Blackstone Mortgage Trust, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Blackstone Mortgage Trust (NYSE: BXMT) is an externally managed REIT that originates senior loans secured by commercial real estate in North America and Europe. This unaudited report covers the three months ended March 31, 2018; financial results are compared with Q1 2017 unless otherwise noted.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Interest and related income | $155.4 million | $118.5 million in Q1 2017 |
| Interest expense | $70.0 million | $46.7 million in Q1 2017 |
| Net interest income | $85.4 million | $71.8 million in Q1 2017 |
| Net income attributable to BXMT | $61.0 million; $0.56 per diluted share | $51.4 million; $0.54 per share in Q1 2017 |
| Core Earnings (non-GAAP) | $69.3 million; $0.64 per share | $64.5 million; $0.65 per share in Q4 2017 |
| Dividend declared | $0.62 per share | $0.62 in Q1 2017 |
| Cash flow from operations | $72.6 million | $57.4 million in Q1 2017 |
| Cash, cash equivalents and restricted cash | $74.5 million | $102.5 million at year-end 2017 |
| Total assets / total equity | $11.21 billion / $2.93 billion | $10.26 billion / $2.92 billion at year-end 2017 |
| Loans receivable, net | $11.08 billion; 106 loans | $10.06 billion; 110 loans at year-end 2017 |
| Secured debt, net / convertible notes, net | $6.00 billion / $778.1 million | $5.27 billion / $563.9 million at year-end 2017 |
| Leverage ratios | Debt-to-equity 2.3x; total leverage 3.1x | 2.0x and 2.8x at year-end 2017 |
Investing cash outflow was $967.5 million, largely reflecting $2.0 billion in loan fundings, partly offset by $1.0 billion of loan principal collections and sales proceeds. Financing activities provided $857.7 million, including net secured-debt borrowings and $214.5 million of net proceeds from convertible notes. Cash, cash equivalents and restricted cash decreased by $37.2 million during the quarter.
Loan portfolio total exposure was $12.14 billion, including $995.9 million of non-consolidated senior interests; weighted-average cash coupon was 5.50%, all-in yield 5.88%, maximum maturity 3.7 years, and origination/acquisition LTV 62.4%. Office loans represented 48% of portfolio exposure and U.S. loans 78%. Unfunded loan commitments were $1.47 billion.
Material changes and management commentary
- Compared with Q1 2017, net interest income rose $13.6 million and net income attributable to BXMT increased $9.6 million. Management attributed higher net interest income primarily to a $1.7 billion increase in the weighted-average loan balance, partly offset by higher financing balances and interest expense.
- Loan originations were $1.89 billion and net fundings were $1.02 billion. The portfolio expanded from $10.06 billion of net book value at year-end 2017 to $11.08 billion at quarter-end.
- The company issued $220 million of 4.75% convertible notes due 2023 during March. Face value of all convertible notes outstanding was $795 million, including $172.5 million due December 2018.
- BXMT added a $1.0 billion credit facility, increased an existing facility by $250 million, and entered into euro-denominated asset-specific financing. Available borrowings under secured debt agreements were reported as $825.1 million.
- Management reported $0.64 per share of Core Earnings against a $0.62 dividend. Core Earnings is a non-GAAP measure and is not equivalent to GAAP income or cash available for distribution.
Outlook, risks and unusual items
- The filing provides no specific earnings or origination guidance. Management states that rising interest rates generally benefit net income: 94% of loan exposure was floating rate and financed with floating-rate liabilities, while 6% was fixed-rate assets financed with floating-rate debt. Rate floors, asset/liability mismatches and borrower performance may affect the outcome.
- For the 12 months after March 31, management estimated an approximately $8.4 million increase in interest income less expense from an immediate 25-basis-point rate increase, and approximately $17.5 million from a 50-basis-point increase; corresponding decreases were estimated at approximately $7.9 million and $15.6 million. These are sensitivities, not forecasts.
- Key risks include commercial real estate credit and collateral values, higher borrower debt-service costs, refinancing and capital-market access, short-term credit-facility maturities, counterparty performance, foreign exchange movements, and the requirement to distribute taxable income as a REIT. A 10% U.S. dollar appreciation was estimated to reduce net assets by $29.2 million against sterling and $32.7 million against the euro; Canadian-dollar exposure was substantially hedged.
- Debt covenants were met at quarter-end. The company had no impaired, nonaccrual or maturity-default loans, and no material legal proceedings. Management reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
- The company originated a €1.0 billion portion of a €7.3 billion Spanish senior term facility involving a joint venture controlled by Blackstone-advised vehicles; BXMT stated the loan was negotiated without its involvement and on market terms. It also originated a $330 million loan used to repay a loan held by a Blackstone-advised investment vehicle. These related-party transactions merit review.
- BXMT adopted revenue-recognition guidance in Q1 without material impact. It expects the future expected-credit-loss standard, effective after 2019, to result in earlier and potentially higher loan-loss provisions; it reported no provision for loan losses at this time.
Important facts for investors to verify
- Reconcile reported GAAP earnings, non-GAAP Core Earnings and the $0.62 dividend, including the effect of incentive fees and non-cash compensation.
- Review leverage and refinancing exposure: $6.0 billion of secured debt, $795 million face value of convertible notes, 2.3x debt-to-equity and 3.1x total leverage; contractual principal repayments include $448.9 million within one year.
- Assess liquidity against $1.47 billion of unfunded commitments and other obligations; reported liquidity sources include cash, available secured borrowings and net servicer receivables.
- Examine portfolio concentration, collateral performance and internal risk ratings. The weighted-average rating was 2.7, with no loans rated 4 or 5 at March 31, 2018.
- Evaluate interest-rate and currency sensitivities, including floating-rate floors, hedges and the potential impact on borrowers’ ability to service debt.
- Review related-party lending, management and incentive fees, and the Spanish facility disclosures; confirm the terms and ongoing performance of these arrangements.