Blackstone Mortgage Trust, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015. Unaudited. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Blackstone Mortgage Trust is an externally managed REIT that originates and purchases commercial real estate loans, principally senior loans secured by properties in North America and Europe. The company reported one operating segment after determining that its CT Legacy Portfolio was no longer a separately managed business.
Financial performance and condition
| Metric | Q1 2015 | Comparable period / prior date |
|---|---|---|
| Interest and related income | $63.4 million | $33.7 million in Q1 2014 |
| Interest and related expense | $24.2 million | $12.1 million in Q1 2014 |
| Net income from loans and other investments | $39.2 million | $21.6 million in Q1 2014 |
| Net income attributable to the company | $35.4 million | $13.1 million in Q1 2014 |
| Basic and diluted EPS | $0.60 | $0.34 in Q1 2014 |
| Dividend declared per share | $0.52 | $0.48 in Q1 2014 |
| Core Earnings per share, non-GAAP | $0.54 | $0.52 in Q4 2014 |
| Book value per share | $24.87 | $25.10 at December 31, 2014 |
| Cash and cash equivalents | $18.5 million | $51.8 million at December 31, 2014 |
| Available repurchase-facility borrowings | $410.0 million | $218.6 million at December 31, 2014 |
Net income increased 251% year over year, while net income attributable to the company increased 171%. Growth reflected a larger loan book as well as $17.5 million of unrealized gains on CT Legacy Partners investments and $3.9 million of promote income from CTOPI. Core Earnings is a company-defined non-GAAP measure and should not be treated as GAAP earnings or cash available for distribution. The filing does not provide a clear reported net interest margin.
Operating cash flow was $32.4 million, versus $15.0 million in Q1 2014. Investing activities used $564.2 million, primarily reflecting $903.2 million in loan fundings, partly offset by $348.2 million of principal collections and loan-sale proceeds. Financing activities provided $498.8 million. Cash decreased $33.0 million during the quarter.
Total assets were $5.09 billion and total liabilities $3.58 billion. Loans receivable, net, were $4.94 billion, up from $4.43 billion at year-end. Debt and financing included $2.24 billion under revolving repurchase facilities, $407.2 million in asset-specific repurchase agreements, $708.8 million of loan participations sold, and convertible notes with a $162.5 million net carrying value. Revolving facilities had a weighted-average all-in cost of LIBOR plus 2.09% and 1.7-year weighted-average maturity, excluding extensions. The company reported compliance with its financial covenants.
Portfolio and material changes
- The loan portfolio comprised 60 loans with $4.98 billion principal balance and $550.0 million of unfunded commitments. Weighted-average cash coupon was LIBOR plus 4.26%; all-in yield was LIBOR plus 4.68%; maximum maturity averaged 3.7 years.
- About 99% of portfolio book value was in senior loans. Office loans represented 51% and hotels 26%; 83% of loans were subject to prepayment restrictions. Management reported all loans performing as expected, an average internal risk rating of 2.1, and no impaired, nonaccrual, or maturity-default loans.
- During the quarter, the company funded $903.2 million in loans and received $333.1 million from loan repayments and sales. It expanded three revolving facilities, entered one asset-specific financing, and sold a senior participation, adding $1.1 billion of financing capacity.
- Foreign-currency translation contributed a $16.7 million other comprehensive loss. Accumulated other comprehensive loss increased to $31.8 million.
- After quarter-end, the company completed a public offering of 23.0 million shares on April 17, raising $681.8 million net. It also agreed to acquire a $4.6 billion commercial mortgage loan portfolio for $4.4 billion, subject to adjustments, and assume $223.9 million of unfunded commitments. The filing describes the agreement as entered into April 10 in the notes; the MD&A gives April 17, so the date should be checked against the transaction documents.
Outlook, risks and unusual items
No numerical earnings or dividend guidance is provided. Management said the proposed acquisition includes a significant portion of fixed-rate loans and is expected to reduce the portfolio’s positive sensitivity to LIBOR increases. Before the acquisition, a 100-basis-point LIBOR increase was estimated to raise annual net income by about $16.0 million, or $0.27 per share; this sensitivity excludes the acquisition.
The proposed purchase remained subject to regulatory approval and other closing conditions. A planned Wells Fargo secured facility of up to $4.0 billion was not yet supported by definitive documentation. Risks include financing or closing failure, due-diligence and valuation uncertainty, integration and capacity challenges, concentration in property types and geographies, reinvestment risk, fixed-rate exposure, foreign-currency movements, and maintaining REIT and Investment Company Act status. The filing notes that approximately 30.6% of the acquired portfolio’s loans were secured by mobile home parks and approximately $2.2 billion of its principal was fixed-rate. Failure to close could also expose the company to transaction-related costs and, in specified circumstances, damages subject to a stated $1.5 billion termination-fee cap.
Other items to note: the quarter’s results included the CT Legacy unrealized gain and CTOPI promote income; the $0.52 dividend was paid April 15; and management reported effective disclosure controls and no material litigation or off-balance-sheet arrangements. The company’s REIT status requires distributions of taxable income and depends on continued compliance with tax rules.
Key facts investors should verify
- Whether the GE Capital loan-portfolio acquisition closed, its final purchase price and asset composition, and whether the proposed $4.0 billion Wells Fargo financing was documented and funded.
- Actual acquired-portfolio performance, particularly credit quality, mobile-home-park concentration, fixed-rate exposure, foreign-currency exposure, and unfunded commitments.
- How the acquisition and its financing affect leverage, liquidity, covenant headroom, interest-rate sensitivity, and book value per share.
- How much reported earnings and Core Earnings depend on recurring loan income versus valuation gains, promote income, incentive fees, and other non-cash or legacy-portfolio items.
- Whether loan originations, repayment activity, dividends, and REIT distribution requirements remain supportable by cash generation and available financing.