Final Transcript
Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call
April 27, 2016/10:00 a.m. EDT
SPEAKERS
Stephen D. Plavin – President & Chief Executive Officer
Michael B. Nash – Executive Chairman
Douglas N. Armer – Head of Capital Markets and Treasurer
Anthony F. Marone – Chief Financial Officer
Weston Tucker – Head of Investor Relations
ANALYSTS
Sam Choe – Credit Suisse
Jessica Ribner – FBR Capital Markets
Jade Rahmani – KBW
Don Fandetti - Citibank
Joel Houck – Wells Fargo
Ben Zucker – JMP Securities
Final Transcript Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call April 27, 2016/10:00 a.m. EDT Page 2
Coordinator Good day, ladies and gentlemen, and welcome to the Blackstone
Mortgage Trust First Quarter 2016 Investor Conference call. My name
is Derrick and I’ll be your operator for today. At this time, all
participants are in a listen-only mode. We shall facilitate a question
and answer session at the end of the conference. (Operator
instructions) As a reminder, this conference is being recorded for
replay purposes.
W. Tucker Great. Thanks, Derrick. Good morning, and welcome to Blackstone
Mortgage Trust’s First Quarter Conference call. I’m joined today by
Steve Plavin, President and CEO; Tony Marone, Chief Financial
Officer, and Doug Armer, Treasurer and Head of Capital Markets.
Last night, we filed our Form 10-Q and issued a press release with the
presentation of our results, which hopefully you’ve all had some time to
review. I’d like to remind everybody that today’s call may include
forward-looking statements, which are uncertain and outside of the
company’s control. Actual results may differ materially.
For a discussion of some of the risks that could affect results, please see
the “Risk Factor” section of our most recent Form 10-K. We do not
undertake any duty to update forward-looking statements.
Final Transcript Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call April 27, 2016/10:00 a.m. EDT Page 3
We will refer to certain non-GAAP measures on this call and for
reconciliations to GAAP, you should refer to the press release and our
10-Q, which are posted on our website and have been filed with the
SEC. This audiocast is copyrighted material of Blackstone Mortgage
Trust and may not be duplicated without our consent.
So, a quick recap of our results before I turn things over to Steve. We
reported core earnings per share of $0.65 for the first quarter. That’s
up 25% versus the prior year first quarter with an increase due to
greater net interest income from the continued growth in our loan
origination portfolio, as well as the positive impact from the GE
portfolio acquisition.
A few weeks ago, we paid a dividend of $0.62 per share with respect to
the first quarter, equating to an attractive dividend yield of over 9%
based on the most recent stock price. If you have any questions
following today’s call, please give me a call. With that, I’ll turn things
over to Steve.
S. Plavin Thanks Weston, and good morning everyone. Amid highly volatile
market conditions, BXMT delivered an excellent first quarter
performance. Even with CMBS spreads blown out and the CRE
securitization market barely functioning, we produced strong results
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because of our singular focus on originating senior mortgage loans for
our own portfolio efficiently financed to maximize ROI. Our
originations are sourced and underwritten by Blackstone and backed
by major market real estate with top sponsors.
Our business model insulates us from CMBS market volatility as our
core earnings are entirely driven by net interest income derived from
our loan portfolio. Our earnings are not predicated upon trading or
securitization activities. We have not bought CMBS, higher risk
mezzanine loans, preferred equity positions or otherwise moved out on
the credit curve. We have utilized Blackstone’s strong, longstanding
banking relationships to develop expansive, bilateral term credit from a
diverse group of lenders that provides greater financial flexibility.
At BXMT, we have stayed true to senior mortgages, because we
continue to believe they are the best value proposition for our capital.
During the quarter, we originated $861million of loans in a choppy, but
ultimately favorable environment for BXMT with wider spreads and
diminished competition. Market volatility slowed new transaction
activity early in the quarter, but during March, it became clear that the
period of highest volatility was behind us- at least for now- and our
pipeline grew as prospective borrowers moved off the sidelines.
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Since quarter-end, we have already closed or have in the closing
process another $625 million of loans and have an active pipeline of
additional potential opportunities. The more volatile, less liquid
conditions slowed overall market activity, but played to our strengths
as a Blackstone managed direct originator with a reputation for quick
and reliable execution.
100% of the new loans closed during the quarter are senior and floating
rate, and in the same coastal, major markets where our direct
origination portfolio is concentrated. Two of the loans are with repeat
borrowers -- high-quality sponsors that we know well and that like our
customized, client-centric approach. We feel great about the credit
quality of our new originations and our loan portfolio overall with its
63% appraised LTV and 100% performing status.
In Q1, we also demonstrated our consistent ability to efficiently
capitalize our business even during a challenging period when market
liquidity was contracting. All of the quarter’s originations are financed
with existing credit providers. During the quarter, we extended an
existing $750 million facility to a fresh, five-year term. Post quarter-
end, we finalized the increase of another credit facility by $300 million
to $1 billion and extended its final maturity to 2022. We also closed a
new, $125 million committed credit facility, which we intend to grow
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over time, that provides us with increased flexibility in the term
funding or syndication of our loans. And we have other upsizes and
new facilities in process to further expand our credit capacity and
improve our access to liquidity.
At quarter-end, we had liquidity of over $575 million which translates
to $2 billion of loan capacity. We expect that capacity and increasing
repayment activity in our portfolio to fund our new originations during
the coming quarters. If repayments slow, we are happy to maintain our
existing loans longer and will calibrate our originations accordingly
while equity market conditions remain weak.
In closing, despite what was a truly tough quarter for the public and
CRE capital markets- and leveraged, lending strategies in general-
BXMT flourished. We were able to leverage the reputation we’ve built
over the past three years as a reliable counterparty and capital provider
to move the business forward on all fronts. Blackstone and its
employees are the largest stockholder in BXMT and we see great value
in the shares. We love the high cash dividends generated by our low
volatility, floating rate, senior mortgage business, especially in this
yield challenged environment.
With that, I will turn it over to Tony.
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T. Marone Thank you Steve, and good morning everyone.
As Steve mentioned, BXMT stayed true to its core business during the
first quarter, and we continue to generate strong returns for our
stockholders, while protecting their capital from market volatility.
We originated six new loans during the quarter, for a total of $861
million and an average loan size of $142 million, reflecting our
continued focus on large loans. The loans we originated in 1Q have an
average coupon of LIBOR plus 4.4%, almost 50 basis points wider than
our existing floating-rate portfolio, and reflecting the market
conditions Steve mentioned earlier. Importantly however, the average
LTV of these originations at 61% is in-line with our existing portfolio,
so we have not simply traded additional credit risk for higher returns.
Total loan fundings during the quarter of $619 million outpaced
repayments of $375 million, increasing total assets on our balance
sheet to $9.6 billion as of quarter-end. We continue to have no
defaulted or impaired loans in our portfolio, and our overall portfolio
LTV of 63% and risk rating of 2.2 (on a scale of 1-5) is consistent with
prior quarters, demonstrating the strong credit profile of our loan
book. During the quarter, we collected a par repayment of over 50% of
Final Transcript Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call April 27, 2016/10:00 a.m. EDT Page 8
the only “4” rated loan in our portfolio, reducing its balance to $54
million.
Before leaving our loan portfolio, I would like to highlight some
additional loan-by-loan disclosure we have included in our earnings
release and 10-Q beginning this quarter. Specifically, we have added
disclosure of our loan per square foot, per unit, or per key, reflecting
our basis in the collateral property, a metric we focus on at Blackstone
when evaluating each potential investment. We believe this additional
information furthers our goal of providing best-in-class disclosure to
our stockholders and can be used in conjunction with origination LTV
and risk rating to get a fulsome picture of each loan in our portfolio.
We financed all of our 1Q originations primarily using our existing
revolving credit facilities, which had an all-in cost of LIBOR plus 2.03%
at quarter-end. As Steve mentioned, we are in active dialogue with our
lenders to extend and expand our access to credit under both existing
and new facilities. During the quarter, we fully repaid our GE portfolio
add-on advance financing, fully satisfying this obligation prior to its
maturity, and reducing our balance sheet leverage as expected
following repayment of the shorter-term GE loans. At March 31st, our
debt-to-equity ratio of 2.6x and the cost of our revolving credit facilities
of LIBOR plus 2.03% are both consistent with where we began the
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quarter and within the range we expect to maintain for the foreseeable
future.
Turning to our operating results, we generated Core Earnings of $0.65
per share and declared a dividend of $0.62, up 25% and 19%,
respectively, from the first quarter of last year, and reflective of the
dramatic growth we experienced in 2015. GAAP net income of $0.61
per share is up 33% year-over-year, after adjusting for $0.14 of non-
recurring income in 1Q 2015 related to our CT Legacy portfolio, which
was substantially resolved in 2015 and is no longer a material
contributor to our financial results.
Quarter-over-quarter, Core Earnings has continued to trend toward
our expected run-rate of $0.62 per share, reflecting the impact of
balance sheet deleveraging resulting from the repayment of the
shorter-term loans in the GE portfolio I mentioned earlier.
Our Core Earnings of $0.65 covered our $0.62 dividend by 105% and
retained earnings during the quarter contributed to our book value of
$26.53, which was essentially flat relative to $26.56 atDecember 31st.
The stability in our book value during a quarter marked by capital
markets volatility highlights our focus on stability on both the left and
right-hand sides of the balance sheet. Our earnings are entirely driven
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by the net interest income produced by our loan portfolio. Our loans
are held for long-term investment, with no impairments in the
portfolio, and are not subject to mark-to-market accounting associated
with securitization or other shorter-term business models. We did not
experience any margin calls on our credit facilities during the quarter,
maintaining our portfolio leverage and reflecting the stability of these
facilities. As we have discussed previously, none of our credit facilities
have capital-markets-based margin call provisions.
Our portfolio remains highly correlated to increases in US LIBOR, with
an increase of 50bps generating approximately $0.04 of additional
Core earnings on an annual basis. Although recent signals from the
FED and others have been mixed, we believe rate increases are
inevitable and we are positioned to benefit from any future rate
increases when they occur, something we believe is a key differentiator
from other mortgage REITs and specialty finance companies.
In closing, we believe that our business produces exceptional value for
our stockholders with a high current return, generated by a stable
portfolio, with superior sponsorship by Blackstone and we look
forward to continued positive results in future quarters.
Final Transcript Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call April 27, 2016/10:00 a.m. EDT Page 11
Thank you for your support and with that I will ask the operator to
open the call to questions.
Coordinator (Operator instructions.) Our first question will come from the line of
Sam Choe, Credit Suisse.
S. Choe Hello. I’m filling in for Doug Harter today. So, given that you guys
have seen a reduction in the risk-weighted four loans this quarter, I
just wanted to revisit your thoughts on managing the risk profile of the
loan portfolio. Specifically, is there like a certain sweet spot you guys
are looking for when balancing the higher risk-weighted loans?
S. Plavin Hello, Sam. In general, we don’t have a barbelled approach for credit,
meaning we don’t originate a combination of higher LTV and lower
LTV loans to average 63%. In general, our LTVs are close to that
average. The one four rated loan was a loan that we acquired from GE,
not one that we originated. We’re well on the way towards resolving
that loan, but it’s not reflective of any other loan in our portfolio.
The two- and three-rated loans, which dominate our portfolio risk
ratings, are loans that are consistent with the average credit profile of
our deals. Again, we’re typically originating loans on major-market
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assets with top sponsors that have some degree of transition. For
example, an office building that has lost a tenant, or a hotel that needs
a renovation, it’s a consistent profile.
S. Choe So you’re more focused on keeping the average consistent over time?
S. Plavin Yes. We’re not trying to step out on risk, and there’ll be no four rated
loans by design.
S. Choe Got it. Okay. So, my second question; I know this is largely dependent
on market conditions, but do you have a general sense of, or do you
have a target range for, capital deployment this year?
S. Plavin I think that given where our shares are trading, we’re going to keep our
capital deployment generally consistent with where it is today. That
means that we think that our originations and the repayments in our
portfolio will remain in sync. We have some additional capacity as
well, which you talked about in terms of our overall liquidity.
We’ve been able to maintain a very strong level of deployment in terms
of our existing capital base. Given the repayments that we foresee, we
think we can maintain that level of deployment through the year. It’ll
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vary in any one quarter, the swing of a loan repaying or a loan being
originated, and we can’t keep them exactly in sync on a quarterly basis.
But in general, over a couple of quarters, we think we can.
S. Choe Got it. Thank you.
Coordinator The next question will be from the line of Jessica Ribner, FBR Capital
Markets.
J. Ribner Good morning, guys.
S. Plavin Good morning.
T. Marone Hello, Jess.
J. Ribner Just a couple of questions here. Your new swing line credit facilities,
could that speed up the rate of originations since you’re originating a
little bit more, or is it more dependent on what you have in the pipeline
and how you like those kind of loan characteristics?
D. Armer That’s a great question, Jessica. It doesn’t really relate to the types of
loans we’re going to be originating. We’re going to continue to
originate the senior floating rate loan strategy that we have been thus
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far. I think it will facilitate more efficient originations for us. And so,
it’s a liquidity management tool for us. It enables us to coordinate our
originations and term financing executions more efficiently, and it’s a
step towards a more efficient balance sheet.
By providing additional liquidity, it does give us more optionality in
terms of our capital markets alternatives, but it doesn’t affect our
origination strategy.
J. Ribner Okay. Great. Then I just wanted to clarify; you said you’ve already
closed $625 million of loans in the second quarter?
S. Plavin That’s a combination of loans that are already closed and loans where
we have agreed terms and are in the closing process. Our success rate
on converting in closing deals to closed deals is very high.
J. Ribner All right. Perfect. I think that’s all for me. I think the credit
disclosures that you’ve given and the loan level disclosures are really
helpful. So, thank you very much for that.
S. Plavin You’re welcome. Thanks, Jessica.
Coordinator The next question will be from the line of Jade Rahmani, KBW.
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J. Rahmani Thanks for taking my question. Can you comment on what drove the
sharp decline in loan repayments and if you have seen a resumption in
repayment activity?
S. Plavin Yes. I think that the unique nature of our loan portfolio to some extent
is what caused a low repayment quarter, but it was also definitely
impacted by the volatility in the markets, especially in January and
February.
In order for our loans to get repaid, a new loan has to be closed. In
general, given where the CMBS market was, a lot of lenders retrenched
or revised terms on loans to their borrowers, which caused transaction
activity to get canceled or delayed. We had a couple of loans that we
thought were going to repay that didn’t because of either buyers getting
cold feet, or lenders changing loan terms.
We have seen a resumption of more regular way activity in the market
and expect that repayment activity will increase during the year,
starting in this quarter.
J. Rahmani Can you say whether that’s sort of back to the previous levels that we
saw in, for example, the last quarter as an annualized repayment rate,
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or as a percentage of your portfolio, or is it still below what you would
have otherwise expected absent the volatility?
S. Plavin I think it’s very hard to predict, with floating rate loans, when they are
going to get repaid. The fixed rate loans are much easier. They tend to
go to maturity or near maturity because of the prepayment protection
that lenders get on those loans.
But, for the floaters, they get repaid when an asset is sold, or a
borrower has an opportunity to borrow on a more accretive basis. It
isn’t tied to the maturity of the loans, it’s really a matter of predicting
the behavior of a borrower, what he’s going to do.
As we look across our portfolio, I do expect that we’ll see a return to
more normalized levels of repayment. I can’t say that they’ll exactly
match 3Q or 4Q of last year, but I do think that 1Q of this year was an
anomaly, in that it was an especially low repayment quarter.
J. Rahmani Just with regards to your liquidity position, which is close to what it
was last quarter, but slightly lower, do you anticipate any near-term
need to raise equity, and what would drive your decision to raise equity
at the current valuation level?
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S. Plavin We don’t, at this moment, see any near-term need to raise equity. We
talked about $2 billion worth of loan capacity plus the repayments that
we expect over the coming quarters. If you match that to what our
originations have traditionally been, $700 million to a billion dollars
plus, you can see that we have plenty of capacity for our loan
origination program.
J. Rahmani Okay. Just with respect to the liability structure, what are your
thoughts on potentially diversifying the liability structure by, for
example, issuing unsecured debt, which one of your commercial
mortgage REIT peers recently did? How do you feel about unsecured
debt, which although at a higher cost could be viewed as safer than
credit facilities?
D. Armer Hello, Jade. This is Doug. It’s an interesting point. We have our eye
on the high yield market. I think high yield debt is a potential
alternative for us. There has been some positive activity in the market
recently for companies similar to ours.
We don’t have a public rating, and that’s one of the things that we think
about when we’re looking at the high yield market. But, high yield as a
capital markets alternative for us is definitely interesting. So are
convertible notes, for example. But, we’re basically happy with the way
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the company is capitalized now in terms of the asset-level leverage that
we have and where leverage is on the balance sheet. High yield debt
would be a way for us to take that up a little bit, maybe half a turn. So,
it’s something that we think about.
J. Rahmani Lastly, you guys have done a nice job extending and upsizing credit
facilities, including the past quarter. We have gotten some investor
questions about how credit facilities would perform in a downturn or
hypothetical stress environment. Would you care to comment on
whether you have any concerns about how these repo facilities could
perform in a downturn scenario? For example, what events could
trigger a margin call and what level of margin call could you experience
on say a 65% LTV loan?
D. Armer Sure. I think the thing to keep in mind is that our credit facilities are
different from the 1.0 generation or what’s out there in the market
today. People tend to focus on economics, but the real difference is in
the structure. Our credit facilities are term-matched or long-term.
They’re currency- and index-matched, limited recourse, and we have
no capital markets-based mark-to-market provisions.
You mentioned the potential for non-performance or credit-based
marks. In our facilities, collateral non-performance is not a repurchase
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event. Our lenders look to the relevant real estate fundamentals and
have to make a judgment about the collectability of the loan according
to a commercially reasonable standard.
Keep in mind what commercially reasonable means in the context of a
cross-collateralized pool of 63% LTV mortgages. It’s a relatively high
bar, we think, for a potential margin call so, we don’t believe there’s
any scope for material deleveraging in our portfolio in any realistic
scenario. I just underscore, again, that during the last quarter, which
was a quarter where there was some stress in the market for sure—we
didn’t have credit stress in our portfolio, but there was stress in the
market generally— and we extended and upsized almost $2 billion of
credit. I think that’s the best indication of the stability in our credit
facilities and the strength of our relationships with our credit
providers.
J. Rahmani That’s very helpful. Thanks for the color.
Coordinator Your next question will be from the line of Don Fandetti, Citigroup.
D. Fandetti Steve, your simple strategy of originating senior loans seemed to play
out pretty well with the volatility that we saw in Q1. As you come out of
that, do you think to yourself, “You know what? There’s been some
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distress out there. I could possibly get into different businesses,” or do
you say, “I’m glad that we kept things simple and we’re going to stay on
that track”?
S. Plavin We’re certainly glad that we kept things simple and we had this
strategy, which we think fared the best among the alternatives. You
raised an interesting point because those activities which are highly
volatile will cycle up, as well as cycling down. It’s certainly easier to
talk about not participating when they cycle down.
I think that ultimately in a vehicle like ours stability is hugely
important. I do think that REITs as yield vehicles work best when they
produce low volatility, reliable income that allows people to get
visibility on core earnings and dividends and feel good about the safety
of those.
So, we always look at potential new opportunities and new business
lines. We’re always evaluating things that could create additional
shareholder value. If there are activities out there that we think would
fit that model we would do them, but not if they’re high volatility
activities.
D. Fandetti Thanks.
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Coordinator The next question will comes from the line of Joel Houck, Wells Fargo.
J. Houck Good morning, guys. So, the spread widening we saw in CMBS in the
first quarter did not—I don’t think it was expected to you, but it
certainly didn’t really extend into kind of the senior loan market as
evidenced by—you still got L plus 440, which is pretty close to what the
overall yield is.
I guess the question is, is there some point where dislocation or
distress in capital markets, particularly CMBS, could result in you guys
getting wider spreads on new originations, or do you see it more as
your segment is more insulated and the sell-off we’re seeing away from
your guys is more technical in nature?
S. Plavin I think the sell-off that we’re seeing is more technical and not
fundamental. I think the spread widening isn’t reflective of bad quality
credit, rather unique market factors that impact CMBS perhaps more
heavily than other like securities.
Our market is less volatile because the participants are not exiting their
loans through the capital markets. As a result, we did not see, nor did
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we expect to see, spreads increase nearly to the extent they did in
CMBS-related loans.
They did trend a little bit wider, I would say 25 to 50 wider. As
volatility diminishes, I think we’ve seen those spreads stabilize. I don’t
think they’re going to get any wider from here.
So, I think it’s unlikely we’re going to see an environment of higher
spreads. Our market is still pretty competitive, but I always think we’ll
be able to finance a little bit better than most of our competitors and
originate a little better. As long as we can maintain the very efficient
financing that we have, as we have been able to thus far, we expect to
see a stable to positive trend in our ROIs.. And so, it gives us a nice
trend line on our deals, but not anything that’s going to really deviate
from the pattern that we’ve seen over the quarter and since we started
up in 2013.
J. Houck All right. Great. Thank you.
S. Plavin Sure.
Coordinator Our final question will come from the line of Ben Zucker, JMP
Securities.
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B. Zucker Good morning, guys, and thanks for taking my question. I was going to
ask about the strategy matching originations with repayments, but it
sounds like you kind of touched on that.
I wanted to look at the fixed rate portfolio really quickly. When that
GE portfolio first closed, it added something like $2.1 billion, $2.2
billion in fixed rate loans, and those were always highlighted as very
short duration at the time. We might have even started to talk about
this last quarter, but as we sit here now, the portfolio is nearly $2
billion in size. I saw the commentary in the queue mentioning the
percentage that are subject to early repayment and not.
I was just wondering based off your updated conversations with
borrowers, specifically the 36% that have the eligibility to repay, what
your feeling is or understanding on how this fixed rate portfolio that
has kind of not really shrunk as much as we might have thought, how
that might play out during the year.
S. Plavin I do think that we’ll see a significant reduction in the fixed rate loans,
especially in the manufactured housing sector across our portfolio. The
loans that we have in that property category are very stable, strong
performing loans and there is now a very strong agency bid for those
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loans. Fannie and Freddie are very active in the sector. The loans that
we have in general are stabilized enough where they work in that
model.
So, as we progress through the year and we get to the point where those
loans can be economically prepaid, I think you’ll see a lot of movement
in the fixed rate loans, in that sector, and our balance sheets out to
Fannie and Freddie.
B. Zucker Okay. Then just lastly, and this is maybe a little technical, I just wanted
to ask about the target leverage. I feel like I’ve always kind of been
hearing the term that you’re comfortable running this up to a three, but
we kind of hear these like different leverage ratios. I think previously,
you were including the non-consolidated senior interest, and this
quarter, I heard you reference a 2.6 figure, which I calculate for myself
also. It kind of includes your senior converts as equity capital.
When I’m thinking about the three times leverage level to run this
business, in what element should I be thinking about that? In the
context of the 2.6 that you called out, or including those non-
consolidated senior interest that you include in your marketing debt
when you list the leverage?
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D. Armer Ben, it’s Doug. I think that’s a great question. The difference between
the two numbers is exactly what you’re referring to. The 2.6 is the
debt-to-equity ratio based on the actual credit facilities that we have.
The 3.2 takes into account our senior loan participations, some of
which are on balance sheet as loan participations sold, and some of
which are off balance sheet in the form of mortgage-mezzanine splits.
And so, if you think about the portfolio as a portfolio of 100% senior
mortgages that are financed in a couple of different ways, then the right
way to look at it is 3.2 times levered. If you’re thinking about our debt-
to-equity ratio with regard to debt maturities, then the 2.6 times ratio
applies.
From a modeling point of view, I would look at the three times leverage
level and think about that being carried forward and that being our
stabilized leverage level. From a credit point of view, I would think
about the debt-to-equity ratio because that’s the amount of debt that
we actually have maturities on.
B. Zucker Right. Okay. That’s very helpful. Appreciate your comments, guys.
Thanks, again, for taking my questions.
S. Plavin You’re welcome.
Final Transcript Blackstone Mortgage Trust, Inc.: 1Q 2016 Earnings Call April 27, 2016/10:00 a.m. EDT Page 26
Coordinator At this time, I would like to turn the conference back over to Mr.
Weston Tucker for any closing remarks.
W. Tucker Great. Thanks, everyone for your time today and please reach out with
any questions.
Coordinator Ladies and gentlemen that concludes today’s conference. We thank
you for your participation. You may now disconnect. Have a great day.