Blackstone Mortgage Trust, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also discusses fourth-quarter results. Blackstone Mortgage Trust is an externally managed commercial real estate lender and REIT. After selling its investment management business in December 2012, the company relaunched loan originations in May 2013 and changed its name from Capital Trust. Annual and prior-year results are not directly comparable because of the relaunch, the business sale, and other legacy transactions.
Key financial results and position
| Metric | 2013 / December 31, 2013 | Comparison or context |
|---|---|---|
| Full-year revenue | $53.2 million | Up from $34.9 million in 2012; 2013 included only a partial year of the relaunched origination business. |
| Full-year net income attributable to Blackstone Mortgage Trust | $15.0 million; $0.81 per share | Down from $181.0 million in 2012, which included substantial gains from deconsolidations and other legacy transactions. |
| Fourth-quarter net income attributable to the company | $7.1 million; $0.24 per share | Compared with $8.3 million and $0.29 per share in Q3. Q4 included $3.0 million of net gains on legacy investments at fair value. |
| Q4 Core Earnings | $12.0 million; $0.41 per share | Compared with $8.0 million and $0.28 per share in Q3. Core Earnings is a non-GAAP measure and is not a substitute for GAAP income or cash flow. |
| Q4 net interest income from loans and other investments | $15.3 million | Up 6.0% from Q3. Interest income increased with loan growth, partly offset by higher financing costs. |
| Full-year net interest income | $35.1 million | Includes $28.6 million from Loan Origination and $6.6 million from the CT Legacy Portfolio. |
| Loan Origination portfolio | 28 loans; $2.019 billion principal balance and $2.000 billion net book value | Weighted-average cash coupon LIBOR + 4.64%; all-in yield LIBOR + 5.28%; average maximum maturity 4.2 years. Loans were floating-rate. |
| Portfolio credit indicators | Loan Origination weighted-average risk rating 2.8; all loans performing as expected | No impaired loans in Loan Origination. Legacy holdings included impaired and nonaccrual loans. |
| Dividends | $0.72 per share declared for 2013; Q4 dividend $0.45 | The Q4 dividend was paid in January 2014. Payment levels remain at the board’s discretion. |
| Book value | $24.25 per share; company stockholders’ equity $717.9 million | Book value per share was $24.68 at September 30, 2013. The Q4 decrease reflected dividends exceeding GAAP net income and restricted-stock issuance. |
| Cash and available liquidity | $52.3 million cash; $218.6 million available under repurchase facilities | $270.9 million combined, before considering operating needs and restrictions. |
| Debt and financing | $1.109 billion repurchase borrowings; $172.5 million convertible notes issued ($159.5 million net carrying amount); $90.0 million loan participation; $40.2 million nonrecourse securitized debt | Repurchase funding cost averaged LIBOR + 2.39% including fees. Convertible notes bear a 5.25% coupon, mature in 2018, and have a stated all-in cost that varies by accounting convention. |
| Cash flow | $28.7 million operating cash flow; $36.9 million net increase in cash | Investing cash flow was $(1.782) billion and financing cash flow was $1.791 billion, reflecting rapid loan deployment and associated capital raising. |
Material changes and unusual items
- In May 2013, the company raised $633.8 million net from a public common-stock offering and completed a one-for-ten reverse stock split. It originated $2.5 billion of loan commitments during 2013 and funded $2.3 billion.
- During 2013, the company obtained $1.9 billion of secured repurchase capacity and issued $172.5 million of convertible notes. It used these and equity proceeds to expand the lending platform.
- Q4 included approximately $4.0 million of aggregate CT Legacy interest and compensation expense, including a $2.0 million repurchase-note prepayment penalty and $2.0 million of accelerated legacy incentive compensation. The company repaid its secured notes in full.
- CT Legacy Partners distributed $46.6 million to the company during 2013; the company also received an $8.8 million CTOPI tax advance. Management said $36.8 million of net Q4 cash flow from the legacy segment was unrestricted and available for new lending.
- The company’s CT CDO I cash flows remain trapped by breached coverage and overcollateralization tests; the company reported receiving no cash payments from that consolidated vehicle. Its $40.2 million debt is nonrecourse, but the cash trap reduces legacy cash available to the company.
- After year-end, the company raised $256.1 million net from a January 2014 stock offering and originated three loans with $286.4 million total commitments, of which $208.8 million was funded at closing.
Outlook, risks, and other disclosures
- Management’s stated strategy is to grow a global commercial real estate lending platform, primarily through senior mortgage loans. No quantified earnings, origination, or dividend guidance is provided.
- The company said leverage was expected not to exceed 4-to-1 debt to equity, subject to management discretion and financing conditions. Repurchase agreements impose collateral, liquidity, and financial covenants; the company reported compliance at year-end.
- The floating-rate portfolio is financed principally with floating-rate debt. A 100-basis-point increase in LIBOR was estimated to increase annual net income by approximately $8.2 million, before the impact of loan LIBOR floors. Rising rates could also strain borrowers and increase defaults.
- Key risks include commercial-property credit deterioration, refinancing and collateral-value risk, leverage and margin calls, funding availability and cost, loan illiquidity, interest-rate and currency movements, and the company’s reliance on its external manager.
- Blackstone affiliation creates potential conflicts in allocating opportunities, managing loans alongside affiliated funds, and setting fees. The manager receives base fees and may earn incentive fees based on Core Earnings.
- The company reported REIT compliance at December 31, 2013, no off-balance-sheet arrangements, no material litigation proceedings, and effective disclosure controls and internal control over financial reporting. It had $164.3 million of unfunded loan commitments.
Important facts for investors to verify
- Confirm the performance and credit quality of the rapidly expanded loan portfolio, including loan-level collateral, concentration, risk ratings, and the status of legacy impaired loans.
- Review the CT CDO I cash-trap tests, expected timing of any cash-flow restoration, and the company’s economic exposure to legacy assets.
- Assess liquidity against debt maturities, collateral calls, $164.3 million of unfunded commitments, and dividend needs; distinguish available facility capacity from unrestricted cash.
- Reconcile reported GAAP earnings, non-GAAP Core Earnings, and dividends, including the impact of fees, compensation, fair-value gains, and one-time legacy expenses.
- Evaluate dilution and leverage following the January 2014 equity raise, as well as the conversion terms and refinancing implications of the 2018 convertible notes.