BLACKSTONE MORTGAGE TRUST, INC. quarterly report, Q2 FY2019

Blackstone Mortgage Trust, Inc. — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. Blackstone Mortgage Trust (NYSE: BXMT) is an externally managed REIT that originates senior commercial real estate loans in North America, Europe and Australia.

Financial performance and position

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Interest and related income	$223.4 million	$191.5 million	$448.1 million	$346.9 million
Net interest income	$106.5 million	$103.7 million	$212.5 million	$189.2 million
Net income attributable to BXMT	$75.2 million	$72.3 million	$151.7 million	$133.3 million
GAAP diluted EPS	$0.59	$0.66	$1.21	$1.23
Core Earnings per share (non-GAAP)	$0.68	Not stated here	Not stated here	Not stated here
Dividend declared per share	$0.62	$0.62	$1.24	$1.24

• Q2 interest income rose about 17% year over year and net interest income rose about 3%; management attributed growth primarily to a larger average loan portfolio and higher LIBOR, partly offset by increased financing balances and costs. Six-month net income increased about 14%.
• Q2 GAAP EPS declined about 11% despite higher attributable net income, alongside an increase in weighted-average shares to 126.5 million from 109.1 million. Core Earnings is a company-defined non-GAAP measure and should not be treated as GAAP income or cash flow.
• At June 30, total assets were $14.57 billion, loans receivable net were $14.28 billion, total equity was $3.78 billion, and cash was $80.6 million. Total liabilities were $10.79 billion.
• Six-month operating cash flow was $157.2 million, versus $135.0 million a year earlier. Cash decreased $25.1 million during the six months. Investing cash outflow was $90.4 million; financing cash outflow was $91.8 million.
• Reported liquidity sources totaled $961.7 million: $80.6 million cash, $848.1 million available under secured debt agreements, and $33.0 million of net loan payments held by servicers.

Portfolio, debt and material changes

• The loan portfolio comprised 123 loans with $14.37 billion principal balance and $14.28 billion net book value, versus 125 loans and $14.29 billion principal at year-end 2018. Q2 originations or acquisitions were $1.26 billion; quarterly repayments exceeded fundings by $248.0 million.
• Weighted-average cash coupon was 5.42% and all-in yield 5.77% at June 30, compared with 5.67% and 6.00%, respectively, at year-end. About 99% of balance-sheet loans earned floating rates. Average loan LTV was approximately 64%; weighted-average risk rating was 2.7, unchanged from year-end.
• Three loans totaling $166.7 million were risk-rated 4; none were rated 5. The company reported no impaired loans, nonaccrual loans or loans in maturity default at June 30.
• Debt-to-equity declined to 2.5x from 2.8x at year-end; total leverage declined to 3.2x from 3.7x. Secured debt agreements net were $8.26 billion, securitized debt obligations net $1.29 billion, secured term loan net $491.6 million, and convertible notes net $611.5 million.
• In April, the company issued a $500 million secured term loan, bearing interest at LIBOR plus 2.50% and maturing in 2026. Six-month net proceeds from common stock issuance were $372.3 million, including 8.6 million shares issued in June at a $36.00 weighted-average gross price. The share issuance increased equity capital but diluted per-share results.
• Q2 funding and repayment activity was active: $1.14 billion of loan fundings and $1.39 billion of repayments. Secured debt agreements outstanding declined to $8.28 billion gross from $9.00 billion at year-end; available borrowings under such agreements increased to $848.1 million from $359.6 million.

Outlook, risks and other matters

• The filing provides no specific earnings or portfolio guidance. Management states that higher benchmark rates generally increase net income because the portfolio is predominantly floating-rate, subject to loan floors, funding costs and borrower performance.
• In its modeled 12-month sensitivity, an immediate 50-basis-point rate increase was estimated to raise net interest by $14.9 million; a 50-basis-point decrease was estimated to reduce it by $8.1 million. These are estimates, not forecasts.
• Foreign currency exposure remains: a 10% U.S. dollar appreciation was estimated to reduce net assets by $58.0 million against sterling and $47.5 million against the euro. Canadian and Australian dollar net exposure was described as substantially hedged.
• Unfunded loan commitments were $3.22 billion, primarily for construction, development, improvements and leasing costs. The company also identified credit, commercial real estate market, refinancing/capital markets, interest-rate, currency and counterparty risks.
• The company had no loan-loss provision at June 30. It expects adoption of the expected-credit-loss standard on January 1, 2020 to result in earlier and potentially higher provisions; the impact was still being evaluated.
• The $0.62-per-share Q2 dividend was paid July 15, 2019. The declared dividend exceeded Q2 GAAP EPS of $0.59 but was below Core Earnings per share of $0.68; REIT distributions are based on taxable income, which differs from GAAP income.
• BXMT reported compliance with debt covenants and REIT requirements, effective disclosure controls, no material legal proceedings, and no material changes to previously disclosed risk factors. Certain Blackstone-advised vehicles participated in financing transactions and borrowers; the filing states the relevant loan terms were market-based.

Important facts for investors to verify

1. Whether Core Earnings of $0.68 per share adequately covers the $0.62 dividend, and how taxable income compares with both measures.
2. Loan-level performance, collateral values and migration among risk ratings, particularly the three risk-rated-4 loans and the portfolio’s office and hotel exposures.
3. The timing and funding needs of $3.22 billion in unfunded commitments, and whether available financing and liquidity remain sufficient as loans fund or repay.
4. Interest-rate, currency and refinancing sensitivities, including floating-rate loan floors, funding spreads and upcoming secured-facility maturities.
5. The effect of share issuance on per-share earnings and book value, and the expected impact of the 2020 expected-credit-loss accounting adoption.
6. Related-party lending, servicing and management-fee arrangements, including the disclosed Blackstone-affiliated borrower and financing transactions.