Blackstone Mortgage Trust, Inc. (NYSE: BXMT) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company is an externally managed REIT that originates senior commercial real estate loans in North America, Europe and Australia. Results were materially affected by the COVID-19 pandemic and related credit-loss estimates.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest and related income | $192.0m | $223.4m | $396.9m | $448.1m |
| Interest expense | $84.9m | $116.9m | $189.1m | $235.6m |
| Net interest income | $107.1m | $106.5m | $207.8m | $212.5m |
| GAAP net income (loss) attributable to BXMT | $17.5m | $75.2m | ($35.8m) | $151.7m |
| GAAP earnings (loss) per share | $0.13 | $0.59 | ($0.26) | $1.21 |
- Q2 Core Earnings, a non-GAAP measure, were $85.2m, or $0.62 per share, versus $0.64 per share in Q1 2020. The company excluded the CECL provision from Core Earnings; this measure is not equivalent to GAAP earnings or operating cash flow.
- Q2 dividend declared was $0.62 per share, unchanged from the prior-year quarter, and was paid July 15, 2020. Book value was $26.45 per share, down from $26.92 at March 31, 2020.
- Six-month operating cash flow was $175.7m, compared with $157.2m a year earlier. Investing cash use was $234.7m; financing provided $1.17bn. Cash increased by $1.11bn to $1.26bn, driven chiefly by financing and equity proceeds.
Balance sheet, portfolio and liquidity
- At June 30, 2020, total assets were $17.66bn, including $16.16bn of net loans; total liabilities were $13.77bn and equity was $3.90bn.
- Gross loan principal was $16.43bn across 128 loans, with $3.59bn of unfunded commitments. Portfolio weighted-average cash coupon was LIBOR plus 3.17%, all-in yield LIBOR plus 3.52%, and origination LTV 63.6%. About 99% of loan principal earned floating rates.
- Office loans represented 59% of portfolio exposure and hospitality 13%. The weighted-average internal loan risk rating worsened to 3.0 from 2.8 at year-end 2019; $3.1bn of loans were downgraded to risk grades 4 or 5, primarily reflecting COVID-19 pressure on hospitality and select other properties.
- Total CECL reserves were approximately $197.2m: $178.1m against loans, $4.1m against held-to-maturity debt securities and $15.0m against unfunded commitments. The loan reserve included $69.7m for two loans with $334.2m combined principal, valued using significant unobservable collateral assumptions.
- Reported debt included $9.72bn of secured debt agreements, $2.24bn of securitized debt obligations, $1.05bn of secured term loans and $614.7m of convertible notes. Debt-to-equity was 2.6x versus 3.0x at year-end; total leverage was 3.6x versus 3.7x.
- Available liquidity was reported at $1.37bn, comprising $1.26bn cash, $97m of available secured borrowings and $11.6m of net loan payments held by servicers. Only $97m remained available under pledged collateral facilities at quarter-end.
- Unfunded loan commitments were $3.6bn; identified financing covered $2.2bn. The timing and amount of future funding depend on collateral performance and project progress.
Changes, management commentary and risks
- Compared with Q2 2019, interest income fell $31.4m, but interest expense fell $32.0m, leaving net interest income slightly higher. Lower benchmark rates and financing mix affected results; interest-rate floors on many loans partly offset lower LIBOR.
- GAAP earnings fell sharply year over year, principally due to the new CECL reserve. The company adopted CECL on January 1, 2020, recording a $17.7m opening retained-earnings adjustment, followed by a $179.5m six-month reserve increase through earnings.
- During Q2, the company completed 13 loan modifications covering $2.4bn of principal. Terms included extensions, rate changes, reserve use, temporary interest deferrals and covenant or performance-test waivers; many included additional sponsor equity. Management said all interest due under loans had been collected through July 2020, including on hospitality loans.
- Seven secured-credit lenders, representing $7.9bn of facilities, temporarily suspended certain collateral credit-mark provisions in exchange for cash repayments, additional collateral and reduced borrowing availability. This highlights funding and collateral-management sensitivity during market stress.
- Management expected loan prepayments to slow during the pandemic and warned that modifications allowing interest capitalization and facility repayments could pressure operating cash flow. It described balance-sheet fortification as a priority and said it could raise capital, borrow, sell assets, pay fees in shares, or reduce, suspend or pay future dividends in kind. No formal earnings guidance was provided.
- COVID-19 risks include weaker property cash flows and valuations, borrower requests for relief, slower construction and leasing, uncertain credit losses, reduced financing availability and possible effects on liquidity and distributions. The company stated that the ultimate effects were uncertain.
- As a REIT, BXMT generally must distribute taxable income to maintain its tax status. It reported compliance with REIT requirements and debt covenants at June 30, 2020. No material legal proceedings or defaults on senior securities were reported.
Most important facts for investors to verify
- Subsequent performance, collateral values and recoveries for the two specifically impaired loans and the other risk-grade 4/5 exposures.
- Whether the $197.2m CECL reserve adequately reflects COVID-related credit risk, and how management’s assumptions and reserve levels change in later filings.
- Liquidity after lender collateral requirements, facility availability changes, loan modifications and the $3.6bn unfunded commitment obligation.
- Collection of interest and principal, particularly from hospitality borrowers, and the realized impact of the 13 modifications and any further forbearance.
- The sustainability of the $0.62 quarterly dividend in light of GAAP losses, cash needs and management’s stated willingness to change dividend policy.
- Future financing costs, refinancing needs and lender concentration; verify the status and terms of credit facilities whose credit-mark provisions were temporarily suspended.