Blackstone Mortgage Trust, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Blackstone Mortgage Trust is an externally managed REIT that originates and purchases senior commercial real estate loans in North America and Europe.
Financial performance and position
Unless noted, amounts are in millions of dollars. Interim financial statements are unaudited.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest and related income | $146.4 | $128.2 | $391.8 | $381.7 |
| Interest and related expense | $67.9 | $45.4 | $168.9 | $139.8 |
| Net income from loans and other investments | $78.6 | $82.8 | $222.9 | $241.9 |
| Net income attributable to Blackstone Mortgage Trust | $57.7 | $64.8 | $159.7 | $184.9 |
| GAAP diluted EPS | $0.61 | $0.69 | $1.68 | $1.97 |
| Dividends declared per share | $0.62 | $0.62 | $1.86 | $1.86 |
- Management reported Q3 Core Earnings of $65.1 million, or $0.69 per share, versus $57.4 million, or $0.60 per share, in Q2 2017. Core Earnings is a non-GAAP measure and should not be treated as GAAP income or cash available for distribution.
- At September 30, total assets were $9.78 billion, including $9.64 billion of net loans. Total liabilities were $7.25 billion and stockholders’ equity was $2.52 billion. Cash and cash equivalents were $61.2 million; restricted cash was $32.9 million.
- Net secured debt was $6.08 billion; convertible notes, net, were $562.7 million; and securitized debt, net, was $474.3 million. Debt-to-equity was 2.6x and total leverage was 3.2x, compared with 2.3x and 2.9x at December 31, 2016.
- Available liquidity sources totaled $701.9 million: $61.2 million cash, $639.8 million available under secured facilities, and $0.8 million of loan payments held by servicers.
- For the first nine months, operating cash flow was $176.5 million, investing cash flow was negative $319.7 million, and financing cash flow was positive $157.1 million. Cash, cash equivalents and restricted cash increased by $14.0 million.
Material changes and portfolio
- Q3 net income attributable to the company fell $7.1 million year over year; nine-month income fell $25.2 million. Net loan income declined despite higher interest income, as interest expense rose and non-recurring prepayment fee income was lower. The company also issued convertible debt in 2017.
- The loan portfolio grew to 111 loans, with $9.68 billion principal balance on the balance sheet and $10.67 billion total loan exposure, including $987.6 million of non-consolidated senior interests. Net book value rose from $8.69 billion at year-end 2016.
- Unfunded loan commitments increased to $1.62 billion from $882.5 million at year-end; these are generally for property improvements or leasing costs. Weighted-average cash coupon and all-in yield on balance-sheet loans were 5.30% and 5.68%, respectively. Average LTV for total loan exposure was 61.8%.
- Management’s weighted-average portfolio risk rating increased to 2.6 from 2.5, primarily because lower-risk loans repaid, not because of rating downgrades. The company reported no impaired, nonaccrual, or maturity-default loans at quarter-end.
- The company launched a Multifamily Joint Venture with Walker & Dunlop in April, contributing 85% of its equity and consolidating the venture. It also completed a single-asset securitization; the related $474.6 million debt is non-recourse, and securitization assets are restricted to its obligations.
- In May and Q3, the company issued convertible notes, bringing their aggregate face value to $575 million. It also expanded credit capacity, including a $250 million revolving facility, of which $101.8 million was drawn at quarter-end.
Outlook, risks and contingencies
- No specific earnings or portfolio guidance is provided in the filing. Management states that higher interest rates generally benefit net income because 92% of loan exposure is floating-rate, while noting rate floors and asset-liability mismatches. Its modeled 12-month net interest income impact was positive $6.4 million for a 25-basis-point increase and negative $5.6 million for a 25-basis-point decrease.
- Key risks include borrower credit and property performance, higher rates potentially straining borrower debt service, access to debt and equity capital, refinancing and liquidity needs, lender/counterparty performance, and foreign-currency movements. A 10% U.S. dollar appreciation was estimated to reduce net asset value by $27.9 million against sterling and $9.4 million against euros; Canadian-dollar exposure was substantially hedged.
- The company had $2.65 billion of contractual obligations and commitments scheduled within one year, including $2.22 billion of secured debt principal and $224.0 million of unfunded loan commitments. It was in compliance with its debt covenants at quarter-end.
- The filing reports no material legal proceedings and no material changes to previously disclosed risk factors. The company had no loan-loss provision; it expects the future adoption of the expected-credit-loss standard to result in earlier and potentially higher provisions.
- REIT status depends on meeting tax and distribution requirements. The board retains discretion over dividends; the declared Q3 dividend was $0.62 per share.
Investor verification priorities
- Reconcile reported GAAP EPS, the $0.69 Core Earnings per share, and the continuing $0.62 quarterly dividend; review the company’s non-GAAP adjustments.
- Assess the $1.62 billion unfunded commitments against available liquidity, facility availability, and near-term debt maturities.
- Review the increase in leverage and the maturity, pricing, recourse, and covenant terms of secured and convertible debt.
- Examine portfolio concentration, loan risk ratings, LTVs, and the underlying credit quality of the largest loans, including the securitized asset.
- Evaluate sensitivity to interest rates, foreign exchange, and refinancing conditions, as well as management-fee and incentive-fee arrangements with the external manager.