Blackstone Mortgage Trust, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The company is an externally managed REIT that originates and purchases commercial real estate loans, primarily senior loans, in the United States and Europe. Its segments are Loan Origination and CT Legacy Portfolio. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q2 2014 / June 30, 2014 | Comparable period / prior date |
|---|---|---|
| Interest and related income | $42.5 | $6.0 in Q2 2013 |
| Net income from loans and other investments | $26.7 | $4.7 in Q2 2013 |
| Net income attributable to company | $33.5; $0.70 per share | $2.7; $0.22 per share in Q2 2013 |
| Core Earnings (non-GAAP) | $20.5; $0.43 per share | $16.3; $0.43 per share in Q1 2014 |
| Dividend declared | $0.48 per share | $0.48 in Q1 2014; none in Q2 2013 |
| Book value per share | $25.51 | $24.63 at March 31, 2014 |
| Total assets / total equity | $3,754.8 / $1,282.0 | $2,212.8 / $756.8 at December 31, 2013 |
| Cash and cash equivalents | $120.5; plus $11.4 restricted | $52.3 cash and $10.1 restricted at December 31, 2013 |
- For the six months, company-attributable net income was $46.5 million, or $1.08 per share, versus a $0.4 million loss, or $0.05 per share, in the first half of 2013. Net interest income was $48.3 million versus $5.4 million.
- Q2 results included $24.3 million of CTOPI promote income and $7.2 million of gains on investments carried at fair value. These legacy portfolio items contributed materially to GAAP earnings; Core Earnings excludes CT Legacy Portfolio results and certain other items. Core Earnings is not a GAAP measure or a measure of cash available.
- Loan receivables totaled $3.49 billion net across 48 loans, up from $2.05 billion across 31 loans at year-end. Portfolio weighted-average cash coupon was LIBOR plus 4.46%, all-in yield LIBOR plus 5.02%, and maximum maturity 4.1 years. Senior loans were 94% of net book value.
- Cash flow for the first half: $34.0 million provided by operations, $1,448.6 million used in investing, and $1,482.7 million provided by financing. Cash increased by $68.1 million. Loan originations and fundings used $1,741.0 million; financing included $510.8 million net equity proceeds and $667.6 million net repurchase borrowings.
Debt, liquidity, and capital
- At June 30, repurchase obligations were $1,779.7 million, participations sold were $461.1 million, and convertible notes had a $160.7 million net carrying value ($172.5 million face). The convertible notes bear a 5.25% coupon and mature in December 2018.
- Revolving repurchase borrowings were approximately $1.52 billion, with a weighted-average cash cost of LIBOR plus 1.95%, all-in cost of LIBOR plus 2.19%, and weighted-average maturity of 2.3 years, excluding extension and term-out provisions. Total available borrowings under repurchase facilities were $232.0 million.
- Cash plus available repurchase borrowings totaled $352.4 million. The company identified $407.3 million of unfunded loan commitments, as well as debt service, dividends, and operating expenses, as liquidity needs. Some cash and assets held in CT Legacy entities are restricted or not generally available to the parent.
- Two 2014 public offerings generated $510.9 million net proceeds in total. The company also had a $200 million at-the-market stock program, with no shares sold under it by June 30. Repurchase guarantees include specified partial guarantees; the company reported compliance with its financial covenants.
Changes, outlook, and risks
- Growth reflects the post-May 2013 relaunch of loan originations, new loan funding, expanded financing capacity, and equity issuance. From year-end 2013 to June 30, loans net rose about 70%, repurchase obligations rose about 60%, and total equity increased $525.3 million.
- Management reported a 2.8 weighted-average loan risk rating, unchanged from year-end; all Loan Origination investments were performing as expected, with no impaired, maturity-defaulted, or nonaccrual loans at June 30. A $10.5 million legacy loan reserve had been written off, and a legacy loan previously in maturity default was restructured and reclassified to other assets.
- Management stated that a 100-basis-point increase in LIBOR would increase annual net income by an estimated $11.8 million, or $0.25 per share, all else equal. Higher rates may also strain borrowers’ property cash flows and increase credit risk. Foreign currency assets are partly matched with foreign currency borrowings; a 10% decline in the pound and euro against the U.S. dollar was estimated to reduce net assets by $10.9 million and $0.8 million, respectively.
- Key risks include borrower/property credit performance, commercial real estate conditions, interest-rate and currency movements, reliance on debt and equity markets, counterparty performance, and REIT qualification and distribution requirements. The company noted potential conflicts involving its external manager and affiliates. Level 3 fair-value estimates rely on significant unobservable inputs.
- No numerical earnings or portfolio guidance was provided. The company said it intends generally to distribute substantially all taxable income, subject to board discretion and REIT requirements. A July 24, 2014 CT Legacy Partners distribution included $8.3 million to the company; $1.4 million was payable under its incentive plan.
- Management concluded disclosure controls were effective and reported no material change in internal controls. The filing reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of reported earnings and future distributable cash is recurring loan-originations performance versus CTOPI promote income and fair-value gains; review the Core Earnings reconciliation and incentive-plan payments.
- Loan underwriting and concentration: property and geographic mix, borrower performance, collateral values, and the $407.3 million of unfunded commitments. The filing reports 16% international loans, including 15% in the United Kingdom.
- Leverage, collateral eligibility, facility renewals and extensions, guarantees, covenant headroom, and the availability of the $232.0 million in undrawn repurchase capacity.
- Dividend sustainability relative to taxable income, GAAP earnings, Core Earnings, and cash flow, and the effect of future share issuance on per-share results.
- Interest-rate and foreign-exchange sensitivities, including the assumptions underlying management’s estimated LIBOR impact and currency-loss estimates.