Blackstone Mortgage Trust, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unless stated otherwise, amounts are U.S. dollars. The company is an externally managed REIT focused primarily on originating and purchasing commercial real estate mortgage loans. The quarter marked the launch and rapid capitalization of its Loan Origination business; comparisons with 2012 are affected by major portfolio and business changes.
Financial performance and position
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Interest and related income | $6.0 million for Q2; $7.5 million for H1 | Q2 2012: $6.8 million; H1 2012: $21.5 million |
| Net interest income | $4.7 million for Q2; $5.4 million for H1 | Q2 2012: $1.4 million; H1 2012: a $7.3 million loss |
| Net income / (loss) attributable to BXMT | $2.7 million for Q2; H1 loss of $0.4 million | Q2 2012: $2.3 million; H1 2012: $68.8 million income |
| Diluted earnings per share | $0.22 for Q2; H1 loss of $0.05 per share | Q2 2012: $1.00; H1 2012: $28.27 |
| Total assets / total equity | $1.087 billion / $801.7 million | December 31, 2012: $322.3 million / $153.5 million |
| Loans receivable, net | $830.1 million, plus $117.5 million carried at fair value and $3.8 million held for sale | December 31, 2012 net loans: $141.5 million |
| Debt obligations | $248.6 million: $165.2 million repurchase borrowings, $74.5 million securitized debt and $8.8 million secured notes | December 31, 2012: $147.7 million in securitized debt and secured notes; no repurchase borrowings |
| Cash and liquidity | $59.7 million unrestricted cash; $22.0 million restricted cash; $364.4 million reported available liquidity, including $304.6 million available under repurchase facilities | December 31, 2012 unrestricted cash: $15.4 million |
| Cash flows, H1 | $8.6 million operating; $667.5 million used in investing; $703.2 million provided by financing | H1 2012: $6.5 million operating; $105.6 million investing inflow; $112.3 million financing outflow |
Conventional revenue or operating margin percentages are not clearly provided in the filing. No common dividends were declared during the first half of 2013. Book value was $24.67 per share at June 30, compared with $24.35 at year-end 2012.
Material changes and comparison
- BXMT issued 25.875 million shares at $25.50 per share in May, generating $633.8 million net proceeds. The offering funded a major expansion in lending; the loan portfolio grew from seven loans with $164.2 million principal at year-end to 13 loans with $851.7 million principal at June 30.
- Q2 attributable net income increased 20% from 2012, but diluted EPS fell to $0.22 from $1.00, reflecting the much larger share count and significant differences in the businesses and portfolios being reported.
- H1 2013 attributable results were a $0.4 million loss versus $68.8 million income in H1 2012. The prior-year period included a $146.4 million gain on deconsolidation of a subsidiary; 2013 results also reflect the new loan origination business and consolidation of CT Legacy Partners.
- Net interest income improved despite lower interest income, as interest expense fell substantially. The filing attributes the comparison largely to prior deconsolidations, portfolio repayments and, for H1 2012, $10.2 million of accelerated discount expense on a mezzanine loan.
- The company changed its name from Capital Trust, Inc. to Blackstone Mortgage Trust, Inc. and effected a one-for-ten reverse stock split in May 2013.
Portfolio, outlook, and risks
- The Loan Origination segment originated $756.6 million of senior mortgage loans during Q2. Its eight loans had a $753.1 million net book value, a weighted-average cash coupon of LIBOR plus 4.44%, an all-in yield of LIBOR plus 5.26%, and a 4.0-year average maximum maturity. Management reported all segment loans performing as expected, with a weighted-average risk rating of 2.3.
- Management attributed the Loan Origination segment’s $0.4 million Q2 loss mainly to originations closing late in the quarter, which limited interest income, and to operating expenses. It reported $1.9 million segment interest income and $0.2 million interest expense for Q2.
- The legacy portfolio is more distressed: 10 of CT Legacy Partners’ 11 loans, representing $98 million or 82.9% of net book value, were on the watch list. Two impaired CT CDO I subordinate loans had $18.1 million aggregate principal and full reserves; one additional $27 million loan was in maturity default, with management expecting full collection.
- Management estimates a 100-basis-point increase in LIBOR would increase annual net income by approximately $5.9 million for the Loan Origination segment, before the effect of LIBOR floors. The company cautions that higher rates could also strain borrowers’ property cash flows and increase defaults.
- Repurchase facilities totaling $1.0 billion were established with four counterparties; $165.2 million was outstanding at quarter-end, at a weighted-average cash rate of LIBOR plus 1.98%. The company was in compliance with financial covenants. Guarantees apply to portions of certain facilities, and lenders may require additional collateral or repayment if asset values fall or covenants are breached.
- After quarter-end, the company originated five additional loans with $289.1 million total commitments, of which $233.3 million was funded at closing, and borrowed $254.0 million under existing repurchase facilities. It also obtained two Wells Fargo asset-specific facilities totaling $91.8 million and amended its Citibank agreement to add a potential $250 million tranche.
- No earnings or dividend guidance is provided. Management notes that the REIT must generally distribute at least 90% of taxable income to maintain its tax treatment. It also warns that the May share issuance significantly limits the availability of existing net operating and capital loss carryforwards.
- Key risks include dependence on capital and repurchase markets, collateral and margin-call exposure, commercial real estate credit risk, LIBOR sensitivity, REIT and Investment Company Act qualification requirements, and conflicts of interest with the external manager and Blackstone affiliates. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether post-quarter loan growth and financing availability translate into recurring net interest income, while monitoring borrowing costs and facility covenants.
- The quality and concentration of the new loan book, including collateral performance, loan-to-value levels, LIBOR floors and any migration in risk ratings.
- Recoveries and valuation assumptions for legacy assets, especially watch-list, impaired, nonaccrual and maturity-default loans; significant fair-value estimates use Level 3 inputs.
- The impact of share issuance and limited tax-loss carryforwards on per-share earnings, taxable income and future distributions.
- Related-party arrangements, manager fees and investment-allocation practices, including potential conflicts between BXMT and Blackstone-managed funds.