Blackstone Mortgage Trust, Inc. — Q1 2016 Form 10-Q
Business context and period. Blackstone Mortgage Trust is an externally managed REIT originating and purchasing commercial real estate loans secured by properties in North America and Europe. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015, and operating results are compared with Q1 2015.
Financial and operating highlights
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest and related income | $123.0 million | $63.4 million in Q1 2015 |
| Interest and related expense | $45.4 million | $24.2 million in Q1 2015 |
| Net income from loans and other investments | $77.6 million | $39.2 million in Q1 2015 |
| Net income attributable to BXMT | $57.0 million; $0.61 per share | $35.4 million; $0.60 per share in Q1 2015 |
| Core Earnings, non-GAAP | $61.2 million; $0.65 per share | $64.1 million; $0.68 per share in Q4 2015 |
| Dividend declared | $0.62 per share | $0.52 in Q1 2015; $0.62 in Q4 2015 |
| Loans receivable, net | $9.314 billion | $9.077 billion at December 31, 2015 |
| Total assets / total equity | $9.555 billion / $2.502 billion | $9.377 billion / $2.506 billion at December 31, 2015 |
| Cash and cash equivalents | $110.6 million | $96.5 million at December 31, 2015 |
| Secured debt, carrying value | $6.312 billion | $6.116 billion at December 31, 2015 |
| Loan participations sold / convertible notes, net | $476.9 million / $164.7 million | $497.0 million / $164.0 million at December 31, 2015 |
| Operating / investing / financing cash flow | $65.8 million / $(146.0) million / $91.7 million | $32.4 million / $(564.2) million / $498.8 million in Q1 2015 |
Portfolio, liquidity and material changes
- The portfolio comprised 126 loans with $9.346 billion principal balance. Senior loans were 97% of net book value; 79% of principal was floating-rate. Average loan LTV was 63.3%, weighted-average risk rating 2.2, and average all-in yield 5.18%. Office represented 45% and hotels 20% of portfolio book value; 78% was U.S.-based.
- Q1 originations were $861.3 million and loan fundings were $586.1 million, or $619.1 million including non-consolidated senior interests. Unfunded commitments totaled $965.1 million, mostly for borrower property improvements or leasing-related expenditures.
- Available liquidity was $574.9 million: $110.6 million cash plus $464.3 million available under revolving repurchase facilities. Management identified debt service, unfunded commitments, dividends, and operating costs as principal liquidity needs.
- Secured debt borrowings rose to $6.329 billion face amount. Revolving repurchase borrowings increased to $3.252 billion; the GE portfolio facility declined to $2.920 billion, and asset-specific financing rose to $157.0 million. The repurchase facilities had a 79.2% weighted-average advance rate and 1.3-year weighted-average maturity, excluding extensions and term-out provisions.
- Compared with Q1 2015, loan net income increased 98% and income attributable to BXMT increased 61%, mainly because the portfolio was $4.4 billion larger year over year, partly offset by $3.7 billion higher secured debt balances. EPS increased 2% despite the larger share count. Comparisons also reflect much smaller legacy investment gains and CTOPI promote income in Q1 2016 than in Q1 2015.
- Compared with Q4 2015, Core Earnings per share declined from $0.68 to $0.65; book value per share was $26.53 versus $26.56. The $0.62 dividend was declared March 15 and paid April 15, 2016.
- Cash increased by $11.5 million during Q1. Operating cash flow was $65.8 million; investing outflow primarily reflected loan originations and fundings, partly offset by principal collections and other proceeds. Financing provided $91.7 million, including net secured borrowing.
Management commentary, risks and unusual items
- Management states that rising rates generally increase net income because most loans and related funding are floating-rate, subject to floors and currency-specific mismatches. Its modeled 12-month impact of a 25-basis-point rate increase was a net $1.510 million increase in interest income less expense; a 25-basis-point decrease was a $0.722 million reduction. These are estimates, not forecasts.
- Foreign-currency hedges mitigate currency risk, but the filing estimates that a 10% U.S. dollar appreciation would reduce net assets by $28.0 million against sterling and $14.5 million against the euro. Canadian-dollar net exposure was substantially hedged.
- Credit, commercial real estate, refinancing, funding-market, counterparty, interest-rate and currency risks remain. A significant rate increase could strain borrower cash flows; the company also depends on debt and equity markets while REIT distributions limit retained cash.
- No loans were impaired, nonaccrual, or in maturity default at March 31. One loan that had defaulted on maturity in 2015 was modified and extended to August 31, 2016; after collateral sales and a $59.3 million partial repayment, its book value was $53.6 million. The borrower was current, and management expected contractual collection.
- Debt guarantees contain financial covenants, including a minimum 1.40-to-1 EBITDA/fixed-charge ratio and maximum debt of 83.33% of total assets. The company reported compliance at March 31. No material legal proceedings or off-balance-sheet arrangements were reported. An IRS and New York examination of a former subsidiary remains ongoing; no reserve was recorded, and the company may be responsible for amounts owed under indemnities.
- After quarter-end, BXMT entered a $125 million full-recourse Barclays revolving facility on April 4 and increased its MetLife repurchase facility by $304.1 million to $1.0 billion on April 22, extending its maturity to 2022, subject to extension options.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing provides no earnings or dividend guidance. The $0.65 Core Earnings measure is non-GAAP, and the filing cautions that it is not a substitute for GAAP earnings, operating cash flow, or liquidity.
Most important facts for investors to verify
- Whether loan growth, realized cash yields and credit quality support recurring earnings, particularly given the $965.1 million in unfunded commitments and property-sector concentrations.
- Funding availability, facility maturities, advance rates and covenant headroom, including the effects of collateral valuations and refinancing conditions on the highly secured-debt-funded balance sheet.
- Dividend sustainability relative to GAAP EPS of $0.61 and Core Earnings of $0.65 per share, and how management’s non-GAAP adjustments are calculated.
- Performance and repayment prospects for the modified $53.6 million loan, and any changes in internal risk ratings or borrower payment status after quarter-end.
- Foreign-exchange, interest-rate and counterparty exposures, including hedge effectiveness and the estimated sensitivity assumptions.
- Progress and potential exposure from the former-subsidiary tax examinations, and continued compliance with REIT distribution and qualification requirements.