Business context and reporting period
Blackstone Mortgage Trust, Inc. (NYSE: BXMT) is an externally managed REIT that originates senior commercial real estate loans in North America, Europe and Australia. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods unless noted.
Financial performance and position
- Third-quarter earnings: Interest and related income was $203.1 million and interest expense was $98.0 million, producing net income from loans and other investments of $105.2 million. Net income attributable to BXMT was $78.2 million, or $0.67 per diluted share, versus $57.7 million and $0.61 per share in Q3 2017.
- Nine-month results: Interest and related income was $550.0 million, interest expense was $255.7 million, and net income attributable to BXMT was $211.4 million, or $1.90 per share, compared with $159.7 million and $1.68 per share in 2017.
- Core Earnings: Q3 Core Earnings, a non-GAAP measure, were $87.4 million, or $0.75 per share. This compared with $90.4 million, or $0.83 per share, in Q2 2018. Management cautions that Core Earnings is not GAAP income, cash flow, or a measure of liquidity.
- Dividends: Declared dividends were $0.62 per share for Q3 and $1.86 per share for the first nine months, unchanged per share from 2017. The Q3 dividend of $74.2 million was paid October 15, 2018.
- Portfolio: At quarter-end, the company held 112 loans with $12.26 billion principal balance and $12.18 billion net book value. Weighted-average cash coupon was 5.61%, all-in yield 5.94%, and maximum maturity 3.8 years. Average risk rating was 2.7; there were no impaired, nonaccrual, or maturity-default loans.
- Balance sheet and leverage: Total assets were $12.42 billion and total equity was $3.31 billion. Cash and cash equivalents were $87.0 million. Net book value per share was $27.53. Debt-to-equity was 2.3x and total leverage was 3.1x, versus 2.0x and 2.8x at December 31, 2017.
- Debt and liquidity: Net secured debt was $6.84 billion, securitized debt $1.28 billion, and convertible notes $781.0 million. Available borrowings under secured debt agreements were $573.0 million; together with cash and net loan payments held by servicers, disclosed liquidity sources totaled $663.6 million. The company reported compliance with its debt covenants.
- Cash flow: For the first nine months, operating cash flow was $222.7 million, investing cash flow was negative $2.21 billion, and financing cash flow was positive $1.96 billion. Cash, cash equivalents and restricted cash declined $23.8 million to $87.0 million.
- Margins: The filing does not provide a clearly labeled operating or net interest margin metric.
Material changes versus comparable periods
- Q3 net income attributable to BXMT increased $20.4 million year over year; nine-month income increased $51.7 million. Management attributed higher net interest income mainly to portfolio growth, higher LIBOR and increased non-recurring prepayment fee income; higher financing balances partly offset these factors.
- Loans receivable net book value increased from $10.06 billion at year-end 2017 to $12.18 billion at September 30, 2018. The portfolio grew through $5.22 billion of loan fundings during the nine months, partly offset by repayments.
- Secured debt agreements, net, increased from $5.27 billion to $6.84 billion, while convertible notes, net, increased from $563.9 million to $781.0 million. The company also issued 11.48 million common shares in 2018, generating $369.8 million of net proceeds.
- Q3 2018 Core Earnings per share was below Q2 2018’s $0.83. Q2 included $8.7 million of previously deferred GE portfolio purchase discount recognized in Core Earnings once repayment was considered substantially assured.
Outlook, risks and unusual items
- No specific earnings, origination, or dividend guidance is provided. Management states that its business is generally positively exposed to rising rates because most loans and related financing are floating rate; however, higher rates could increase borrowers’ debt-service burden and contribute to loan underperformance or default.
- Approximately 95% of loan exposure earned floating rates. For the 12 months following September 30, management estimated net interest income, net of incentive fees, would change by about +$7.2 million for a 25-basis-point increase and −$6.2 million for a 25-basis-point decrease, subject to stated assumptions and interest-rate floors.
- Unfunded loan commitments were $3.05 billion. Contractual obligations also included $445.6 million of principal repayments due within one year, including $172.3 million of convertible notes maturing December 1, 2018.
- In Q3, BXMT contributed a $517.5 million loan to a $1.0 billion single-asset securitization and retained a $99.0 million subordinate risk-retention position. It does not consolidate the vehicle; maximum disclosed exposure to loss on that position was its $96.1 million book value.
- Foreign currency exposure remains a risk despite hedging. Management estimated that a 10% U.S. dollar appreciation against sterling and the euro would reduce net assets by $22.8 million and $31.0 million, respectively.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting. It expects adoption of the expected-credit-loss accounting standard in 2020 to result in larger and earlier provisions; it currently reported no loan-loss provision.
Important facts for investors to verify
- Whether portfolio growth and higher floating-rate income continue to exceed the rising cost of debt and management fees.
- How the $3.05 billion of unfunded commitments, near-term debt maturities and available borrowing capacity affect liquidity and leverage.
- Repayment or refinancing of the $172.3 million convertible notes due December 2018, and the terms and availability of replacement financing.
- Credit quality and collateral performance across the portfolio, including the concentration in office loans and the large Spanish exposure.
- The performance and loss exposure of the 2018 single-asset securitization retained position, and the company’s related-party lending and Blackstone-affiliated transactions.
- Whether the $0.62 quarterly dividend remains supported by taxable income and recurring cash earnings; dividend decisions remain at the board’s discretion.