BLACKSTONE MORTGAGE TRUST, INC. quarterly report, Q3 FY2019

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Blackstone Mortgage Trust, Inc. — Q3 2019 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. This unaudited report covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars.

Financial performance and condition

  • Q3 earnings: Interest and related income was $213.9 million, interest expense $112.0 million, and net income from loans and other investments $101.9 million. Net income attributable to BXMT was $74.9 million, or $0.56 per diluted share, versus $78.2 million, or $0.67 per share, in Q3 2018. Management reported non-GAAP Core Earnings of $85.6 million, or $0.64 per share; the company cautions that this measure is not GAAP income or cash flow.
  • Nine-month results: Interest and related income was $662.0 million, interest expense $347.5 million, and net income attributable to BXMT $226.6 million, or $1.76 per share, versus $211.4 million and $1.90 per share in 2018.
  • Portfolio: At quarter-end, 128 loans had $14.85 billion in principal balance and $14.76 billion in net book value. Weighted-average cash coupon was 5.07%, all-in yield 5.42%, and maximum maturity 3.6 years. Office loans represented 50% of the portfolio; 76% of exposure was in the U.S. and 24% international. Weighted-average risk rating was 2.7; the company reported no impaired, nonaccrual, or maturity-defaulted loans.
  • Balance sheet and leverage: Total assets were $15.08 billion and total equity $3.76 billion. Cash was $84.3 million. Debt included $8.79 billion of secured debt agreements, $1.29 billion of securitized debt, a $490.7 million secured term loan, and $612.3 million of convertible notes. Debt-to-equity was 2.6x and total leverage 3.4x, down from 2.8x and 3.7x at year-end 2018.
  • Liquidity and commitments: Reported liquidity sources totaled $795.9 million, including $708.4 million of available borrowings under secured debt agreements. Unfunded loan commitments were $4.72 billion. Contractual obligations totaled $15.84 billion, including unfunded commitments, principal repayments, and estimated interest payments.
  • Cash flow: For the nine months, operating cash flow was $228.6 million, investing cash flow was negative $668.6 million, financing cash flow was $419.6 million, and cash declined $20.5 million to $84.3 million. Loan originations and fundings were $3.32 billion; principal collections and sales proceeds were $2.59 billion. The company also received $498.8 million net from its new secured term loan and $372.3 million net from common-stock issuance.
  • Dividends and equity: The quarterly dividend remained $0.62 per share; $1.86 per share was declared for the first nine months. Book value per share was $27.82, compared with $27.85 at June 30. Shares outstanding increased during the first nine months, including 10.5 million shares issued through offerings and the ATM program.

Material changes versus comparable periods

  • Q3 net income attributable to BXMT fell $3.3 million year over year and diluted EPS declined $0.11. Management attributed lower quarterly net interest income primarily to prepayment fees recognized in Q3 2018.
  • Nine-month net income attributable to BXMT increased $15.2 million, while EPS declined $0.14, reflecting a substantially larger weighted-average share count. Management attributed higher net investment income primarily to portfolio growth, partly offset by higher financing balances and expenses.
  • Loan net book value rose $563.9 million from year-end 2018. Unfunded commitments increased from $3.41 billion to $4.72 billion. The share of loans open to penalty-free repayment increased, while the weighted-average risk rating remained 2.7.
  • The company added a $498.8 million secured term loan in April 2019, with a stated maturity in 2026. It also added credit facilities and expanded existing facility capacity. Secured debt agreements’ net book value declined from $8.97 billion to $8.79 billion.

Outlook, risks, and unusual items

  • The filing provides no specific earnings or portfolio guidance. Management states that rising interest rates generally increase net income and falling rates generally decrease it. Its modeled 12-month net-interest sensitivity was positive $4.3 million for an immediate 25-basis-point increase and positive $11.5 million for a 50-basis-point increase; decreases produced negative $2.1 million and $3.1 million, respectively. These estimates depend on stated assumptions and include incentive-fee effects.
  • Interest-rate and credit risks include borrower payment stress if rates rise, commercial real estate performance and collateral-value changes, funding-market access, counterparty performance, and foreign-currency movements. The company uses derivatives and currency-matched financing to manage exposures. A 10% U.S. dollar appreciation was estimated to reduce net assets by $59.7 million against sterling and $34.2 million against the euro.
  • ASU 2016-13, the expected-credit-loss standard, is scheduled for adoption January 1, 2020. Management expects adoption to increase provisions for potential loan losses and recognize them earlier; no loan-loss provision was recorded at September 30, 2019.
  • Other comprehensive income included a $40.0 million Q3 foreign-currency translation loss, partly offset by derivative gains. The company recorded an income-tax benefit of $0.7 million in Q3, primarily related to an expected tax-credit refund.
  • The company reported compliance with debt covenants and REIT requirements, effective disclosure controls, no material legal proceedings, and no material changes to previously disclosed risk factors. It reported no off-balance-sheet arrangements.

Investor verification priorities

  1. Review the loan-level schedule, especially the three loans rated 4, their collateral performance, and the concentration in office properties and international markets.
  2. Assess the $4.72 billion of unfunded commitments against available liquidity, funding availability, and upcoming debt maturities.
  3. Reconcile GAAP EPS, non-GAAP Core Earnings, and the $0.62 dividend, including the effects of stock issuance and incentive fees.
  4. Check assumptions behind interest-rate sensitivity and foreign-currency hedges, including interest-rate floors and remaining net currency exposures.
  5. Track the expected-credit-loss standard’s adoption and any resulting loan-loss provision, and review the terms and covenant headroom of the company’s financing arrangements.