Final Transcript - s21.q4cdn.coms21.q4cdn.com/266160035/files/doc_news/BXMT-Transcript-2Q-201… · Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27,

Final Transcript

Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call

July 27, 2016/10:00 a.m. EDT

SPEAKERS

Michael B. Nash – Executive Chairman

Stephen D. Plavin – Chief Executive Officer

Douglas N. Armer – Head of Capital Markets

Anthony F. Marone – Chief Financial Officer

Weston Tucker – Head of Investor Relations

ANALYSTS

Steve Delaney – JMP Securities

Jessica Ribner – FBR Capital Markets

Jade Rahmani – KBW

Don Fandetti - Citigroup

Douglas Harter – Credit Suisse

Rick Shane - JPMorgan

Ken Bruce – Bank of America Merrill Lynch

Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27, 2016/10:00 a.m. EDT Page 2

Coordinator Good day, ladies and gentlemen, and welcome to the Blackstone

Mortgage Trust Second Quarter 2016 Earnings 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.

At this time, I would like to turn the conference over to Mr. Weston

Tucker, Head of Investor Relations. Please proceed.

W. Tucker Great. Thanks, Derrick. Good morning everyone, and welcome to

Blackstone Mortgage Trust’s Second Quarter Conference call. I’m

joined today by Steve Plavin, President and CEO; Mike Nash, Executive

Chairman; Jonathan Pollack, Head of Blackstone Real Estate Debt

Strategies; Tony Marone, Chief Financial Officer, and Doug Armer,

Head of Capital Markets.

Last night we filed a 10-Q and issued a press release with a

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 10-K and 10-Q. We do not

undertake any duty to update forward-looking statements.

We will refer to certain non-GAAP measures on this call and for

reconciliations, you should refer to the press release and our 10-Q,

which are posted on the website and which have been filed with the

SEC. This audio cast 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 GAAP net income per share of $0.67 for the second quarter.

We also reported Core Earnings per share of $0.67, which was up from

the $0.65 in the first quarter.

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 nearly 9%. If

you have any questions following today's call, please let me know. And

with that, I'll turn things over to Steve.

S. Plavin Thanks Weston, and good morning everyone. BXMT delivered strong

results in the second quarter, with healthy origination activity and


continued expansion of our credit capacity, a key driver of BXMT’s

strong asset level ROI’s.

The BXMT origination performance through the first half of the year

reflects the success of our client-centric, balance sheet lending strategy.

We closed high quality business throughout the period, despite a

turbulent lending environment which constrained deal flow. While

many lenders retreated early in the year, we maintained our pipeline

loans and sought to originate more.

By early second quarter, credit markets had improved. More borrowers

came off the sidelines and our pipeline expanded. Transaction activity

in the property market is what makes our loan origination business

tick. We don’t need an opportunistic environment. A balanced market

with high levels of regular way transactions, the conditions we are

experiencing now in the US, provides an excellent backdrop for BXMT.

As a result, our new origination activity and pipeline remain strong. We

closed $859 million of loans in the quarter. The new loans were

primarily backed by office buildings located in the major U.S. markets

where our portfolio is concentrated. The $161 million average size of

our Q2 originations reflects our continued focus on larger loans


secured by major market assets where we can best utilize our

competitive advantages as part of Blackstone real estate.

Since quarter-end, we’ve already closed or have in the closing process

another $1.1 billion of loans, reflecting the uptick in transaction activity

that began in Q2.

To finance all of our activity, we continue to expand our lender base

and debt capacity. We added $1.4 billion of new credit facility capacity

during the quarter. We also closed additional asset specific financings

to round out a very strong quarter of credit expansion from a diverse

group of providers.

Our credit facilities —term, currency and index matched— help drive

our gross, asset level ROI’s which averaged 13.64% on originations

closed in the first half of the year. These ROI’s are well in excess of

comparable B-Note and mezzanine returns, even with our moderate

LTV, senior mortgage loan portfolio. Our secured corporate credit

facilities, structured to price inside of A-Notes, more efficiently lever

the equity invested in our loans.

Perhaps the most newsworthy event of the quarter was the Brexit vote,

which occurred in late June. The initial market reaction in the U.S. was


negative, but that quickly reversed and the equity markets established

new record highs.

For BXMT, 13% of our loan portfolio is secured by properties in the

UK- a mix of office, hotel and retail assets with an average origination

LTV of 61%. The collateral assets we anticipate being most affected by

Brexit are the transitional office buildings located in London, where

leasing activity is likely to slow. We have four loans secured by London

office assets. They have an average origination LTV of 48% and

represent 2% of our loan portfolio. We believe that the equity cushions

in these loans are more than sufficient to cover any reductions in value

that may occur.

We are hopeful that new European opportunities will emerge post

Brexit as competitive bank lending, now chilled, had made it very

difficult for us to compete. Because of the pre-Brexit market

conditions, we originated only one new loan in continental Europe and

the UK in the first half of 2016.

Brexit may have an additional consequence of increasing the focus of

global investment activity on US real estate where we expect values in

the major markets that we target to remain strong. Global demand for

stable investment opportunities and positive yields is accelerating as


we face an extended period of low or even negative interest rates

around the world.

Many of you on the call today will remember that we had one risk rated

4 loan in the portfolio over the last three quarters. We acquired the

loan from GE last year and, at that point, it had an outstanding loan

balance of $120 million. Our asset management team restructured the

loan in Q4 of last year which has led to a series of collateral asset sales

executed by the borrower. We are very pleased to report that during the

second quarter, the loan was repaid by an additional $43 million and

now has an $11 million remaining balance and an upgraded risk rating

of 3.

Our loan portfolio generated significant liquidity for BXMT in the

second quarter. The $966 million of repayments we received fully

covered our originations and we expect a continued active repayment

pace while our pipeline remains strong. We ended the quarter with

liquidity of $612 million, which translates to $2.3 billion of lending

capacity.

In closing, BXMT’s steady performance, despite the shifting and

volatile market backdrop we experienced in the first half of 2016,

demonstrates the strength and stability of our pure play, senior


mortgage business model. Our borrowers, many of which are repeat

customers, continue to seek our capital because of our reliability and

reputation for fair dealing. We appreciate the great relationships that

we have established with our borrowers as well as our lenders. For

stockholders, BXMT’s stable dividend currently yields 8.7%, a highly

attractive value proposition in today’s low-rate environment.

With that, I will turn it over to Tony.

T. Marone Thank you Steve, and good morning everyone.

This quarter, BXMT continued to deliver for its stockholders, with

strong earnings results, robust originations, and increased financing

capacity. Against a backdrop of continued market volatility and

geopolitical events during the quarter, our senior lending business

continues to shine.

We originated four new floating-rate loans and upsized three loans

during the quarter, for a total origination volume of $859 million. The

loans we originated in 2Q have an average yield of LIBOR plus 4.7%,

with an average LTV of only 57%. This compares to our current

floating-rate portfolio average yield of LIBOR plus 4.4% and


origination LTV of 61%, as we are able to lend at higher yields given the

favorable market dynamics Steve mentioned earlier.

Total loan fundings during the quarter of $848 million was in-line with

repayments of $966 million, as our pace of loan originations and

repayments have begun to converge with the seasoning of our portfolio.

We expect this trend to continue in the near-term; however the exact

timing and amount of originations and repayments may vary

somewhat from quarter-to-quarter. During the second quarter, the

majority of our loan originations closed earlier in the quarter, with new

loans outstanding on average for two-thirds of 2Q. On the other hand,

repayments occurred on average just about mid-quarter, resulting in a

larger portfolio outstanding during the quarter than we have on our

6/30 balance sheet and generating about $0.01 of additional earnings

for Q2.

Our portfolio continues to have no defaulted or impaired loans, and

following the upgrade of the previously “4” rated loan Steve mentioned

earlier, we no longer have any “4” or “5” rated loans. Our overall

portfolio LTV of 62% and risk rating of 2.3 (on a scale of 1-5) is

consistent with prior quarters, demonstrating the strong credit profile

of our loan book.


We financed our 2Q originations primarily using our existing revolving

credit facilities, which had an all-in cost of LIBOR + 2.04% at quarter-

end. During the quarter, we closed $1.8 billion of additional financing

capacity, including $1.3 billion of upsizes to existing revolving credit

facilities, $381 million of additional asset-specific financings, and a

new $125 million revolving corporate credit facility. This facility

provides additional flexibility to our capital structure and is designed to

finance new originations on an interim basis as a bridge to a future

senior syndication or long-term pledge under our $5.5 billion of

revolving credit facilities.

Turning to our operating results, we generated Core Earnings of $0.67

per share, up $0.02 from 1Q largely as a result of the higher intra-

quarter portfolio peak I mentioned earlier. We have maintained our

quarterly dividend at $0.62 per share, a 9% yield on yesterday’s closing

price, and an amount we clearly cover with our Core Earnings and that

we believe is sustainable and supportable given the scale of our

business. GAAP net income of $0.67 per share increased more

significantly than Core Earnings, up $0.06 from 1Q. This incremental

increase is driven by non-recurring mark-to-market income related to

our CT Legacy portfolio, which is carried at fair value and continues to

liquidate in the ordinary course. Notwithstanding the results of any

particular quarter, we believe that our Core Earnings will continue to


trend toward the expected run-rate of $0.62 per share over the

medium term.

Our book value increased to $26.54 from $26.53 at 3/31. Although the

increment is only $0.01, we believe this is a compelling statistic in light

of the foreign currency devaluation some companies experienced

following the Brexit vote in June. As we have highlighted on previous

calls, we finance our assets in local currencies, eliminating a significant

majority of foreign currency risk in our investments. Further, we hedge

a significant portion of our non-US Dollar equity using forward

contracts, further limiting our net foreign currency exposure. On a net

basis, we recorded an unrealized foreign currency loss of only $0.08

per share following a 7% decline in the pound and 2% decline of the

Euro against the dollar during the quarter. This modest decline of 0.3%

of book value was more than offset by retained earnings during the

quarter, for a net increase of $0.01 per share.

In terms of capitalization for our business, at 6/30, our debt-to-equity

ratio of 2.5x and total leverage of 3.1x are both in line with where we

began the quarter as the converging pace of loan originations and

repayments allows us to self-fund new originations while maintaining

consistent equity deployment. On the capital markets front, we will be

filing an updated shelf registration and prospectus supplements for our


ATM and DRIP programs later this week. These ordinary course filings

are not in connection with an offering, but will allow us to take

advantage of any compelling market opportunities that may arise in the

future.

To close, I would like to highlight some key thematic differentiators of

BXMT that are reflected in our 2Q results, and in our overall $10

billion senior lending business:

We remain highly correlated to increases in USD LIBOR, with an

increase of 50bps generating approximately $0.04 of additional Core

Earnings on an annual basis.

Our earnings are entirely driven by the net interest income generated

by our portfolio, without reliance on the securitization or other

transactional markets.

We generate returns for our shareholders by making fundamentally

low-risk senior loans and financing them prudently with best in class

credit facilities free of capital-markets-based margin call provisions.

And lastly, BXMT is uniquely positioned among mortgage REITs and

specialty finance companies as a component of Blackstone's real estate


business, providing us with expertise and market insight that drive

every facet of our business.

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

Steve Delaney, JMP Securities.

S. Delaney Thank you, and good morning, everyone. So looking at the second

quarter origination activity, this maybe an oversimplification, but it

looks the current opportunity in the market is offering Blackstone

Mortgage more yield for less risk in terms of LTV than you had

generally seen over the last two years.

I'm just curious if there is anything specific about the loan mix or a

couple of higher yielding loans that may have pushed things up a little

bit in terms of the spread over LIBOR, or is my description of the

market opportunity looking like more yield for less risk is that a

reasonably accurate description of what you're seeing? Thank you.


S. Plavin Thanks for the question, Steve. I think some of the originations that we

closed in the second quarter were carried over from being originated in

Q1 during a period of time of high volatility and wider spreads.

There is a little bit of lag between origination and closing. So you do see

the benefit in the Q2 closings of the Q1 market environment. Spreads

have moderated since the end of the first quarter. Although I think

we'll continue to generate gross ROIs in the same ranges as our historic

levels, a couple of the loans that we closed in Q1 really benefited from

having gone through that very turbulent period.

S. Delaney Got it. That's helpful to have that color and certainly first quarter was a

unique period and I guess that is another reason why you guys try to

maintain a lot of liquidity so that you can be opportunistic if you do see

those stress conditions and take advantage of it.

Something more specific, I was listening to a hotel analyst today on the

morning call and she mentioned that three of her hotel REIT's had just

in last 24 hours had dropped their RevPAR guidance.

Now hotels are I think 19% of your portfolio. It's your second highest

property type behind office. We just appreciate any comments about

how Blackstone sees the hotel market today and from a lending


standpoint and within your portfolio if there are any defensive

characteristics that you would point to in your portfolio? Thanks.

S. Plavin I think, Steve, what we've seen in the hotel sector is obviously the

deceleration of RevPAR growth. Growth in most markets and most

markets that we’re active in as a lender is still positive, which is again

at a slower pace.

I think we'll begin to see more and more hotel lending opportunities as

a result of the REITs being somewhat on the sidelines and not being as

active buyers as they have been historically.

We're very cautious on full service hotels and hotels in general, which

are most of the deals that were declining. I do think there will be some

special situations out there that will enable us to make very strong

hospitality based loans, but it's definitely an asset class to view

cautiously.

S. Delaney Got it. And I think that's where we can read into it, it seems like most of

your activity in the second quarter was office, would you describe that

as maybe the most appealing sector for you right now from a property

type standpoint?


S. Plavin I think it really varies market to market and situation to situation.

We're opportunistic, so we can find good loans in all property sectors

and we try and support our client activity. If we see situations that we

think are subject to greater risk and we don’t pass, then we'll lend less.

Our LTVs reflect the potential volatility in our loans. So our low LTVs

give us a lot of protection from any kind of performance issues that

may exist in hotels or in any other property sector that we're active in.

S. Delaney Good point. Well, thank you for the color. I appreciate it.

S. Plavin Thanks Steve.

Coordinator The next question will be from the line of Jessica Ribner, FBR Capital

Markets.

J. Ribner Hey guys. Thanks for taking my question. Just to kind of piggyback off

of Steve's question, are there any loan types or sectors that you're

staying away from in the current environment or is it kind of business

as usual?

S. Plavin I think as we get further into the cycle, we become more and more

cautious and spend more time thinking about where things could


migrate to. We're focused on larger assets in the major markets,

markets where we see dynamic demand for space and I think there are

still good opportunities in those markets.

We actually see values increasing in those markets given the view of

low rates persisting, maybe for even longer than what people thought,

and more capital coming into the U.S. and finding its home in real

estate in those more liquid, major markets.

So we're sticking to our knitting, focused on larger loans, top sponsors

and better assets. We're not choosing the current market situation to

go and venture into secondary and tertiary markets and we don’t think

the primary markets are oversold.

We think that the opportunity to lend in those markets and in all asset

classes is good as long as you have the information that we have and a

realistic view of what might happen in the future.

J. Ribner Okay. Thank you. And just a quick question on your earnings run

rate/dividend, I know you mentioned the $0.62 run rate, but it looks

like you've been pretty easily covering the dividend. How do we think

about that?


D. Armer Hey, Jessica, it's Doug. If you look back over the last four quarters,

you’ll see we have covered the $0.62 dividend pretty healthily. That's

been a function of a couple of different factors mostly related to the GE

loan acquisition: the additional leverage and the relatively short term,

but high yielding fixed rate loans that we took on in that acquisition.

Those play through our results and will continue to play through them

through 2016 into 2017.

So we sized the dividend to be sustainable for the long term based on

our floating rate senior mortgage business, and we're continuing to see

some accretion to that on a less recurring basis through 2016.

In this quarter, we had a good deal of repayments. Some of those

repayments came with prepayment penalties and other non-recurring

items that increased earnings a little bit more than the street expected

and more than the run rate might indicate.

We do expect that to continue sporadically through 2016 and into 2017,

it’s part of our business and it does add a little bit to our yield. So the

dividend is sized conservatively and we're very happy to cover it at

105% to 110% on an ongoing basis.

J. Ribner All right. Fair enough. Thanks so much.


D. Armer Thanks, Jessica.

Coordinator The next question will be from the line of Jade Rahmani, KBW.

J. Rahmani Thanks for taking my questions. Just to clarify on the dividend

commentary including what was said in the opening remarks, based on

the run off of the fixed rate, high yielding portfolio and the

prepayments that you’ve been receiving, once that process is complete,

do you believe that recurring core earnings will match that current

dividend level?

D. Armer Jade, hey it's Doug. We don’t give guidance regarding future periods

that specifically. But I would say that if you think about our dividend

policy in general, you’ll see we've set it conservatively, set it at a level

that we believe is sustainable. So I think it stands to reason that we'll

cover that dividend going forward, we wouldn’t have set it there if we

didn’t think so.

J. Rahmani Okay. Just wanted to ask about equity issuance and how you think

about that, it seems that the last couple of quarters repayments are

running close to or slightly in excess of originations over the last say

several quarters particularly this quarter.


So where the stock is currently trading and it’s up modestly today

would you be contemplating any equity issuance and if you made that

decision, what will drive it? Would it be a specific opportunity?

S. Plavin Jade, we feel really good about our liquidity and the firepower that we

have in the business today. You're right in that our repayments have

been in sync with our originations and have been providing us with

liquidity to fund the business.

We look at equity issuance dependent upon where we see the

opportunities to deploy capital in our business. If the deployment

opportunities expand, and we're hopeful that they will, then we'll look

at issuing more equity when we need it for our business.

That’s predicated upon where the stock would be trading as well. We

want to sell stock into a market with a strong demand and when we’re

priced more fairly than where we see it today. But at the moment, we're

very satisfied with our current liquidity and the outlook in terms of

originations and repayments.

J. Rahmani Thanks. And what are your thoughts on diversifying the business

model? So far you’ve stuck to your niche in the first mortgage space


primarily, are there other sectors that could be attractive such as triple

net lease or even special servicing or are there other ways to diversify

by extending duration or doing more fixed rate lending?

S. Plavin We believe that the business that we run at BXMT, the floating rate

direct origination model, is the best use for our capital and we have

plenty of legs in the business model. So we haven’t really felt any need

to diversify to what we view to be the second and third best alternative

for our capital.

That continues to be the case as we go forward. We believe that the

dividend that we produce is more stable and has a lower volatility than

those that are involved in these other activities, which are inherently

more volatile than generating dividends from a portfolio of senior

mortgage loans.

So we’re pleased with where we are, notwithstanding that we look at all

the alternatives to expand to make our business better to create more

value for our shareholders. If we saw something that we thought was

truly complementary and additive, then we would certainly give serious

consideration to add it into the mix.

J. Rahmani Thanks very much for taking my questions.


S. Plavin You’re welcome.

Coordinator Your next question will be from the line of Don Fandetti, Citigroup.

D. Fandetti Steve, there are some concerns in the market about commercial real

estate property values being at very peak levels, you're seeing this feel

pretty good at least in the near-term just given liquidity, can you talk a

little bit more about what gives you that confidence?

And then secondarily, the early repayments that you're seeing over the

last quarter or two, are they just normal repayments where the

borrowers is just going for permanent refinancing or is it more

opportunistic?

S. Plavin I think on the repayment front, we're seeing a mix of repayments from

property sales and from refinancing. Some of the GE loans that we had

in the portfolio were fixed rate loans and when the call protection

expired they’ve been repaid.

Some of the GE loans in the residential sectors have Fannie and

Freddie alternative take outs, which are obviously at much lower rates

than we’re able to offer.


But in general, our asset management activities are focused on

maintaining the loans that we feel are strong in our portfolio. We've

had good success in extending the duration of the loans that we feel are

very additive and appropriate for us to maintain. That will continue to

be the focus.

But in a liquid market like today, we'll still see a lot of repayments and

this generally is correlated with origination activity. When we see more

opportunities to lend, it is more likely that our existing loans will be

impacted by the strength of property performance and debt market

conditions.

As it relates to valuations, a lot of what we we’re seeing relates to yields

in the market. Cap rates are still well in excess of treasury rates and the

spread between cap rates and treasuries are still historically wide.

We don’t see any upward pressure on rates. In fact, we see downward

pressure on yields almost everywhere in the world. So we feel that

property cap rates are potentially going to go lower as opposed to going

higher and that’s a huge driver of where we see valuations, especially in

the markets that we were involved in.


We try and focus our credit activities again in major markets that are

liquid and have dynamic sources of demand. We feel that by focusing

in those markets the valuations that underlie our loans will endure;

that’s our strategy and we feel very confident that will continue to be

the best strategy available to us as we go forward in terms of our

lending business.

D. Fandetti Thanks.

Coordinator The next question will comes from the line of Douglas Harter, Credit

Suisse.

D. Harter Thanks. Doug touched on this a little bit, but just want to touch on it a

little more, you have a very strong liquidity of over $600 million. What

is the target, minimum level that you guys want to keep and does that

new interim financing facility lower that amount given that it gives you

more flexibility?

D. Armer Hey Doug, it’s the other Doug, answering the question. We’ve talked a

lot about a target liquidity in the range of $400 million to $600

million, which basically relates to a weighted average deployment of

our equity of 80% and that’s what ultimately informs the $0.62


dividend based on the ROIs that we're able to generate in our senior

floating rate business.

The swing line does actually help us with that math. It allows us to

maintain liquidity in non-equity form, or non-equity funded liquidity,

so that we can increase that proportion of our equity deployment. So

closing that gave us a little bit more range in capital markets terms.

It also helps us operationally in terms of closing loans and executing

the business and so it allows us to up the stroke in terms of

originations, which will also result in a higher degree of equity

deployment on average.

So those are the parameters that we're working within on that front

and as you know, Steve mentioned repayments and originations have

been roughly in balance and we've been operating inside that range for

the last few quarters now.

D. Harter And then I guess along the lines of non-equity liquidity, how are you

thinking about other capital structure opportunities at this point,

whether its converts, high yield notes or something else?


D. Armer We're thinking about those, obviously health has returned to those

marketplaces and so the economic equation is more appealing than it

was, certainly, six months ago.

The ultimate question for us is what investable capital do we need in

order to fund our originations and our deployment. And those are good

sources of capital that are accretive that will allow us to add a little of

leverage to the balance sheet.

We're very low levered now with a 2.5 times debt to equity ratio. So

there is certainly room in the capital structure to add say the half a turn

of leverage that would result from issuing high yield or convertible

debt.

But we don’t have a need for capital given the current status of the

business. So it’s a market that we keep our eye on, but it's not

something that we have immediate plans to tap.

D. Harter Great. Thank you.

Coordinator Your next question will be from the line of Rick Shane, JPMorgan.


R. Shane Hey guys, thanks, most of my questions have been asked and

answered. But I think I would like to make sure we understand the

dynamics here, the description is that of a reversion to regular way

business and in the way I would think of it is Q1 was very volatile, low

deal volumes, low repayments that’s spilled through into Q2 in terms of

the basically 20 basis point pick up in yield in terms of the originations.

We also saw I think a return to repayments on the fixed rate portfolio,

which has frankly been part of the outlook for a long-time or since the

acquisition I should say and my expectation at this point is that we'll

continue to see that and a reversion to normal originations of floating

rate paper and continue to pay down of that fixed-rate portfolio?

S. Plavin Yeah. Rick, the originations in Q2 were really four loans and so it's

really hard to generalize across such a small sample. If we had one

outlier loan, it would really impact the average of those four.

So I think the profile of the business is consistent as it has been over

the three years or so, since we've been executing it. Spreads did widen

in Q1 and we did benefit a little bit from that in our Q1 and Q2

originations, but not to a great extent.


And so I see the business continuing in a pattern that it’s developed

over the last several quarters. Our pipeline is very active now. We're

seeing a lot of transactions in the market. So it feels like a good time for

our business.

We're excited about it. We're able to continue to maintain strong asset

level ROIs with relatively lower risk senior mortgage assets and

generate our dividends and what we’re trying to do is get the market to

appreciate the value of our dividend and how it’s differentiated from

those who generate it from more volatile activities to hopefully see

some more upward movement in the share price.

D. Armer I would just underscore that relative value point regarding our

dividend yield. We’re trading today at roughly 8.5%, so we're 700 basis

points wide of the 10-year treasury and that’s on a portfolio of first

mortgages that are levered less than 2.5 times in terms of the

company’s debt to equity ratio.

It’s a really incredible relative value story that we're able to generate

from this very simple business model. And so when you talk about

return to the regular way business, we see it as a return to an extremely

appealing, safe business.


R. Shane Okay. I’ll accept that refinement. I guess the other question I would

have is obviously given the size of the portfolio acquisition that you

made and the additional capital that you took on to bring that portfolio

on, as that portfolio runs off, you had a origination platform that was

able to grow a $4 billion, $5 billion balance sheet.

I’m assuming given the brand and the scalability that your expectations

are that you will be able to scale the originations up over the long term

to replace that run-off and this won’t be a story where you have excess

capital.

S. Plavin I think you're already seeing that our pace of originations really reflects

the $10 billion portfolio not the $4 billion to $5 billion that we had

prior to GE and so our originations, which are in an $800 million to $1

billion range, are sufficient to keep that $10 billion portfolio deployed

and we’re seeing the ability to originate more in the current market

environment.

So I think not only am I confident that we'll be able to keep the $10

billion of portfolio deployed over time, but there is a good opportunity

for us to grow that if the market continues to stay strong as it is today.

R. Shane Right, thank you very much guys.


S. Plavin Thanks Rick.

Coordinator The next question will comes from the line of Ken Bruce, Bank of

America/Merrill Lynch.

K. Bruce Thanks, good morning. Firstly, congratulations on another very solid

quarter. Thanks for making our jobs easy. My question relates more to

I guess how you're thinking about future opportunities, there is

obviously some tension in the market as it relates to commercial real

estate and how -- whether values are toppy or not and a lot of other

things that are kind of a wash.

And some of that has to do with the CMBS maturities, some of that has

to do with essentially changes in risk retention and the like, but how do

you the market is going to play out either differently over the course of

next six months, how might that impact what opportunities you're able

to take advantage of in the market and how you think that kind of

works into the fundamentals of your business?

S. Plavin I think on the margin we are seeing a few more opportunities than we

had been previously as a result of the CMBS market not functioning

very well, both fixed and floating, and we’re more impacted by the


floating rate CMBS market than by the conduit market. But when that

market functions more poorly, we see more opportunity which is

obviously favorable to us. I don’t see a dramatic change in the

landscape over the next six-month period. I don’t think it's the time to

sort of up the risk profile and reach for yield, that’s not what we do.

We keep the risk dialed down and generate our returns taking as little

risk as we can from very safe senior mortgages, and that will continue

to be our profile to make sure that our business and our loans endure

whatever cycle may occur.

But we're confident that given our ability to utilize the Blackstone

Investment platform and focus our energies, as it relates to loan

originations, in the right places, in the right markets, with the right

sponsors and the right assets, our loans on those properties will endure

the cycle very well. And again, I don’t see anything happening over the

next three to six or nine months that is going to cause that to change.

K. Bruce Okay. Thank you. And you mentioned to one of the prior questions

that with rates where they are that there may be some downward bias

in terms of cap rates and that should help valuations.


I'm interested in how you think about fundamentals in the kind of

major markets and major food groups that you're looking at. Are we

seeing any pressure on fundamentals or do you think that from that

point of view that the business commercial real estate business is still

on a good footing?

S. Plavin I think demand for space in most asset classes is slowing. So I don't

think it's as robust as it's been over the last year or two from a demand

standpoint, but demand is still generally positive in most markets and

in most asset classes.

Slow growth works quite well in commercial real estate in the low rate

environment. So I think the fundamentals are in an okay spot. I don't

think we're going to see the huge uptick in office building leasing and

hotel RevPARs that we've seen in prior years, but in the major markets

with the right properties there’s still enough demand to make top

assets very viable in the current market.

K. Bruce Great I understand, you look first dynamic demand market. So I won’t

ask any questions about which markets you don't like, but thank you.

That's been very helpful. Appreciate the color.

S. Plavin Thanks Ken.


Coordinator And at this time, we have no further questions in queue. I would like to

turn the call back over to Management for any closing remarks.

W. Tucker Great. Thanks, everyone for joining us this morning and please reach

out with any questions.

Documents

Final Transcript - s21.q4cdn.coms21.q4cdn.com/266160035/files/doc_news/BXMT-Transcript-2Q-201… · Final Transcript Blackstone Mortgage Trust, Inc.: 2Q 2016 Earnings Call July 27,