Weston Tucker – Head, IR Steve Plavin – CEO and President Paul Quinlan – CFO and Assistant Secretary Doug Armer – Treasurer and Managing Director, Head of Capital Markets.

Aaron Sagonovich – Evercore Don Fandetti – Citigroup Joelle Hawk – Wells Fargo Jade Rahmani – KBW Rick Shane – JP Morgan Dan Altscher – FBR Ken Bruce – Bank of America.

Welcome to the Blackstone Mortgage Trust second quarter 2014 investor call. I would now like to turn the conference over to Weston Tucker, Head of Investor Relations. Please proceed..

Great. Thanks, Jasmine. Good morning and welcome to Blackstone Mortgage Trust’s second quarter 2014 conference call. I’m joined today by Steve Plavin, President and CEO; Mike Nash, Executive Chairman; Paul Quinlan, CFO; Doug Armer, Treasurer and Head of Capital Markets; and Tony Marone, Principal Accounting Officer.

Last night we filed our 10-Q report 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 everyone that today’s call may contain forward-looking statements which by their nature are uncertain and outside of the company’s control. Actual results may differ materially.

For a discussion of some of the risks that can affect the company’s results, please see the risk factors section of our Form 10-K. We do not undertake any duty to update forward-looking statements. We will refer to non-GAAP measures on this call.

For reconciliations to GAAP measures, you should refer to the press release and to our Form 10-Q filing each of which have been posted on our website and have been filed with the SEC. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without consent.

So a quick recap of our results, before I turn things over to Steve. We reported core earnings per share of $0.43 for the second quarter, which was flat compared to the first quarter as a sharp sequential increase in net interest income offset the impact of additional shares from our April equity offering.

A few weeks ago, we paid a dividend of $0.48 per share with respect to the second quarter. If you have any additional questions following today’s call, you can reach out to me or Doug directly. With that, I’ll now turn the call over to Steve..

Thanks, Weston, and good morning, everyone. I’m very pleased with our strong performance in the first half of the year and our momentum heading into the second half. Our core loan origination business exceeded our expectations for the quarter.

We closed 11 loans, representing total commitments of $1.1 billion, more than $5 billion of total commitments since our relaunch in May of last year.

We have established a diverse senior mortgage portfolio comprised mainly of office, hotel and multifamily loans with other 60% of the collateral located in major markets, New York, California and the UK.

At the time of our, (re IPO) we emphasized that there was a significant embedded value in our legacy portfolio that wasn’t fully reflected in our financials. This quarter, much of that value was delivered to shareholders with $0.27 per share of net income for promote payments related to CTOPI, a legacy opportunistic debt and equity fund.

This realization came sooner than anticipated and is a significant milestone in terms of the wind down of the legacy business and the deployment of legacy capital into our loan origination business. We were also able to retain most of this income and book value. And at quarter end, BXMT’s book value per share stood at $25.51, up $0.88 per share.

We have discussed on previous calls the anticipated growth of our origination business in Europe. In Europe, the recovery in property values and cash flows are in an earlier stage than the US and the financing markets are less efficient. These credit conditions are very favorable for our lending business.

In the more opportunistic environment, there’s less regular way transaction activity and related borrower demand. As a result, market presence, local knowledge and the ability to find opportunities off the run are critical to succeed.

Like in the US, our European lending platform benefits greatly from Blackstone’s extensive real estate ownership and very active opportunistic and core plus equity investment initiatives in the region. This market leading position is tremendously beneficial in sourcing and evaluating prospective loans.

Our experienced London-based debt team led by Rob Harper has made great strides in developing the European senior mortgage business for BXMT.

During the quarter, we closed three loans totaling $424 million in Europe including retail and hotel transactions in the UK and our first Euro denominated loan which was secured by an office portfolio in the Netherlands. This activity drove the European loans in our portfolio to 16% of the total as compared to 4% at the end of Q1.

Even with the significant growth in the US and European loan portfolios, we have maintained our levered returns and we strictly adhered to our primary mandate of keeping our investments within what we consider to be traditional senior mortgage risk. Our portfolio LTV remained at 63% in line with prior quarters.

To further support the growth of our loan origination business, in April we issued $255 million of equity. We also significantly extended our debt capacity during the quarter, including the addition of a $500 million credit facility.

Our total debt capacity now stands at nearly $4 billion, including our multi currency credit facilities and asset specific financing and we continue to work on developing additional dollar, pound and Euro denominated credit including our ongoing analysis of CLO and term loan options.

We have seen increased competition in certain segments of our market. The reemergence of full floating rate CMBS has compressed lending spreads for fully funded loans on more stable properties.

For the majority of our business, traditional lending against assets not yet fully leased or with post closing capital needs, the CMBS originators are not a factor. To address spread compression resulting from increased competition and to maintain the lowest possible cost of debt capital, we continue to actively manage our funding costs.

During the quarter, we negotiated material pricing improvements for new credit facility borrowings and extended term with our initial credit facility providers. Overall, we are as excited about the prospects of the business as we have ever been.

I believe that we have the best brand of the business as well as the strongest platform and the most talented team. We remain committed to protecting and growing our investors’ capital through our strategy of disciplined growth and are focused on creating a LIBOR index low volatility dividend.

And with that, I’d like to turn the call over to Paul to review our financial results..

Thank you, Steve, and good morning, everyone. Our financial results demonstrate the continued strong execution of our business plan on a number of fronts. In our legacy segment, 2Q marked the first realization of carry interest income in CTOPI, the CT opportunity fund in which BXMT has a 55% promote interest.

The realization of $13 million of net income from the CTOPI promote contributed to $0.70 of GAAP net income this quarter. As Steve mentioned, this was a significant step in winding down the CT legacy portfolio.

There is still earnings upside in selected legacy assets reflected in the unrealized markup in CT legacy partners, which contributed $3 million to income in the quarter as well as $8 million or $0.16 per share of unrecognized promote income in CTOPI.

However, the legacy segment now represents only 3% of our capitalization, down from 9% in last year’s second quarter, so 97% of our capital is dedicated to our core loan origination business.

Our core earnings in the quarter, as Weston mentioned, were $0.43 per share, the results of a 27% sequential increase in the net interest income as our origination engine drove strong volume through the first half of the year.

This increase fully offset the downward pressure on core earnings per share from our accretive equity offering in April, reinforcing the disciplined approach we take to sizing our offerings. Excluding the impact of the stock issuance, our core earnings would have been $0.51 per share.

Expenses included in core earnings were up $1.1 million during the quarter due to the increase in management fees associated with the April issuance as other G&A remained approximately flat at $1.1 million. Net loan fundings in the quarter $828 million, including $173 million of repayments.

We focus on this metric from an earnings perspective as net fundings represent an in place growth drive to net interest income. Net fundings are also important from a capital management perspective as we consider future capital needs. Loans closed during the quarter carried an all-in yield of LIBOR plus 4.8%.

This was slightly lower than our overall portfolio yield, however ROIs remained consistent due to lower financing costs for new originations. On the liability front, we tapped asset specific financing sources for three transactions during the quarter.

We sold two senior participations for $371 million and closed on a $194 million asset specific repo agreement. This is an important alternative funding source for our business, providing additional capacity in our credit facilities.

These agreements are typically fully non-recourse and also provide diverse funding terms and pricing directly linked to the underlying financed assets.

Our overall leverage level at quarter end was approximately two times with total liquidity of more than $350 million representing potential leverage origination and funding capacity of approximately $1.3 billion. We paid a dividend of $0.48 in the quarter, representing 7.5% yield on book value.

We think shareholders benefit from the stability of the cash we generate from the BXMT platform in the form of senior loans on the asset side of our balance sheet coupled with highly structured, low cost leverage to generate a gross ROI of LIBOR plus 12.7%. We also think there are several sources of upside from the platform.

Most imminently, from the continued growth and seasoning of the business in both the US and Europe, in the medium term from rising rates as our floating rate portfolio would generate a 10% plus increase in earnings from a 100 basis point increase in LIBOR and in the long term from Blackstone’s sponsorship and continued focus on growing the business to maximize long-term returns for shareholders.

And with that, I will ask Jasmine to open the call to questions..

(Operator Instructions) And your first question comes from the line of (Aaron Sagonovich) with Evercore. Please proceed..

It was a very impressive origination quarter. I was wondering if you could talk about maybe the timing of the closings. Where they a little bit later in the quarter? And then generally just the competition you’re seeing for the transitional commercial real estate asset loan that you’re providing..

Hi, Aaron, how are you? It’s Paul. I’ll take the first piece of the question and then hand it off to Steve. So the average origination for the quarter closed approximately two-thirds of the way through the quarter..

And I’ll take the second half. I think we’re seeing increased competition in the segment but we still find that we’re on a competitive basis still waiting our fair share or more than our fair share.

There’s a new CMBS initiative out there for floaters but it’s only impacting us slightly, as I mentioned in my prepared remarks, as it relates to some of the more stabilized assets that we finance.

For the more transitional assets, which is again the core of our lending activity, we are seeing some competition but in general, we’re seeing plenty of opportunity to get capital invested both in the US and in Europe..

Great, thanks. And then in terms of your funding, you have a lot of capacity. You continue to increase capacity with your credit facilities.

How far do you think you can take those and what other funding options do you think you’ll use as you grow the balance sheet going forward?.

As it relates to capacity, we think we have… it’ll ultimately depend upon market conditions, the pace of new origination loan closings and repayments. But we think we have the capacity to go another quarter or two given the capital that we have on hand. We do intend to increase leverage over time. Our leverage at quarter end was about two times.

We do have a goal of trying to increase that leverage given our portfolio of senior mortgages which we think could handle a little bit of a higher leverage. We have a lot of debt capacity both in the US and in Europe and we’re actively working on increasing that capacity. I talked about that as well.

We’re looking at the CLO market and the term market but there’s a lot of capacity left with the banks and our more traditional sources. So we continue to push those sources very hard to give us very, very efficient terms and we’ve had success in doing that..

Thanks. And then lastly, the 4.8% all-in yield that I think you quoted for new investments in the quarter, does that include the structured participation interests that were sold? So I think it was something like 12.7% all-in yield associated with that.

Or is that just strictly from the origination level?.

That was related to the loans originated during the quarter, so any loan originated during the second quarter would have been included in that 4.8%..

Aaron, are you referring to the participation interest sold in the UK loan we originated during the quarter?.

Well, there were a couple of I guess participation loans that if I back out the senior piece associated in the 10-Q it looks like the average yield remaining on your interest would be about 12.7%, so I just was curious as to whether or not that was included in that 4.88% yield or if that was just before you actually build those participations..

That 4.8% is the unlevered asset yield and those participations sold that you’re referring to sort of represent leverage to that 4.8%..

Great. Okay. Thank you very much..

And your next question comes from the line of Don Fandetti with Citigroup. Please proceed..

Steve, it sounds like the competition is certainly modest. I was wondering if you could just elaborate a little bit. Are there new players at the table when you’re originating a loan or is it just CMBS market? And then secondly, it seems like you’re likely to be in a position to hold leverage returns, at least in the near to intermediate term.

Do you think that that’s the case?.

Thanks, Don. In terms of the first part of your question, as it relates to competitors, the group of competitors we see is relatively unchanged and so the 15 or so months that we’ve been originating loans, the combination of private equity funds will have a lending mandate.

Other mortgage REIDs, occasionally banks and now occasionally the floating rate CMBS originators and the banks and the CMBS market tend to really only focus on loans that would represent the most conservative and stabilized financings that we have the ability to compete for.

The core of our business, we haven’t seen a lot of new competitors, so as a result, we find that we continue to win on a relatively high percentage of the time. So we think the competitive landscape is favorable. In Europe, the challenge there is really finding the opportunities. The market is more fragmented and less efficient.

We benefit greatly there from the Blackstone footprint in London. We have a very strong presence in Europe because we’re investing a huge equity fund there as well as pursuing the lending activity. So we’re well positioned there to find these sort of off the run loans.

And so I think as a result of sort of net-net, I feel like we’re in a strong… with the competitive position of the company is as strong now as it’s been in the entire sort of 15 or 16 months of our recent history.

Second half of the question, Don?.

Yeah, I was just wondering if you expect that spreads come in a little bit if your financing cost will continue to sort of drive down and that as far as you can see out the levered returns look like they’re likely to be steady?.

Yeah, I think that we’ve been able to maintain the levered returns partly from holding lending spreads and part from reducing the cost of our credit facilities.

One of the nice things about how we finance ourselves is as spreads compress on the asset side, we’re able to push an equivalent compression on the liability side given how we choose to capitalize ourselves. So I see that construct changing, not changing.

Also, we’re able to increase leverage at the asset level if we choose and, again, we’re trying to increase the overall leverage of the company a little bit because we feel like we’ve been under levered. And that also serves to maintain or enhance our asset level of levered returns..

Thanks..

And your next question comes from the line of (Joelle Hawk) with Wells Fargo. Please proceed..

Thanks.

I guess a question on obviously credit is really good right now and I guess across the industry but when you guys look out, whether it’s geography or property type, are there certain things, not necessarily transaction based, but certain markets or within those markets, property types that you shy away from that perhaps are either overheated or don’t make economic sense to you?.

There’s certainly things that we like more than others in terms of what we see in the market. We have a strong preference for major markets and larger transactions. Those we find the demand at the tenant level is strongest for those properties. It’s most synergistic with what we’re doing on the equity side at Blackstone.

We find that liquidity stays longer with those assets and (inaudible) leave returns more quickly. Our big bias tends to be again towards larger transactions in major markets, the primary asset classes. We tend not to redline anything.

We will look at anything that comes in, see if there’s a possibility to make a loan against it that we think would be accretive to our business. But in general I think it’s the major market focus that distinguishes us from others..

Okay but nothing stands out on a negative side either property type or geography at this point..

I think we’re cautious on suburban office. We’re cautious on suburban full service hotels. We’re generally cautious on anything that involves a major aspect of development. We’ll finance development transactions but we’re very mindful of keeping leverage low and having very tight loan structures. But I think, no, there’s not a lot that we redline..

Okay, great. Thank you..

And your next question comes from the line of Jade Rahmani with KBW. Please proceed..

Thank you.

On the competitive landscape, have you seen anything, any changes in underwriting standards that concerns you whether it be uncertain deal types, structures? And can you comment on where the competitive pressure is greatest, whether it be on yields or originations, exit fees or something?.

I think as it relates to sort of underwriting and credit creep, I mean, typically the way it works, right, is that the most conservative deals get done at the beginning of the cycle and the most aggressive at the end.

So I think where we are now is sort of mid cycle, so we are seeing a little bit more pressure on leverage and on structure but not at a level that’s sort of alarming to us at this stage. We’re always very mindful of how we look at credit and what we’re willing to do. But I do think that the market as for the time being is not in a dangerous spot.

And where we’re feeling competitive pressure is more on the lower leverage, more conservative loans that we try to pursue where we might have bank competition or CMBS competition. That’s generally… what we feel there is generally rate pressure.

They’ll just go lower in rate and if we can’t hold our levered returns on those transactions, we won’t pursue them. A lot of times, even on transactions with that profile, borrowers need certainty of closing or they have timing pressure or there’s a complex factor in the deal that they feel wouldn’t be well addressed by the bank or the CMBS market.

So we can still win a share of those transactions. But those are the ones where, again, we feel the pressure most occasionally from the banks and the CMBS originators..

Okay.

And are you guys being able to generally maintain your origination and exit fees?.

We have been able to, for the most part, maintain our origination fees unchanged through the 55 or 56 loans that we’ve now classified as closed during closing. We have never been… we’ve typically not had exit fees as a component of our revenue envelope.

We do have prepayment fees meant to protect the minimum duration of the loan and we’ve been able to hold those I’d say in general at around the 18 month bubble..

Okay. I think you guys regularly note that your dividend is LIBOR index.

I wonder with respect to the underlying borrowers, what do you think is the ability of the cash flows of the properties at say 100 bases? That is within the envelope of not impacting those properties?.

Yeah, I don’t think there would be any credit impact for I would say even 200 or 200 to 300 basis points of LIBOR uptick and we underwrite presuming a much higher stabilized interest rate, an interest rate on the exit and current rates and so our loans’ really built to withstand much higher rates.

In addition, also, we do require for most of our loans that the borrowers purchase an interest rate cap that would pay out if LIBOR exceeded a threshold level, typically around 3%..

Okay, that’s very helpful. Just regarding the participations that were sold, I think the presentation says your loans comprise 94% of the portfolio.

Does that count the participations in that 6%? And also can you just maybe provide a little color on what the participations were? Are you guys retaining a fee note or are they already past due? What’s your (inaudible)?.

Yes, Jade, hey, it’s Doug. I can answer those questions for you. The participations sold that show up on the balance sheet sort of correspond to the assets that are consolidated on the balance sheet.

So the 6% of loans that aren’t first mortgages consolidated as assets are really related to those investments that we made where there aren’t participations sold consolidated on the balance sheet.

If you look at our earnings release on Page 6, it’s the off balance sheet senior interest sales that sort of give rise to that 6% of loans, which aren’t consolidated. So none of those occurred this quarter and all the participations sold relate to senior loans that are on our balance sheet..

Okay and can you just… are those A notes that you sold and you retain a fee note?.

That’s right. Typically we send out consolidated treatment is when we sell an A note from our balance sheet. So we maintain (inaudible) with the borrower. We own the whole loan and as a foremost financing we’ve sold the participation to a third party..

Okay. Great. Thank you very much for taking my questions..

And your next question comes from the line of Rick Shane with JP Morgan. Please proceed..

Thanks, guys, good morning. It’s safe to say that my questions on competition have been asked and answered, so thank you..

You’re welcome, Rick..

Thanks, Rick..

And your next question comes from the line of Dan Altscher with FBR. Please proceed..

Thanks, good morning. I appreciate you taking the call.

With now the largest loan being the UK hotel, can you maybe talk about the investment merits of that loan and as you walk through on the investment committee, what do you see as the appeal, the attraction relative on pricing? Again, what are the overall merits that warrant a very sizeable loan here in the region?.

That loan was a really compelling loan that we I think were able to win on a competitive basis by moving very quickly and having some prior knowledge of the asset base and the situation which led rise to the loan. The loan itself is a 57% loan to cost loan, which is a very conservative loan to cost and loan to value ratio.

And so we were very excited about the opportunity to lend on a pool of cash flowing hotels at that leverage level but also a lot of cash flow relative to our loan, so it’s a lot of coverage as well, sort of a low basis loan, so all around a great loan for us. We’re very excited about it..

Okay, so but I mean, that still fits the nature of a transitional or value added type of loan?.

It was transitional in that it has been a distressed situation. Our loan initially is actually secured by our borrower’s loan which is a mortgage loan to the current owner of the properties.

Our loan (implemented) transition to a direct mortgage loan as our borrower takes control and ownership of the properties, so a little bit of the back end of a previously distressed situation which enabled us to lend at a higher rate than what a low LTV loan like this might otherwise warrant..

Okay, got you.

And then maybe taking a look from the top down to the bottom can you maybe just walk through some metrics or ideas around the loan process? In other words, how many loans do you look at that end up going to committee that end up getting bid upon that end up winning? Kind of like what’s that top to bottom down hit rate, if you will?.

We don’t keep those statistics specifically but I will say that the vast majority of the opportunities that we see are rejected relatively early on in the process. We know what we like and what we don’t like and so we’re very disciplined in terms of what we’ll pursue.

So I guess that 70% or 80% of what we see is rejected almost immediately out of hand and there are a large number of assets that we think warrant additional underwriting and consideration and we’ll pursue those deals.

Some of those we’ll file underwriting, some won’t and then generally by the time we’re taking some of these to committee we’ve a pretty good feel that it’s an appropriate risk for the business and our competitive position in terms of winning it is fairly strong.

So not everything goes through the committee process comes out the other side in a positive way. I mean, a lot of times there’s a lot of discussion around if it’s a fit to the business and the credit characteristics of a specific deal. We have a very robust committee process and which meets live on Mondays.

So it’s a rigorous analysis that’s done and then challenged in committee but so we think the process works great. We’re seeing plenty of opportunity now to continue to move the business forward as we’ve moved it over the last 15 months or so and don’t anticipate that changing.

There’s a lot of our demand in the US and we also have great ability to find transactions through our London office in Europe..

And then maybe just one quick one.

Do you think there’s any seasonality effect in the summer months? I mean, obviously we can see that sometimes on the residential side but getting to the commercial side maybe a little bit more immune to that summer slowdown?.

No, I actually think there is a summer slowdown. It’s hard to exactly tie it to when loans will close but certainly the origination market is quiet in August, especially in Europe but in the US as well. It’s a slower month. The loans we’ve already originated that haven’t yet closed, some of those will close in August and September.

But the new loan origination activity slows a little bit in August but then picks up very significantly in the fourth quarter..

Great. Thanks so much..

And our last question will come from the line of Ken Bruce with Bank of America. Please proceed..

Great, thank you. So I’m going to ask a question. I apologize if it’s been either addressed in your prepared remarks. It’s been a busy morning, so I may have missed it. You mentioned that you’re willing to leverage to drift higher or you’re willing to take leverage higher.

Maybe you can put some parameters around how you’re thinking about consolidated leverage at this point, what maybe the book ends are in terms of how high you’re willing to go on the balance sheet leverage please..

Hey, it’s Doug. That’s a good question. I think the right place to address that question is thinking about the liquidity that we have on the balance sheet now, the origination potential that that represents and relating that to our sort of current two times leverage status.

So to run through the numbers real quickly, we’re at… we have about $2.4 billion of financings on the balance sheet right now which is two times our $1.2 billion of equity in the loan originations segment.

And if you think about the $1.3 billion of additional potential loan origination capacity at June 30th, that brings you to a total of $3.7 billion of debt which represents three times leverage on that same $1.2 billion of equity and that’s essentially the book end for fully deployed given our current portfolio.

So you can assume that we’ll run somewhere between that two and three times leverage level on a consolidated GAAP basis looking at the entire balance sheet and that flows from the three to four times asset level leverage assumption..

Okay.

And is there just in terms of thinking what will push it towards say the upper end of that, is it a function of the pricing competition that ultimately requires more leverage in order to make the end returns justified or is there something around the particulars of the types of investments you may be pursuing that gives you the greater comfort to do that or maybe, not to put words in your mouth, but I thought the two times was relatively conservative anyway and this is just really kind of a natural extension of greater comfort with the overall financing markets to be willing to do that..

I think all three of those are factors but I would put the emphasis maybe as you did on the latter factor. Three times is really what we’re comfortable with. It flows from that three to four times asset level leverage target.

We may tend a little bit more towards four times in respect of the spread compression pressure in terms of maintaining our ROIs but basically that two to three times range is sort of what our business model supports and what we’re comfortable with with the type of loans that we’re originating..

Right. Well, great, that was it. Thank you for your comments and it was nice to see the legacy assets begin to materialize meaningfully. So thanks..

Thanks, Ken..

For closing remarks, back to Weston Tucker..

Great, thanks, everyone. Thanks everyone for joining the call this morning..