Blackstone Mortgage Trust, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. The filing was signed October 27, 2015. Blackstone Mortgage Trust is an externally managed REIT originating and acquiring commercial real estate loans in North America and Europe.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest and related income | $138.4 million | $50.4 million | $282.2 million | $126.5 million |
| Net interest income | $87.0 million | $30.5 million | $176.1 million | $78.8 million |
| Net income attributable to the company | $66.9 million | $22.0 million | $131.6 million | $68.6 million |
| Diluted EPS | $0.72 | $0.45 | $1.69 | $1.52 |
| Dividends declared per share | $0.62 | $0.50 | $1.66 | $1.46 |
- Q3 net interest income was 62.9% of interest income, compared with 60.5% a year earlier; interest income and expense both increased substantially as the loan portfolio and secured borrowings expanded.
- At September 30, total assets were $9.85 billion, including $9.38 billion of net loans. Cash and cash equivalents were $138.6 million; total equity was $2.50 billion and total liabilities were $7.35 billion.
- Secured debt agreements totaled $6.59 billion; loan participations sold were $507.2 million and convertible notes had a $163.7 million carrying value ($172.5 million principal). Cash plus available revolving-facility borrowings totaled $555.4 million.
- For the first nine months, operating cash flow was $104.6 million, investing cash flow was negative $5.19 billion, and financing cash flow was positive $5.17 billion. Cash increased $84.3 million to $138.6 million.
Material changes and portfolio
- The second-quarter acquisition of 77 GE commercial mortgage loans—described as a $4.9 billion portfolio acquired for a total purchase price of $4.7 billion—was the principal growth event. Net loan book value more than doubled from $4.43 billion at year-end 2014 to $9.38 billion.
- The acquisition was funded partly with a Wells Fargo facility: $3.57 billion was outstanding at quarter-end, with a further $158.5 million available for future loan fundings. Secured debt increased from $2.37 billion at year-end 2014 to $6.59 billion.
- During Q3, the company originated or acquired $885.6 million of loans, including $534.2 million of non-consolidated senior interests, and funded $868.0 million. The portfolio comprised 132 loans, was 78% floating-rate, had a 5.09% weighted-average all-in yield and 63.6% weighted-average LTV. The weighted-average internal risk rating was 2.1.
- Management reported Q3 Core Earnings of $0.72 per share, up from $0.38 in Q2 2015, citing GE portfolio accretion and the prior quarter’s one-time transaction costs. Core Earnings is non-GAAP; beginning in Q3, the company reported it after incentive fees.
- Book value per share was $26.64, versus $26.60 at June 30, 2015. The company issued 34.78 million shares in 2015 offerings for net proceeds of approximately $1.03 billion.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or dividend guidance. The board declared a $0.62-per-share Q3 dividend, paid October 15, 2015. Dividend policy remains discretionary and subject to taxable income, financial condition, REIT requirements, and other factors.
- Management says rising rates generally benefit net income because most loans and related funding are floating-rate, but fixed-rate assets funded with floating-rate debt create exposure in the opposite direction. Interest-rate caps and currency-matched financing mitigate, but do not eliminate, market risk. A 10% U.S. dollar appreciation was estimated to reduce net assets by $27.8 million against sterling and $14.5 million against the euro.
- Credit, property-market, funding-market, counterparty, and foreign-exchange risks remain material. Unfunded loan commitments were $738.3 million, including $192.7 million due within one year. The company reported one loan with a $119.7 million book value in a maturity default less than 90 days past due; it expected full collection. It reported no impaired or nonaccrual loans.
- Q3 included a small unrealized investment loss ($82,000); nine-month results included $22.1 million of unrealized gains on legacy investments and $5.7 million of CTOPI promote income, down from $24.3 million in the prior-year period. Foreign-currency translation contributed to accumulated other comprehensive loss of $27.6 million at quarter-end.
- Related-party matters include management and incentive fees and the GE acquisition involving affiliates of the Manager. A $2.7 million incentive-compensation obligation related to a legacy hotel portfolio sale was disclosed; $2.5 million had been paid. A tax examination of a former subsidiary’s 2011–2012 returns remained ongoing, with no adjustments communicated and no reserve recorded; the company had provided related indemnifications.
- The company stated that it was in compliance with its debt covenants and REIT requirements, had no material legal proceedings or off-balance-sheet arrangements, and had effective disclosure controls. It reported no material change to previously disclosed risk factors.
Investor verification points
- Review the GE portfolio’s realized yield, asset performance, purchase accounting, and the economics and terms of its associated financing.
- Assess leverage, collateral eligibility and advance rates, refinancing and maturity exposure, covenant headroom, and dependence on continued capital-market access.
- Reconcile GAAP EPS and cash generation with the $0.62 dividend and non-GAAP Core Earnings, including the revised incentive-fee treatment.
- Track the $738.3 million of unfunded commitments, the maturity-defaulted loan, portfolio concentrations, risk-rating migration, and foreign-currency and interest-rate exposures.
- Examine the Manager fee arrangements, related-party transactions, legacy-portfolio gains, and the unresolved tax-indemnity exposure.