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

Welcome to the session of Citi's 2022 Global Property CEO Conference. I'm Arren Cyganovich with Citi Research. And we're pleased to have with us Blackstone Mortgage Trust and CEO, Katie Keenan. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those joining us here today in person to ask management questions, just step up to one of the mics that we have in the middle of the room. If you guys are joining us remotely, simply type them into the question box on the screen, and they will come directly to us. We'll do our best to ask them during the session. So Katie, maybe you could introduce your company and any members of management that are with you here today, just to start off.

Great. Thanks, Arren, for having us. We're very happy to be here in person. So I'm Katie Keenan, CEO of Blackstone Mortgage Trust. We are a floating rate first mortgage commercial real estate lender backed by Blackstone, which gives us really fantastic scale, reach and information across the industry. I'm joined here today by Doug Armer, Executive Vice President of Capital Markets; and Austin Pena, Executive Vice President of Investments.

So what would you say the top 3 reasons investors should buy your stock today versus other mortgage REIT peers?

Absolutely. I think, the first is our platform. I mean, sitting within the Blackstone platform, we truly have, I think, unparalleled access to real-time information from around the world. We're typically the largest owner, the largest player in all the markets and sectors that BXMT is lending to. That gives us the information to make the right credit decisions, and I think you can see that in our performance. And it gives us access to the broadest possible pipeline globally of investments from which to select the portfolio that we put together. I think, the second is, we're fully scaled. We have a $24 billion portfolio. The best borrowers in the market, many of whom are repeat relationships we've done 5, 10 deals with. It gives us access to a diversified balance sheet, well structured, many sources of capital and all of our assets are well positioned for the inflationary environment that we think is coming. And I think, the third thing is the attractive durable dividend that we pay, 8% from a portfolio of first mortgage loans. And critically, in this environment, as a floating rate lender, our earnings are positively correlated with rising rates over time. So when you take a step back, low leverage lending, assets that are well positioned for inflation and floating rate lending position, I think we're uniquely well positioned in the environment today.

Maybe you could talk about your CRE lending strategy, how that works to help your REIT, and then also how that may differ from some of your peers?

Sure. I think that when we started the business, we have a very clear and consistent approach. We are a first mortgage lender, low leverage, 65% LTV. We target institutional quality assets with dynamic sources of demand and really high-quality, well-capitalized experienced sponsors, the Brookfield and Oaktree's of the world. One of our key advantages is scale. With a $24 billion balance sheet, we can act at a size of lending opportunity that others not -- can't necessarily address. And that gives us a competitive advantage on larger-scale deals where we have very well-capitalized sponsor, significant amounts of equity capital. And the scale also extends globally. We have well-established teams in Europe and Australia and around the US. That, again, really just results in the access to investment opportunities that we can use to comprise our well-performing portfolio.

And what are you seeing in the CRE lending environment today? And how does that differ from 2 years ago when the pandemic started?

Yes. I think the environment today is really well balanced. There's a lot of experienced well-capitalized lenders and borrowers. What we've seen really post GFC and into today is the very high-quality institutional sponsors seeing real estate as a good place to make investments. The fundamentals have been very positive, continue to be positive today. And people are not trying to make their returns through high leverage. They're trying to make their returns through picking the right assets, implementing value-add business plans and borrowing at reasonable leverage levels. And I think that, that really translates to a fruitful environment for a lender like us. And I think that's even more so true to today. It is a well-balanced environment. Some of the volatility we're seeing, I think, is resulting in spreads coming out a little bit, which in our position as a lender is not necessarily a bad thing. And I think the environment today has a lot of opportunities. Last year, 2021, we made $14.6 billion of loans. It was a banner year. And 50% of our loans were on the multifamily and industrial side. So again, I think just a credit to the breadth of opportunities that are out there and our ability to access them.

I guess, on that last point, the multifamily and industrial is an area that you've been focused on. What are the areas that you prefer from property type right now? And are there any that you're avoiding?

Sure. Austin, you want to have that one?

Sure. So we see opportunities in the same sort of bread-and-butter asset classes where we have the highest conviction. [Technical Difficulty] as Katie said, was 50% of our originations activity. But we see opportunity in other sectors as well. Office is a significant component of our portfolio, but we're targeting the type of new build, high-quality office products that's attractive to the tenants of today and where we're seeing stronger demand. We also see opportunities in the growth markets in the Sunbelt. We're seeing -- that's our largest market exposure. And in the high-quality office properties that we see in those markets, we find attractive opportunities to lend in those types of deals. The other asset classes where we see opportunity, in leisure resort, hospitality, which we've obviously seen extremely strong performance coming out of COVID, we're seeing selectively attractive opportunities there. And essential retail, there's some select opportunities that we'll pursue in that space as well. Areas that will continue to sort of shy away from commodity office product, certainly in closed malls, those types of properties, which we just haven't seen perform well through cycles and continue to pull that view.

I think even more today, I mean, obviously thinking about the real estate fundamentals has been the primary focus of our business over the long-term. But thinking about the last year, I think, it's been, in particular, focused on assets that really have the pricing power to drive top line growth in inflationary environment. And that's multifamily, industrial value-add office where people are leasing up into a strong demand environment for the high-quality new build office that we lend against. And really critically, just making sure that our portfolio is well positioned for the inflation that we know is coming frankly.

You had mentioned that spreads have been kind of widening out a little bit recently. Where do you view them today versus where they were pre-pandemic? And do you feel like this current geopolitical volatility will create some new opportunities?

I'd say, heading into the end of the year, spreads on most of the deals that we are pursuing, we're pretty much in line with pre-COVID with the exception of hospitality, which still had a bit of a higher yield. Heading into the beginning of this year, we did start to see a bit of volatility in the market and a bit of spread widening, I think, is the prospect of rising -- increasing interest rates and sort of the Fed changing their policy as well as obviously concerns around inflation. And so we did start to see a bit of that spread widening earlier in the year. And obviously, the volatility, the horrible situation going on in Ukraine, I think, has added to that volatility. So the opportunities we're seeing today are a bit wider than we were seeing heading into the last year or relative to pre-COVID.

Your firm and some others have been growing private capital in very large funds, very successfully bringing in new capital. Does that, in your mind, create any issues in terms of always needing to deploy the new funds that you're raising? Or do you feel like the competitive dynamics aren't so much where it would really impact the environment that much?

Yes. I mean, I think from our perspective, being part of Blackstone and the growth that we've had in the overall Blackstone real estate platform is just a critical component to the capabilities and sort of differentiated opportunities that we have for all of the Blackstone investment platform. So we have this virtuous cycle where the more active we are across markets, we gain more information, we meet more borrowers. More borrowers have great experiences with us and come back. $11.5 billion of our loans last year were with repeat borrowers. And as our real estate debt business expands as well as the overall Blackstone Real Estate business, that reached that positive network effect just multiplies. So from our perspective, I've been at Blackstone 10 years and just the continuation of the virtuous cycle of growth and how that gives us really differentiated access to markets to players within market information. I think that that's a key competitive advantage of our overall business.

We do have an investor question here. What percentage of the lending do you plan to deploy overseas or outside of the US?

Sorry, can you just...

What percentage do you expect to deploy in terms of your new investments to overseas or outside the US?

It's a tactical and strategic decision over time. We obviously -- having the global platform and reach that we have gives us the advantage to look at relative value in different markets in sort of a deal-by-deal and market-by-market basis. Historically, Europe and Australia has comprised about 30% of our portfolio, and I think that's a good number. I think that both Western Europe and Australia provide really attractive relative value as a lender, like-for-like assets tend to be lower leverage, wider spread. The structure is very good as a lender. And our competitive position in both Europe and Australia, I think, is, in some ways, even more differentiated than in the U.S. because it just tends to be a less liquid market where information is even more important. We've had long-standing, well-established teams in both of those markets for a long time. And I think that, that has translated to really attractive lending opportunities. So could it be bigger potentially, there are certain periods of time where it's a little bit smaller. I think in 2021, roughly 20% of our business was outside of the US, really a factor of those markets taking a little bit longer to reopen post-COVID. But we really like the opportunity. And I think most importantly, we really like the option that we have within our business of being able to look across all of the sort of lender favorable markets in the world and identify the best relative value.

Maybe we could switch to how interest rates might affect you and we're going to start to see short-term rates start to rise again for the first time in a while. How is your portfolio positioned currently? I know you invested quite a bit last year, which helped remove some of that proportion that you're benefiting from that floor -- LIBOR floors.

I can jump in on that one. We did, at the end of the year, have almost 75% of our portfolio with -- at the money LIBOR floors. Today, that number is higher, and it will continue to increase organically as the portfolio continues to grow and to turn over. And what that percentage really represents is a return to asset sensitivity that's inherent in our business model as the floating rate lender. The hypothetical retrospective calculations, looking back at year-end and thinking what if interest rates have gone up 25 or 50 basis points can be a little bit tricky. The math is a bit complicated given the leverage on the balance sheet. I think a better way to think about it is really prospectively and taking a step back, understanding that our business model as a floating rate lender is inherently asset sensitive. We run a match funded book. And so our ROE is 1-for-1 correlated in the long-term with LIBOR, so for whatever the relevant index or base rate is. And so I sort of -- I think it's more useful to fast forward to the end of 2022, think about 100 basis points or potentially greater increase in interest rates and look at that impact in terms of our earnings. And that's a fairly material and positive impact in terms of our forward cash flows in today's rate environment. It's difficult to quantify in the hypothetical because there's a lot of all else equal assumptions. But you're talking anywhere between $0.02 and $0.04 a quarter on a quarterly basis, again, assuming all else equal. So that positive correlation with interest rates is a real plus to our business model. We saw that in 2020 that we didn't really suffer because of the floors in the loans, we didn't suffer the converse in a precipitously rate declining environment. I mean, it's one of the great hedges in our business model that our floating rate loans have LIBOR floors struck at the money and we benefit from rising rates. And we're somewhat insulated from precipitous declines in rates as well.

Your CRE portfolio grew very well last year with a very active investing year. What's your anticipation for growth in 2022? And is there an optimal level of size that you'll eventually reach in terms of your portfolio?

I think the best way to answer that question is a little bit looking back and then looking forward. And I think, one of the things we're really proud of is that we've seen portfolio growth in every year of our business. And so really what that means is, it gets back to, I think, one of the great sort of inherent hedges in the business in addition to the interest rate sensitivity. Originations and repayments tend to be quite correlated. And so in periods of increasing transaction activity, we grow in increasing -- in periods of reducing transaction activity, repayments also tend to slow down, and we're able to maintain a very stable well-invested portfolio as well. And so I think that depending on how the volatility sort of shakes out or levels out, 2022 could be a year that looks a lot like sort of 2018, 2019, 2021. And we expect to see that continued growth, maybe not at the same level as 2021 because I think that really was, in some ways, a unique situation in terms of overall volumes. But again, looking at the balance between originations and repayments and, therefore, portfolio growth, which is really what drives the earnings power of our business, I think that business -- that correlation is very strong and we would expect to see that continue.

What's your expectation for repayments in general this year? Should they be just kind of normal cycle or do you have a higher proportion than normal expected to repay?

No, I think it will be normal cycle. And I think the important thing to think about is, the best sort of predictor or a number to look at when we think about repayments is what our portfolio looked like 2 or 3 years ago because our business model is making roughly 3-year loans for value-add business plans to sponsors that are implementing a CapEx strategy or a re-leasing strategy. And so the loans that we pay this year will be, by and large, the loans that we made in 2018 and 2019. Sponsors spent the last 2 years implementing their business plans, and now they're ready to sell. And so from that perspective, thinking about roughly 1/3 of the portfolio turning over year-to-year, that's sort of the numbers that we generally think about. And again, it really is very correlated. So what we saw in 2020, obviously repayments slowed down a lot, originations slowed down a lot. We still saw some portfolio growth and the sort of wheel and the correlation was very positive in terms of keeping the portfolio fully invested.

So with 27%-ish currently invested outside of the U.S., U.K., Ireland, Spain, what's the environment like there now? And because of all the geopolitical risk associated with the region, has that changed your risk appetite at all?

I think, as Katie mentioned earlier, we've been an investor in those Western European markets, as you mentioned, concentrated mostly in the UK, Ireland and Spain for many years. And that's sort of on the back of very long-standing platforms. It's very possible that we will see some level of slowdown in investment activity, given the volatility. And obviously, the horrible things happening in Ukraine could create some slowdown in that market. But as far as an investment approach or strategy, I think we've remained consistent.

So from a credit performance, you continue to be done very well. You've maneuvered through the pandemic well despite having decent exposure to hospitality and not so much to retail. How are those proportions of your portfolio doing today as we -- I guess, relative to what the borrowers' plans are?

Yes. We're really out of the credit performance of the portfolio in COVID and obviously over the whole history of our business. And I think, it's really a validation of the approach we take to the low leverage lending, well-capitalized sponsors and really our asset selection, which is informed by all this information and real estate experience we have within the platform. I think that the strategy is the -- investment strategy is the assets that we like, as Austin mentioned, it really has been very consistent over time, pre-COVID, post-COVID. We like assets that have dynamic sources of demand, where we can really underwrite value and cash flows that we think are going to have liquidity over time with the sponsors that have the expertise and the capital to implement the business plan. So I think you'll see a continuation of the trends we've seen over 2021. I mean, we continue to be very constructive, obviously, on multifamily on growth markets, industrial, but also resort hotels, central retail, high-quality office -- and I think that, that mix will sort of -- the trend will continue and the overall mix, it's a $25 billion -- $24 billion portfolio. It doesn't change that much quarter-to-quarter.

We have another investor question. How does your funding structure look today compared to where it was in March or April of 2020?

I'll take that one. Our funding structure, similarly to the investment strategy or the portfolio composition, is relatively consistent year-over-year and has been since the IPO in 2013. What we did see really going into 2019 and going into 2020 was an increase in securitization in our capital structure, SASB CMBS, CRE CLO, that trend continued through 2020. As a matter of fact, we did 2 CLOs in 2020 in the first quarter and the third quarter. And then, it's continued into 2021. And I think that's probably the single biggest difference, an increase in the proportion of securitized liabilities on our balance sheet. We've also grown very significantly and evolved in structural terms our credit facility, the credit facility component of our capital structure. We've diversified the number of counterparties. So I think we're up to, I want to say, 15 relationships, one of which is, of course, Citibank. And that product fared very well during 2020 proved to be a stable funding source for us and continues to provide significant flexibility in our business, which is very important given the portfolio growth that we're seeing. It's also very important in terms of enabling us to pivot between different capitalization options, different capital markets access opportunities so that we can optimize our cost of capital and also maintain a strategic access to funding to support growth of the portfolio. Today, where you have a sort of technical driven or supply -- somewhat oversupplied pre-CLO market, for example, we've seen significant spread widening in that market. The geopolitical events are contributing to that more recently. And we're not dependent on that market, and that's in large part because we do also have syndication alternatives. We have credit facility alternatives. We've got existing securitizations that are well structured in terms of being reinvesting or replenishing. So that stability in the balance sheet is something that's been consistent from 2013 through 2020 and today. But our approach to it in terms of the technology is continuously evolving, with the North Star being running a match funded and well risk-managed liability structure.

We've had a difference of opinions from some of your peers on the use of CLO financing. Why do you find that your -- that you find that option is an attractive use of your attractive funding source versus some of your peers?

The first thing I would say is that our CRE CLO program is very uniquely tailored to match our business model. And I think it's worth stepping back even from CLO, our entire capital markets franchise is oriented around our investment strategy. So the driver for us is the investment strategy. What are the loans that we want to make, where do we want to be from an investment exposure point of view. And then following from that, we devised the most efficient capital market strategy that will enable that investment strategy. And so our CRE CLO program works in tandem with our credit facilities and with our syndications to deliver into that market, substantial diversification but also very high quality loans, the quality of loans that are on our balance sheet, which didn't typically make their way into the securitization or certainly the CRE CLO markets prior to our entry into the market. And having had sort of broken the seal on that quality of product in the market, the market has grown very significantly, $40 billion of CRE CLO issuance last year. And it represents a very significant increase in capacity for us and for really the space in terms of non-bank lenders. That capital has got to come from somewhere, and the CRE CLO market is a very important piece of delivering from the capital markets, the leverage that non-bank lenders like BXMT needs. So it works in concert with our other funding strategies, but is a very significant contributor to the overall capacity in the system for non-bank lenders like BXMT.

I think the key, as Doug said is, we run a diversified balance sheet. We've got the CLOs, the syndications, the credit facilities within the credit facilities. We have domestic banks, international banks, insurance companies, all different sources of capital, who have different views at different times. We have a corporate term loan, we have a high-yield bond. And really, the key is just having that diversification. So we can be strategic about which markets we access at which times. I think where the CLO can be challenging is, if you're running a business, it's wholly dependent on the CLO market. Then when you have situations like we have today, that can be a challenge. But when you're running a diversified balance sheet and you have many different sources, it's a really good option as one of those potential sources.

We have another investor question. How would further dislocation in the capital markets impact your pursuit of new business?

I think we really start with the assets and the investments that we think are attractive. And I think, as we look at the world today, the results of the dislocation of capital markets really is, I think, a little bit of a unique opportunistic investment environment for lenders like us. I mean, we see, interestingly, the CMBS market, which we haven't talked to how much today, is certainly widened as well here in the beginning of the year, in large part driven by just a supply-demand technical. I mean, I think the key to keep in mind right now is the fundamentals in real estate on the ground are very strong. And what we're seeing is sort of a capital markets dislocation, driven by the rates picture, obviously, the geopolitical volatility and some technical supply-demand dynamics. And so with CMBS spreads widening, there are large portfolios of stabilized multifamily industrial assets that typically would have been done very tightly in the CMBS market from a price perspective that are now pricing more in the range that can be attractive for lenders like us. And so I think that will be an interesting dynamic. I'm not sure how long that will last. But I think there is a moment here for opportunistic investing in terms of the profile of the deals that would typically have gotten done by banks or CMBS, that might be more in the purview of lenders such as us.

From a leverage perspective, you ended the year about 3.2x, that was up from about 2.5x year-over-year. Is that an area that you expect to continue to expand your leverage? I know that we had a fairly cheap financing environment. It sounds like it might not be as cheap today. So do you think leverage could potentially expand?

I think there is room on our balance sheet, I think, in our strategy for increased leverage. Quite frankly, we were somewhat underlevered, I think, coming into 2021. And so that 3.2 ratio, I think, represents a more normal range for us. I would expect to see leverage we'd be comfortable with leverage anywhere between 3 and 4x in terms of debt to equity. I think the most important point there is really the one that Katie made relative to our capital markets strategy generally. We want to maintain optionality in terms of funding growth in our business. So we're not going to necessarily see ourselves all the way at the top of the range, but we're also going to make sure that we have the capital markets options available to us to operate on a more levered or less levered basis so that we can be opportunistic and strategic about our capital markets options. We don't target a specific level. I mean, I think what the level that falls out of our -- optimizing the capital structure generally will likely be in the 3 to 4x range. But what we're ultimately pursuing is a maximum return on equity and the most integrity in our balance sheet and from a risk management perspective. And so being match funded is much more important to us than being 3.2 versus 3.0 versus 3.7x levered.

And I guess, the ROE point is a good point. Do you expect with potentially rising short-term rates that your ROEs might expand over the next couple of years?

I think they will. I mean, again, over time, I think we are virtually 1-for-1 correlated in terms of ROEs with LIBOR SOFR. I think, again, looking at it, hypothetically, can be very tricky. But more broadly speaking, increase in base rates for a floating rate lender is going to result in higher ROAs and higher ROEs.

Some of your peers have expanded into different asset classes -- or not necessarily asset classes, but investment types, property investment, residential, et cetera. Do you have any expectation that you might alter your diversification into new areas?

So we certainly look at the whole range of what's out there. And I think one of the benefits of being part of Blackstone is, we have the knowledge, the access, the ability to execute on anything that we think is interesting. I think the key for us is, we love the stability, the performance, the high-quality current income that's produced by our current business model. And so anything that we added on, we would want to make sure stuck with that North Star of credit performance and predictability and was really additive to sort of complementary to the existing business. And I think those are really the frameworks that we think about -- when we think about new business lines. And there's certainly things out there. We're always looking at them. But again, just really want to be true to producing the highest quality dividend, the most predictable, attractive dividend we can for the risk that we're taking. And I think where we're starting from today at an 8% dividend yield of the portfolio of 65% LTV mortgage loans is just -- we've created a very high bar for ourselves, which we're proud of, and we want to make sure that anything we add is complementary.

We have another investor question. Would the turmoil in capital markets slow your expectations for loan repayments?

For loans, right?

Loan repayments.

I think, again, it gets back to what we were talking about before. It's really very correlated. So we don't have a crystal ball. I don't know how volatile the markets will get and for how long. But I think what we've seen in periods of calmness and in periods of volatility is that the originations and repayments are well correlated. And so that has resulted in a very stable portfolio and sort of level of investment of our capital and our balance sheet. And again, that's really the driver of earnings.

And then, just lastly, maybe you could just close out by reminding investors why you think your stock is an attractive value to that.

I think it's exactly what I just said. I think, the dividend yield when we think about the assets that are producing that current income stream and how stable that has been over time in high LIBOR, low LIBOR, periods of turmoil, periods of stability, different fundamental environments. We've just been able to produce, in my view, just a highly attractive stream of current income, which is reliable and transparent and predictable and producing that from fundamentally first mortgage loans to the best borrowers in the market on top quality real estate assets. I mean, we -- where I said, we look across all different markets, public, private, and I really think that the 8% yield we're producing from our first mortgage portfolio is one of the best things out there.

Great. And then, just where we end each session asking folks to use their crystal balls to predict where the 10-year treasury yield will be a year from now. It's currently, I don't know, around what?

Yes, I think there may be a house view, and I think 3% is what Byron Wein would tell you.

2.75% or something. I just told you we didn't have a crystal ball.

Great. Well, thank you for joining us. Really appreciate having you here.

Thank you.

Thank you.