Blackstone Mortgage Trust, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017. Blackstone Mortgage Trust is an externally managed REIT that originates and purchases senior commercial real estate loans secured by properties in North America and Europe. Financial statements are unaudited and prepared under U.S. GAAP.
Financial and operating highlights
- Q2 earnings: Interest and related income was $126.8 million and interest expense was $54.4 million, producing net income from loans and other investments of $72.5 million. Net income attributable to the company was $50.6 million, or $0.53 per diluted share. Core Earnings, a non-GAAP measure, were $57.4 million, or $0.60 per share.
- Dividend and book value: The company declared $0.62 per share for Q2, unchanged from Q2 2016. Book value was $26.38 per share, versus $26.28 at March 31, 2017.
- Six-month results: Net income attributable to the company was $102.0 million, or $1.07 per share, compared with $120.1 million, or $1.28 per share, in the first half of 2016. Dividends declared were $1.24 per share in both periods.
- Portfolio: At June 30, loans receivable, net, were $9.59 billion across 102 loans; total loan exposure, including non-consolidated senior interests, was $10.61 billion. The weighted-average cash coupon was 5.27%, all-in yield 5.65%, and weighted-average maximum maturity 3.4 years. Unfunded loan commitments were $1.39 billion.
- Balance sheet and leverage: Total assets were $9.72 billion, total liabilities $7.21 billion, and equity $2.51 billion. Secured debt agreements were $5.82 billion gross; convertible notes had $460 million face value. Debt-to-equity was 2.5x and total leverage was 3.2x, up from 2.3x and 2.9x at year-end 2016.
- Liquidity and cash flow: Cash and cash equivalents were $33.5 million, with another $34.3 million restricted. Reported available liquidity was $530.4 million, including $491.8 million of available secured borrowings and net loan payments held by servicers. For the first half, operating cash flow was $110.8 million, investing cash outflow $346.0 million, and financing cash inflow $224.2 million; cash, cash equivalents and restricted cash declined $11.0 million.
Material changes versus comparable periods
- Q2 net income attributable to the company declined to $50.6 million from $63.1 million, and EPS fell to $0.53 from $0.67. First-half attributable net income declined to $102.0 million from $120.1 million, and EPS to $1.07 from $1.28.
- Net loan investment income fell $8.9 million in Q2 and $14.7 million in the first half year over year. Management attributed the declines primarily to lower average loan portfolio balances. Prior-year results also included gains on legacy investments and income attributable to non-controlling interests that were absent in 2017.
- Loans receivable, net, grew $894.5 million from December 31, 2016. First-half originations were $2.47 billion, fundings $1.98 billion, and repayments $1.22 billion.
- Debt financing changed during the period: the company issued $287.5 million face value of new convertible notes and completed its first consolidated single-asset securitization, with $474.6 million of securitized debt outstanding. It also expanded certain credit facilities and increased the Barclays revolving facility capacity to $250 million.
Outlook, risks, contingencies and unusual items
- The filing provides no formal earnings or dividend guidance. Management’s stated approach is to distribute substantially all taxable income to maintain REIT status; future distributions remain subject to board discretion and financial and other factors.
- The portfolio is rate-sensitive: 92% of total loan exposure earned floating rates and was financed with floating-rate liabilities. Management estimated that an immediate 25-basis-point rate increase would increase annual net interest income by about $5.8 million; a 25-basis-point decrease would reduce it by about $5.7 million. Floors, currency mix and hedges affect actual results.
- Principal risks include borrower/property credit performance, real estate market conditions, interest-rate changes, funding and capital-market access, counterparty performance, and foreign-exchange movements. The portfolio’s weighted-average internal risk rating rose to 2.6 from 2.5, primarily because lower-risk loans were repaid; management reported no impaired, nonaccrual or maturity-default loans at June 30.
- The company had $1.39 billion of unfunded loan commitments and $2.51 billion of secured-debt principal payments scheduled within one year. It was in compliance with secured-debt covenants. No material legal proceedings or material changes to previously reported risk factors were disclosed.
- The securitization VIE added approximately $500 million of assets and $474 million of liabilities to the consolidated balance sheet; its assets are restricted to VIE obligations and its debt is non-recourse to the company. Management stated consolidation did not affect equity or net income.
- Management expects adoption of the new expected-credit-loss standard to increase provisions for potential loan losses and recognize them earlier; the company then had no loan-loss provision. The filing also notes REIT qualification and distribution requirements, and associated tax consequences if requirements are not met.
Important facts for investors to verify
- Reconcile GAAP EPS of $0.53 with non-GAAP Core Earnings of $0.60 and the $0.62 quarterly dividend; review Core Earnings definitions and adjustments.
- Assess whether portfolio growth, credit quality and the increase in the weighted-average risk rating are consistent with the reported absence of impaired or defaulted loans.
- Review total leverage and near-term secured-debt maturities alongside available borrowing capacity, unfunded commitments and cash liquidity.
- Examine interest-rate floors, hedge coverage and foreign-currency exposure, including the disclosed sensitivity estimates.
- Review the May 2017 convertible-note terms and securitization structure, including non-recourse treatment, restricted assets and related-party participation in the securitization.