Blackstone Mortgage Trust, Inc. (BXMT) Earnings Call Transcript & Summary

Good morning, and welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Michael Bilerman here with Arren Cyganovich from Citi Research. And we're extraordinarily pleased to have with us Steve Plavin from Blackstone Mortgage Trust. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up -- on the webcast. For those joining us today [Operator Instructions]

Steve, I'm going to turn it over to you to introduce, I guess, Weston maybe here, but anyone else from the management team and answer the following question: coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in BXMT? Steve?

Thank you, Michael, and it's great to be here. I think for BXMT, what's most compelling I would -- is the Blackstone sponsorship, the ability to invest in a mortgage REIT stock sponsored by Blackstone, the leading property owner in the world and with that amazing track record of success in real estate investing globally. Also with BXMT, you get amazingly high-quality loan portfolio, all get, all underwritten and sourced and an asset management -- asset managed through that same Blackstone process. I think the other thing that, I think, is really important, especially given that -- with commercial mortgage REITs is the quality of the balance sheet. Our balance sheet is highly liquid. It's match-funded, it's stable, it's resilient. It demonstrated that through the pandemic. I think we're extremely well positioned for success going forward. So I think those are really the -- what I think are the most important criteria for success for BXMT.

And Steve, as you think about the first one, the track record and the sponsorship of Blackstone, nice background, by the way. Let me know who I'm talking to. I got my Citi. You got your Blackstone.

Yes. We spend a little bit of time working on this, but I ultimately like -- this is the Blackstone standard. I think it works pretty well.

Right. Yes. Obviously, Blackstone has expanded the scope in real estate, right, having transitioned from predominantly being in that buy it, fix it, sell it type of organization, predominantly opportunity funds, getting much, much deeper into core and core-plus product. What has that given BXMT in terms of opportunities to deploy capital?

Well, I think, for BXMT, we own property. We own property almost everywhere where we lend. And so the bigger the envelope of investments for BX, the more territory that's available to us to lend. And so -- and we're a lender, I think, in core quest and in value-add and in opportunistic real estate. We're a permanent capital vehicle, which is another important goal of BX as it grows its permanent capital vehicles and where -- from its roots of being primarily draw down. For us, it's enabled us to invest internationally as well as in the U.S. I think that's an important distinction from -- with some of our competitors and that the Blackstone footprint is as strong in Europe as it is in the U.S., and our portfolio is about 30%-or-so Europe assets. And we're able to create the same returns, same low-risk profile in Europe like we can in the U.S.

And then have you found in terms of lending sources -- clearly, you talked about the balance sheet of BXMT being strong, right? So that's provided you the capacity to go out and lend more. How has the competitive landscape started to open up as the economy has started to reopen? Are you finding more traditional lenders trying to outflank you? And just talk about the competitive environment overall.

Yes. It's interesting. The commercial banks have been probably the slowest to come back from the pandemic. We're seeing a lot of competition with, I think, nonbank lenders, also insurance companies. And CMBS is coming back as well. The commercial banks will come back, but I think it's just -- they're taking their time. What we try and get the commercial banks to do is lend money to us and let us make the real loans to the developers and to the property owners, and that's working. We're seeing a lot of demand from our lenders looking for outstandings with us on the -- in our warehouse facilities. As it relates to the competitive environment, we're seeing a recovery of loan demand. And loan demand, it was way off, obviously, during the pandemic. And borrowers didn't perceive it being a good time to go to market. And without much transaction activity, it was just -- it was primarily a refi market, and obviously, not a great time to refi for the most part in 2020. That's really changed now. The capital markets have really opened up. Loan spreads have tightened, and we're seeing a recovery of loan demand. I'd like to see a more rapid one because there's a lot of lenders out there trying to make loans, and so I'd like to see the demand for loans keep pace with the capital that's available. Right now, it's a competitive market. I think it will improve because I do think we'll see a significant increase in transaction activity as we go through the year. There's a lot of undeployed capital in funds. The funds weren't particularly active last year. There was no clear moment, I think, where it felt like, from an opportunistic standpoint, it was the time to go all in. And there's still a lot of uncertainty in the market that's having some dampening effect. But I do think there'll be, with the vaccine and the economy reopening, an increasing recovery of loan demand and transaction activity.

How flexible are you in terms of the type of loan product that you're willing to provide, especially on assets that may not have a lot of income right now given the pandemic or where there's more secular concerns about how things will evolve post pandemic?

I think we're flexible on what we'll do from a loan standpoint, but not very flexible in terms of deviating from high-quality real estate, high-quality sponsors. We're really trying to find properties and markets where there's real growth, catering to the new economy. And so if you look at our new originations, you'll see more life sciences, industrial, multifamily and -- properties and markets that are again catering to the knowledge economy to the segments of the economy that are growing.

Arren, do you want to go ahead? Usually, I would just tap Arren underneath the table. It's a little harder to do in a virtual event.

Yes. Exactly. Yes. Maybe to kind of shift gears towards some of the areas where you have exposure, I think office is definitely an area of kind of continued thought in how that's going to evolve. I've been working from home for about a year. I'm anxious to get back into the office at least a few days in a week. Maybe you could talk a little bit about what you're seeing in the office side of it? How your portfolio is stacked up? And whether or not the kind of de-urbanization trend that we've seen in the falling kind of focus on urban centers, how that might impact your business?

Well, it's a great question. And I'll say that we've had 100% performance in our office portfolio. Our office portfolio is centered on major market assets. I don't see us becoming a suburban lender. I don't think there's going to be a huge secular shift away from the CBDs. And with office especially, we get larger-sized assets. And with the bigger assets, generally comes stronger sponsors who are better able to support assets and fund operating deficits that maybe aren't anticipated or see their way through more difficult periods of time. It's going to take a while for the urban core to recover. But our -- but the -- and in some cases, we'll see delays in the business plans around some of these assets. But we're, for the most part, a 60% to 65% lender. There's a lot of equity to protect in these assets. And we've seen the strong sponsors that come with large assets still believing in their properties and their -- and the equity they have in them, supporting them in instances where maybe leasing has been a little bit slower. But from our -- but we're always, in terms of our lending philosophy, more geared towards assets that cater to technology, and now -- and I think now life sciences and content creation. Our 2 largest assets in New York City office building assets, one is the -- will be the headquarters for Pfizer; and the other is the headquarters for Peloton. So very significant sort of tenants that are in the mainstream of economic growth.

And then maybe in terms of the multifamily side as well, that's an area that also, given your kind of A focus, we've seen rents come down in a lot of the major urban centers. What are you thinking about for that part of the portfolio and that sector longer term?

I think that the -- that in the -- there's -- I think there's an opportunity both to buy and to lend in the CBD. So I think the -- I think we're sort of at the bottom of the market in terms of rental demand. And that's really COVID-related. We lost the 2020 rental season. The 2019 rental season that a lot of those -- the younger tenants when their leases rolled to 2020 moved home. So a lot of what we've seen was exacerbated by COVID. And I think with the recovery in the economy, with the vaccine, I expect to see a recovery in those urban apartment assets. Affordability will be an issue, but it's a stable asset class relative to some of the other things that we're able to lend on in our business. And so again, remember, we're lending it 65% or 70% LTV, maybe a little bit higher in multifamily than in office, but still with a very significant equity cushion. And really, the ultimate performance of these assets is the risk of the equity and not the debt if we're doing our business, right? And so we're hoping to see more CBD apartment opportunities coming in the periods it had, but we'll see some private equity, buy some of these assets if they become distressed or if their existing holders don't want to see them through a recovery period.

And maybe you could talk a little bit about some of the troubled areas that, not necessarily within your portfolio but just, in general, folks have been talking about hospitality and the pressures that have been on the hospitality market, whether or not you think that what we're seeing from a stimulus plan coming through, if that's going to get us through to the other side and whether or not there's been any transactions that might give you any kind of view of the market as well?

We are expecting a strong secular recovery in hospitality assets, especially the drive to leisure assets with the -- a lot of pent-up demand for vacation as a result of people feeling like they've been locked down. I would put myself in that category. And we're beginning to see the very front end of that now. I think the recovery in select service will be more -- will be also at the front edge of the recovery. And the CBD and group assets will take a longer time to recover. But we do expect a very significant recovery in the hospitality sector. We're going to be very selective in terms of the lending that we do at this point. But I do think with values down and recovery very likely that we do expect to see some compelling opportunities in the sector. And we, by no means, redlined it. The assets that we have in our portfolio have generally performed well, in that the sponsors have made the appropriate capital investments into the assets. We haven't had to defer interest. The collections on our hospitality assets have been very strong. And so it's really helped validate, I think, our lending philosophy. The larger assets, the stronger sponsors, the deeper pockets when there's equity invested and the sponsors believe they can carry the assets. And one of the big differences with us versus a more middle-market competitor perhaps is that our sponsors do have the ability to write the checks to cover the unanticipated operating deficits in the face of revenue shutdown. So we haven't had to defer interest, and we haven't had to give a lot of relief. What we have done -- agreed to do is provide more time and -- in terms of loan term, but that's in exchange for significant capital investment. And this performance on the part of our borrowers has really, I think, given us a lot of encouragement in terms of continuing to look -- construct the way of the sector and see where the next generation of opportunities will lie. So we're -- I don't -- I think unlike, say, regional malls, where there's a permanent secular headwind in an asset class that I think is just -- is going against the economic trend, I don't think it's true with hotels. Some markets were overbuilt. But generally, we see a bright near-term future for the asset class and improving economics.

Okay. And we do have a question from some investors, maybe specifically about New York office and multifamily. What your exposure is there? And how you see that changing going forward?

Well, I think that -- we're -- I'm a long-term believer in New York, but I do recognize that we're going to -- that it's going to be a difficult period over the next year or 2 as the world recovers and the occupation of offices in the city begins to improve and people feel safe and companies encourage employees to come back. So the timing of that is uncertain, and any impacts from work from home is, I think, the jury is still out. But we do -- we are strong believers in office. We don't think the asset class is obsolete. We've been back since September, and let me tell you, it's great to be back, and we're so much more productive in the office than we were over the summer and last spring on Zoom. And I think a lot of people when they get back will realize that big productivity pickup versus maybe the short-term benefit of not having to commute. I think -- so I think as it relates to -- I described in the prior answer the 2 major tenants in our 2 largest New York City office exposures. And we are focused on newer assets, higher-quality assets, where there is much greater tenant demand. The portions of the city, in the case of New York, in the general midtown, south and the west Hudson Yards area, that's where the tenants want to be. That's where the talent seems like it wants to be, and so that's where the buildings are having the most leasing success. As it relates to the multifamily, the market in New York took a little bit of a shock with the rent regs that were approved in 2019 that made it much more difficult for landlords to raise rents for unregulated apartments, even with new capital investment. And that's really made that segment of the market much more challenging to lend into. And so I think for now, until there's a little bit more clarity, that's probably one part of the market that is very, very difficult to finance until -- and again, unless there's a business plan that's able to navigate the rent regulations and create enough income for ownership to make new investment viable. I do think that away from rent-regulated multifamily, the other issues in the multifamily market in New York are COVID-related, maybe some affordability is on the margin, but I'm confident the market will come back and that there'll be good lending opportunities and the patient capital will be rewarded.

Steve, how do you -- when Blackstone talks to corporate America leaders, how are they balancing sort of the dollars and cents side of the equation in terms of their office needs versus what you're talking about in terms of productivity? And I agree with you. I've been back myself in the office, and I know the benefits it provides me as an individual. But there is that interplay where I feel like I'm more of the minority than the majority, and it definitely feels as though management teams will look at -- they can quantify rent. They can't quantify as easily the benefits that you're talking about. So how have those conversations been going about getting people back? And how many people are coming back?

Yes. Well, I can tell you from the Blackstone experience, we are working towards getting everybody back, I think, as quickly as we can. I mean, obviously, a priority on safety and office attendance for us is not mandatory. It's optional. And if people feel -- don't feel safe, they don't come in. But in our debt business, we've had a very high current attendance. And I think people really feel and experience the benefit of it. And I know it's important to John Gray in terms of getting people back in the office. And we've raised a lot of capital and are most productive and most able to invest when we're together. And I think most other businesses will experience that same thing. I mean for a lot of businesses, they won't know until they're back. And there is some pressure from work from home, but there's also a lot of pressure about talent development, coaching, mentoring, establishing an office culture, things you just can't do remotely. A series of Zoom calls and Zoom meetings does not really create a business. I mean there needs to be a physical place, especially for the kinds of businesses that we're involved in. So I do expect that more people will come back. I think some of the work from home -- the policies that you're hearing about and philosophies, they're really meant to manage employees in the near term, let them know that they will have options and that their health and safety is a priority. But I think, ultimately, we'll see office use go back to something that looks maybe perhaps a little bit more like it used to look that maybe some people are expecting.

Maybe just talk a little bit about your ability and appetite for growth in this year. Is it -- do you expect this to be more of a recycling of the portfolio as you get repayments coming through? And what kind of leverage levels you're able to get from lenders these days on your own balance sheet?

Well, as it relates to the portfolio growth, we have a very good pipeline. And we see -- and I think it's -- we'll have good opportunities to originate new loans. The unknown is -- are the repayments. As the capital markets open up, we'll get more repayments. And as you'd suspect, the opportunity to originate and the repayment pace are correlated. And so we've seen -- we reported on our first quarter call $1.5 billion of loans in -- post-COVID loans in our pipeline. But we're also seeing a ramp-up of repayments, which I think is to be expected. There was virtually very few repayments last year, so we'll see a little bit of pent-up repayment, things that were -- that would have, in the ordinary, of course, repaid in 2020, and that will now likely repay in 2021. Our goal is going to be to originate ahead of those repayments and to grow the portfolio. We'll see the success we're able to have. I'm confident that we're going to have very significant originations. The repayments are -- obviously are not controllable. As it relates to the -- our -- the borrowing side of the business, we've been really encouraged with the recovery of that market. We're borrowing from our lenders on terms that are pretty close to pre-pandemic terms. The CLO market, which is an important market for us, it's one that we've tapped 3 times previously. Spreads are very tight in that market now. That's helped lead to tightening spreads in the credit facility market that -- the bank market that somehow -- that sometimes functions as the warehouse for the CLO market or term financing for the assets that we originate. So the pricing and rating agency levels in that market are very attractive and support a low cost of capital. We run a very -- we run a diversified right side of the balance sheet. We're able to borrow very efficiently, generally, the best terms that are available to anybody in this segment. Low cost of capital is hugely important in our business, and it obviously helps generate the dividend. But for us, stability is just as important as the cost of capital. And we have a match-funded balance sheet. And the diversified sources of our funding help maintain that stability. As it relates to leverage in the business, that will depend upon the pace of origination and our ability to grow the portfolio. We're very liquid right now. And so as we deploy the portfolio and grow it, we'll increase our leverage to some -- to a little bit closer to our -- to the target range, and we'll see how that goes, again, depending upon the pace of originations versus the repayments.

Okay. You've been investing outside of the U.S. pretty consistently over the years as well. I think it's near -- getting up to nearly 1/3 of the portfolio. How are you thinking in kind of geographically, it's mostly Europe exposure for you, the opportunities you're seeing within the U.S. versus overseas?

Well, we like to lend where Blackstone owns. That's where we have the biggest advantage. And good news is that we own almost everywhere in the world, and we own at huge scale. We have people who are focused on markets and asset classes everywhere in the world. And in our process, we don't -- before we go to committee, we tap all the available resources within Blackstone for all the information that's available. And that's an ongoing process, not just at the front end. So true in asset management as well as in loan origination. And so we like some of the markets in Europe. I think thematically, we're looking for the same types of opportunities there that we are here. The market is a little bit more episodic, so maybe a little bit less regular way loan demand in Europe than in the U.S. But we have been able to find on a consistent basis excellent opportunities there. I think there's been a little bit less spread tightening there over the last -- over the preceding periods than there was in the U.S. So occasionally, you can get a little bit more spread on transactions there than in the U.S. We've exported our ability to borrow from the U.S. to Europe. So we're able to borrow on pretty much identical terms in Europe as we can in the U.S. So the model functions in a very similar way. We look for the similar assets, larger assets in markets that we think are resilient with sponsors that have the ability to fund and have significant equity invested in the assets. So it's the same lending philosophy. We're just fortunate that we have a bigger envelope given the Blackstone footprint. And we do look at new jurisdictions from time to time. The creditor regime in those regions is very important to us. I mean, obviously, the laws, the abilities for the lenders to collect vary from region to region. And where there isn't a good creditor regime, we won't plan. And so that's an important consideration. But our banks will work with us in almost every region where we think there is high-quality opportunity for REIT.

Steve, is there opportunities at all in terms of structure where BXMT is going global? But you think about the opportunity funds and core funds, sometimes they are region-specific, and obviously, you have global as well. Is there an opportunity for region-specific mortgage entities?

I think -- well, I think for us, we prefer -- if we can lend as efficiently as a regional lender, then we think that having the larger and more diversified companies is better for investors, and ultimately, better for our cost of capital. We can spread the fixed cost of running our business across a bigger portfolio and across regions. In some of the areas where we're a lender, we've see some region-specific vehicles, and particularly, in Europe. But we haven't found ourselves in a situation where we're not price-competitive. Generally, in fact, in Europe, there's less direct competition than there is in the U.S. So fewer lenders that look like us. And in some regions, we have to train the borrowers to look to lenders like us. They're used to borrowing recourse for banks that maybe a lower LTV, and so we have to educate them in terms of what's available from BXMT. And we have a lot of relationships that we can utilize from the equity side to get to know some of the region-specific borrowers that maybe we're not calling on in the U.S. But a lot of our U.S. borrowers are international, have Europe funds, have significant Europe presence. And so -- and a lot of the repeat lending that we've done has been the borrowers -- the U.S. borrowers also borrowing in Europe. And the more we can service these -- especially, these big private equity funds with a big value-add and opportunistic real estate portfolios and investment activity, the better it is for us. The repeat borrowers are where we have the biggest edge. They've had the experience of borrowing from us. There's no resistance. They know we're not predatory. They know that we understand their business, are flexible, execute and that we have huge conviction when we agree to do something, and we show up in a reliable way.

Maybe you can just talk a little bit about the -- your earnings power right now benefiting from the LIBOR floors that you put through in prior years? And how that might change as that rolls off? And what other kind of offsets you have on the other side through this cycle?

Well, the LIBOR floors are great to have, and we have LIBOR floors in about half of our loans that are significant -- let's say, significantly active in providing excess return. And obviously, the floors, when you're originating, the time to grow on floors is when LIBOR is high. So the LIBOR floor opportunity in the current market is much different. The -- we're originating loans with -- either with LIBOR floors at current LIBOR, which is say, in the 10 to 15 basis point range. So we're not getting the same pickup in base rate on the new loans that we had on the old loans, but spreads are still wider now than they were pre-pandemic when base rates were much higher. And so I think the lower base rate has helped maintain spreads in a slightly wider state than they otherwise would be in. It's not quite one for one, and so I think we lose a little bit more in base rate than what we pick up in spreads. But it's going to take a long time for our portfolio to migrate from where it is now to a fully new-generation portfolio that doesn't have any of the historic floors in it. And so we'll see where LIBOR goes. We'll see where our spreads migrate to. Well, we covered the dividend in 2020, and we did it while maintaining a lot of liquidity. And we're maintaining a lot of liquidity now. We're extremely well positioned to grow the portfolio and to take advantage of the origination opportunity that we foresee with recovering loan demand following this period of pandemic disruption.

Are you finding, Steve, just in terms of just overall transaction activity, that buyers seem to be picking up, and therefore, increasing loan demand? And where are those pockets where you're finding the most activity to fund new deals, maybe new buying and new bank?

Yes. We're definitely seeing a pickup in loan demand. We've seen a lot of activity in the life science sector in the big nodes. We're -- we have our BioMed investment, and we have an enormous footprint in that industry, and it's been hugely beneficial for us in terms of evaluating a lot of new opportunities. There's a lot of proposed office-to-lab conversions and some of those...

Everyone is a life science owner today. It doesn't matter if you own a shopping center, it's -- we have -- 5% of our portfolio is now life science.

It is definitely -- it definitely is a favorite asset class. But you have to be careful, obviously, because the cost of construction and creating lab space is high. But we have the ability to make that assessment because of our -- again, because of what we own. We've been a lender in that segment for a while because we've had this equity investment for several years now. And so we're seeing a lot of growth there in terms of opportunity. We see a lot of opportunity in multifamily. Some of it are buildings coming off construction loans, where sponsors want to get off recourse debt and maybe get some of their equity back if there's good initial performance and good prospects. So we're seeing a lot of multifamily. Most of the transition to multifamily is on the new development side. We do have a program with Walker & Dunlop, where we do -- where we make loans on multifamily assets that are in transition. It's been a very successful program. We've made over 40 loans in that program. And it's -- if they originate, we collectively improve and we finance them. So that's been good. And it's enabled us to go a little bit more downmarket in the multifamily space. With multifamily, unlike the other asset classes, going smaller in size doesn't mean going down in quality. It just means you can expand the market on loan book of business.

Well, okay, with the time that we have left, we have 4 rapid fire. So when we're sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about your business over the prior 12 months?

That's a great question. I think for us, it will be the bounce back in originations. When you think about the fact that we had virtually no originations through the middle of 2020 and saw a slow recovery of loan demand starting in the fourth quarter, I think when people look back on what we expect to accomplish in 2021, they'll think that we captured a large share of the available high-quality opportunities that are out there.

What do you think your corporate travel budget will be next year as a rough percentage of 2019?

2019?

Right. So looking at 2022 relative to 2019?

Well, I think that once we get a little bit more reopened, it will be the same or higher. I think it'll probably be higher because I think we have some deferred in travel that we'll need to make up. We haven't seen any -- we haven't seen assets or sponsors base in a long time. So I'd suspect there'll be a period of time where our travel budget will actually be higher than it was in 2019 that sort of renormalizes at some point. But there's a lot of travel we've deferred and that we need to go. And there's no substitute for seeing assets and for meeting people face-to-face. And so we're going to get out there as soon as we can.

Okay. And then 10-year treasury a year from today? I think, right now, it's at 1.55%.

2%.

Great. Well, with that, I really appreciate the time, and good luck with the rest of the one-on-one meetings over the course of the next few days.

Thanks. We always love participating in this conference, and thanks for having us.

Okay. Great. Thank you so much.

Thanks, Steve.