there'll be some impact in some of the markets, especially the markets that have maybe a little bit more of a tech focus. But in our view, the way we look at WeWork and other co-working tenants is as a non-credit tenant that we'd like to see in a minority of the space. We have very little WeWork -- as Katie mentioned, very little WeWork in our portfolio. We didn't rely on WeWork to take out vacant space. We think they're additive to some buildings and that they incubate new tenants and add a little bit of a different vibe to the assets. But I think you'll see that as long as there's underlying tenants for the co-working spaces that these buildings in these markets will still perform well.

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Operator [30]

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And your final question comes from the line of Stephen Laws from Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [31]

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Two questions I'd like to touch on. First, can you maybe revisit the 3 multifamily loans in New York that you moved to a 4 rating I believe in the second quarter. Really from an LTV standpoint, have you seen any assets trade post the regulation. How do you think your LTV exposure there has changed from the time of origination to the current LTV on the asset today?

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Katharine Keenan, Blackstone Mortgage Trust, Inc. - Executive VP of Investments & MD [32]

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Sure. So this is Katie. There really haven't been enough trades in the market to establish a new price level. We've been watching, it's -- there's been very much a wait-and-see mode in terms of both buyers and sellers in the market. The few trades that have happened have generally been sort of a for-sale situation, so we don't think that there is a lot of information out there about where things are settling out. I would say as far as our loans, as Tony mentioned, they continue to perform, our borrowers continue to be committed, you got to be paying as agreed. And so we still feel they're very stable. When we originated these loans, they were mid-60s LTV, and we think that they're higher now because the cash flow trajectory is lower than what it was when we originally underwrote, but we still believe and feel strongly that they're covered by values of several hundred percent. Where exactly we are in that range, I think it's a little bit too soon to tell, but we feel good that they'll continue to be performing, and then ultimately it will be covered by value.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [33]

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Great. Thanks for that comment, Katie. Lastly, the spiral funding, I think, April of '18 press release, 2 years, and so we're looking to -- beginning to fund that loan first half next year. Can you maybe update us, for our models, just how we should think about that $1.8 billion of funding occurring, how much do you anticipate next year? Are there any terms you can share with us about the expected drawdowns on our loan?

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Douglas N. Armer, Blackstone Mortgage Trust, Inc. - Executive VP of Capital Markets & Treasurer [34]

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I think -- and Stephen, it's Doug. I think our expectations in terms of the funding schedule remain unchanged. The project is on plan. And so we funded an initial slug of capital in the form of a mezzanine loan, which is yielding an ROI that works for our business. Going forward, we'll be funding the senior loan, which we've syndicated. And so the right way to think about that is that it's essentially a new loan that we'll fund over time at our levered ROI, and that will be a sort of straight-line funding over the course of -- and Katie, maybe you can refresh my memory as to what the funding schedule will be over the course of the next several years, starting in 2020, on a relatively straight-line basis. So you won't see a big pop or decline either way, it will be part of the ongoing portfolio growth that you see in the portfolio over the next couple of years.

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Operator [35]

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And now your final question comes from the line of Arren Cyganovich from Citi.

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Arren Saul Cyganovich, Citigroup Inc, Research Division - VP & Senior Analyst [36]

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Just on the CECL commentary. Did you provide any specific range of how much of that might impact your day 1. I didn't catch that if you gave any nominal or a percent range around there.

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Anthony F. Marone, Blackstone Mortgage Trust, Inc. - CFO, Principal Accounting Officer & Assistant Secretary [37]

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Arren, it's Tony. We didn't provide a range at this point. We're not ready to provide a range, we'll be providing it in the next quarter. I do think, as I commented earlier, we expect that the reserve will be reflective of our business model and our continued focus on senior loans with quality sponsors and quality markets and quality assets. So we will have to book a reserve because the rules say it can't be 0, but we don't have a number that we're sharing at this time.

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Operator [38]

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Okay, thank you. And I would like to hand back to Weston Tucker for final remarks.

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Weston M. Tucker, Blackstone Mortgage Trust, Inc. - Head of IR & Senior MD [39]

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Great. Thanks, everyone, for joining us, and please give me a call after this call if you have any questions.