Blackstone Mortgage Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Blackstone Mortgage Trust is an externally managed REIT focused on originating and purchasing commercial real estate mortgage loans, primarily in the United States and Europe. It reports a Loan Origination segment and a CT Legacy Portfolio segment. The loan origination business relaunched in May 2013, so year-over-year comparisons are not on a like-for-like operating basis.
Financial results and position
| Metric | Q1 2014 / March 31, 2014 | Comparison |
|---|---|---|
| Interest and related income | $33.7 million | $1.5 million in Q1 2013 |
| Net income attributable to Blackstone Mortgage Trust | $13.1 million; $0.34 per diluted share | Loss of $3.1 million; $(1.03) per share in Q1 2013 |
| Core Earnings (non-GAAP) | $16.3 million; $0.43 per share | $12.0 million; $0.41 per share in Q4 2013 |
| Dividend declared | $0.48 per share | $0.45 per share in Q4 2013; none in Q1 2013 |
| Net interest income | $21.6 million | Up 40.9% from Q4 2013 |
| Total assets / total equity | $2.89 billion / $1.01 billion | $2.21 billion / $756.8 million at year-end 2013 |
| Loans receivable, net | $2.71 billion | $2.05 billion at year-end 2013 |
| Cash and cash equivalents | $70.8 million | $52.3 million at year-end 2013 |
| Repurchase obligations | $1.53 billion | $1.11 billion at year-end 2013 |
| Book value per share | $24.63 | $24.25 at year-end 2013 |
Net cash provided by operating activities was $15.0 million. Investing activities used $657.1 million, principally reflecting $740.2 million of loan fundings; financing activities provided $660.6 million, including repurchase borrowings and equity issuance. Net cash increased $18.5 million. A conventional operating margin is not presented in the filing; the reported net interest income is the more relevant lending metric.
Portfolio, capital and material changes
- The loan portfolio grew to 41 loans with $2.74 billion principal balance. Senior mortgage loans were 91% of net book value; office, multifamily and hotel collateral represented 42%, 25% and 23%, respectively.
- Weighted-average cash coupon was LIBOR + 4.60%, all-in yield LIBOR + 5.16%, and maximum maturity 4.0 years. The Loan Origination portfolio’s weighted-average internal risk rating was 2.7, improved from 2.8 at year-end; management said all such investments were performing as expected.
- The company originated $892.0 million of new loan commitments and funded $740.2 million during the quarter. Unfunded commitments totaled $316.4 million across 23 loans, generally for property improvements or leasing costs.
- In January, the company issued 9.775 million shares for $256.1 million net proceeds. After quarter-end, it issued another 9.2 million shares, generating $254.6 million net proceeds. These offerings supported portfolio growth but increased the share count.
- Repurchase borrowings carried a weighted-average cash rate of LIBOR + 2.09% and an all-in cost of LIBOR + 2.36%; weighted-average maturity, excluding extensions and term-out provisions, was 2.3 years. The $172.5 million convertible notes mature in December 2018; the filing reports a 5.25% coupon.
Management commentary, risks and unusual items
- Q1 2014 net income improved substantially versus Q1 2013, principally because the relaunched loan-origination business generated interest income. Versus Q4 2013, net interest income rose 40.9%, while net income attributable to the company rose 84.6% to $13.1 million.
- The CT Legacy Portfolio recorded a $970,000 net loss, including $1.3 million of investment fair-value losses. It includes impaired and nonaccrual legacy loans: CT CDO I had a $10.5 million delinquent loan fully reserved and another $27.0 million net book value loan in maturity default with no reserve recorded. The company reported no impaired or nonaccrual loans in its Loan Origination segment.
- Management estimated that a 100-basis-point rise in LIBOR would increase annual net income by $9.6 million, all else equal. It also cautioned that higher rates could increase borrowers’ debt service and contribute to nonperformance or default. A 10% decline in sterling versus the U.S. dollar was estimated to reduce net assets by $3.9 million.
- Liquidity sources were $70.8 million of cash plus $220.9 million of available repurchase borrowings. Some cash is restricted to CT Legacy Partners and is not generally available to the company. Repurchase agreements include guarantees and financial covenants; the company reported compliance at quarter-end. It also reported no off-balance-sheet arrangements.
- CT CDO I’s debt is non-recourse, but breaches of coverage tests redirect cash flows to repay senior notes; the company said it currently received no cash payments from CT CDO I. CTOPI tax advances totaling $10.2 million may need to be repaid if the fund’s performance does not support the incentive allocation. Related-party arrangements and potential conflicts involving the external manager are disclosed.
- The $0.48 dividend declared exceeded GAAP EPS of $0.34 and Core Earnings of $0.43 per share. The company’s REIT distribution obligation is based on taxable income, which may differ from both measures. The board retains discretion over future dividends.
- No specific earnings or portfolio guidance was provided. Management said forward-looking expectations involve risks and uncertainties. It reported effective disclosure controls, no material legal proceedings, and no material changes to previously disclosed risk factors.
Investor facts to verify
- Loan growth, underwriting quality and subsequent performance of the $316.4 million of unfunded commitments; assess concentrations by property type, geography and borrower.
- Repurchase facility availability, collateral requirements, guarantees, covenants and refinancing exposure, alongside the company’s liquidity needs and leverage.
- Cash coverage and sustainability of the dividend, including the distinction between GAAP earnings, non-GAAP Core Earnings and REIT taxable income.
- Valuation, recovery prospects and cash restrictions associated with CT Legacy assets, CT CDO I and CTOPI, including the potential repayment of CTOPI tax advances.
- The effect of the January and April 2014 equity offerings on per-share earnings, book value and future capital needs.