Good day ladies and gentlemen and welcome to the Blackstone Mortgage Trust’s First Quarter 2016 Investor Conference Call. My name is Derrick and I’ll be your operator for today. At this time all participants are in listen-only mode. We shall facilitate a question-and-answer session at the end of conference.

[Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Weston Tucker, Head of Investor Relations. Please proceed..

Great, thanks Derrick. Good morning and welcome to Blackstone Mortgage Trust’s first quarter conference call. I’m joined today by Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; and Doug Armer, Treasurer and Head of Capital Markets.

Last night we filed our Form 10-K 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 Risk Factor section of our most recent Form 10-K. 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 to GAAP, you should refer to the press release and to our 10-Q, which are 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 our consent.

So, a quick recap of our results before I turn things over to Steve.

We reported core earnings per share of $0.65 for the first quarter, that’s up 25% versus the prior year first quarter, with an increase due to greater net interest income from the continued growth in our loan origination portfolio, as well as the positive impact from the GE portfolio acquisition.

A few weeks ago, we paid a dividend of $0.62 per share with respect to the first quarter, equating to an attractive dividend yield of over 9% based on the most current stock – on the most recent stock price. If you have any questions following today's call, please give me call. And with that, I'll turn things over to Steve..

Thanks, Weston. And good morning, everyone. Amid highly volatile market conditions BXMT delivered excellent first quarter performance.

Even with CMBS spreads blown out and the CRE securitization market barely functioning, we produced strong results because of our singular focus on originating senior mortgage loans for our own portfolio efficiently financed to maximize ROI.

Our originations are sourced underwritten by Blackstone and backed by major market real estate with top sponsors. Our business model insulates us from CMBS market volatility, as our core earnings are entirely driven by net interest income derived from our loan portfolio. Our earnings are not predicated upon trading or securitization activities.

We've not bought CMBS, high risk mezzanine loans, preferred equity positions or otherwise moved out on the credit curve. We've utilized Blackstone's strong long-standing banking relationships to develop expansive bilateral term credit from a diverse group of vendors that provides greater financial flexibility.

At BXMT we have stayed true to senior mortgages because we continue to believe that there is best value proposition for our capital. During the quarter, we originated $861 million of loans in a choppy, but ultimately favorable environment for BXMT with wider spreads and diminish competition.

Market volatility slowed new transaction activity early in the quarter, but during March it became clear that this period of highest volatility was behind us, at least for now and our pipeline grew as perspective borrowers moved off the sidelines.

Since quarter end, we've already closed or have in the closing process another $625 million of loans and have an active pipeline of additional potential opportunities.

The more volatile, less liquid conditions slowed overall market activity, but played to our strengths, as Blackstone managed direct originator with a reputation for quick and reliable execution.

A 100% of the new loans closed during the quarter are senior and floating rate and in the same costal major markets where our direct origination portfolio was concentrated. Two of the loans that was repeat borrowers, high quality sponsors that we know well and that like our customized client centric approach.

We feel great about the credit quality of our new originations and our loan portfolio overall was 63% appraised LTV and 100% performing status. In Q1, we also demonstrated our consistent ability to efficiently capitalize our business even during a challenging period when market liquidity was contracted.

All of the quarters originations are financed with existing credit providers. During the quarter, we extended an existing $750 million credit facility to a fresh five year term. Post-quarter end, we finalized the increase of another credit facility by $300 million to $1 billion and extended its final maturity to 2022.

We also closed a new $125 million committed credit facility which we intend to grow over time that provides us with increased flexibility in the term funding or syndication of our loans. We have other up-sizes and new facility in process to further expand our credit capacity and improve our access to liquidity.

At quarter end, we had liquidity of over $575 million, which translates to $2 billion of loan capacity. We expect that capacity and increased repayment activity in our portfolio to fund our new originations during the coming quarters.

If repayments flow, we are happy to maintain our existing loans longer and we'll calibrate our originations accordingly, while equity market conditions remain weak. In closing, despite what was a truly tough quarter for the public in CRE capital markets and leverage lending strategies in general, BXMT flourished.

We were able to leverage the reputation we've build over the past three years, as a reliable counterparty and capital provider to move the business forward in all fronts. Blackstone and its employees are the largest stockholder in BXMT and we see great value in the shares.

We love the high cash dividends generated by our low volatility floating rate senior mortgage business, especially in this yield challenged environment. And with that, I'll turn it over to Tony..

Thank you, Steve. And good morning, everyone. As Steve mentioned, BXMT stayed true to its core business during the first quarter and we continue to generate strong returns for our stockholders, while protecting their capital from market volatility.

We originated six new loans during the quarter for a total $861 million and an average loan size of $142 million, reflecting our continued focus on large loans.

The loans that we originated in 1Q have an average coupon of LIBOR plus 4.4%, almost 50 basis points wider than our existing floating rate portfolio and reflecting the market conditions Steve mentioned earlier.

Importantly, however, the average LTV of these originations at 61% is inline with our existing portfolio, so we have not simply traded additional credit risks for higher returns. Total loan fundings during the quarter of $690 million outpaced repayments of $375 million, increasing total assets on our balance sheet to $9.6 billion as of quarter end.

We continue to have no default no defaulted or impaired loans in our portfolio and our overall portfolio LTV have 63% and risk rating of 2.2 on a scale of one to five is consistent with prior quarters, demonstrating a strong credit profile of our loan book.

During the quarter, we collected a par repayment of over 50% of the only 4 rated loan in our portfolio, reducing its balance to $54 million. Before leaving our loan portfolio, I would like to highlight some additional loan-by-loan disclosure we have included in our earnings release and 10-Q beginning this quarter.

Specifically, we have added disclosure of our loan per square foot, per unit or per key, reflecting out bases in the collateral property. In metric, we focused on Blackstone when evaluating each potential investment.

We believe this additional information furthers our goal of providing best-in-class disclosure to our stockholders and can be used in conjunction with origination LTV and risk rating to get a wholesome picture of each loan in our portfolio.

We financed our 1Q originations primarily using our existing revolving credit facilities, which had an all in cost of LIBOR plus 2.3% at quarter end. As Steve mentioned, we are in active dialogue with our lenders to extend and expand our access to credit under both and existing and new facilities.

During the quarter, we fully repaid our GE portfolio add-on advance financing, fully satisfying this obligation prior to its maturity and reducing our balance sheet leverage as expected following repayment of the shorter term GE loans.

At 331, our debt to equity ratio of 2.6 times and the cost of our revolving credit facilities of LIBOR plus 2.03% are both consistent with where we began the quarter and within the range we expect to maintain for the foreseeable future. Turning to our operating results.

We generated core earnings of $0.65 per share and declared a dividend of $0.62, up 25% and 19% respectively from the first quarter of last year and reflective of the dramatic growth we experienced in 2015.

GAAP net income of $0.61 per share is up 33% year-over-year, after adjusting for $0.14 of non-recurring income in 1Q, 2015 related to our CT Legacy Portfolio, which was substantially resolved in 2015 and is no longer a material contributor to our financial results.

Quarter-over-quarter core earnings have continued to trend toward our expected run rate of $0.62 per share, reflecting the impact of balance sheet deleveraging resulting from the repayment of the shorter term loans in the GE portfolio I mentioned earlier.

Our core earnings is $0.65, covered our $0.66 dividend by 105% and retained earnings during the quarter contributed to our book value of $26.53, which was essentially flat relative to $26.56 at 12-31.

The stability in our book value during a quarter marked by capital markets volatility highlights our focus on stability on both the left and right hand sides of the balance sheet. Our earnings are entirely driven by the net interest income produced by our loan portfolio.

Our loans are held from long-term investments with no impairments in the portfolio and are not subject to mark-to-market accounting associated with securitization or other short term business models.

We did not experience any margins call on our credit facilities during the quarter, maintaining our portfolio leverage and reflecting the stability of these facilities. As we have discussed previously, none of our credit facilities have capital market space with margin call provisions.

Our portfolio remains high correlated to increases in US LIBOR with an increase of 50 basis points, generating approximately $0.04 of additional core earnings on an annual basis.

Although recent signals from the Fed and others have been mixed, we believe rate increases are inevitable and we are positioned to benefit from any future increases when they occur, something we believe is a key differentiator from other mortgage REITs and specialty finance companies.

In closing, we believe that our business produces exceptional value for our stockholders with a high turn of return, generated by a stable portfolio with superior sponsorship by Blackstone and we look forward to continue positive results in future quarters. Thank you for your support.

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

[Operator Instructions] Our first question will come from the line of Sam Chao, Credit Suisse..

I'm filling in for Doug Harter today. So, given that you've seen a reduction in the risk-rated 4 loans this quarter, I just wanted to revisit your thoughts on managing the risk profile of the loan portfolio.

Specifically is there a certain sweet spot you're looking for when balancing the higher risk-rated loans?.

Hey, Sam, I think in general we don’t have a barbelled approach in terms for credit. So we don’t originate a combination of higher LTV and lower LTV loans to average 63%. In general our LTVs are pretty close to that average. The 1, 4 [ph] rated loan was the loan that we acquired from GE, not one that we originated.

We're along the way towards resolving that loan, but it’s not reflective of any other loan in our portfolio. And so the two and three rated loans which dominate our portfolio risk ratings are loans that are consistent with the average credit profile of our deals.

Again, we're typically originating loans on major market assets with top sponsors that have some degree of transition. So maybe an office building that’s lost a tenant or a hotel that needs a renovation and it’s a consistent profile..

So you are more focused on keeping the average consistent over time?.

Yes..

Is that fair say, okay….

We're not trying to step out risk and you know, there will be no forwarded loans by design..

Got it. Okay.

So my second question, I know this is largely dependent on market conditions, but do you have a general sense of - like, do you have, like, a target range for capital deployment this year?.

I think that in general what – given so where our shares are trading, we're going to keep our capital deployment generally consistent with where it is today. And so that means that we'll – that we think our originations and the repayments in our portfolio will be in about – will remain in sync.

We have some additional capacity as well, which you talked about in terms of our overall liquidity. But we've been able to maintain a very strong level of deployment for us in terms of our existing capital base, with the capacity, with the repayments that we foresee, we think that we can maintain that through the year.

Given, it will vary in any one quarter, you know, the swing of a loan repaying or a loan originating or – and we can't keep them exactly in sync on a quarterly basis, but in general for over a couple of quarters we think we can..

Got it. Thank you..

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

Good morning, guys..

Good morning..

Hey, Jess..

Just a couple of questions here.

Your new swing-line credit facility, could that speed up the rate of originations since you're originating a little bit more? Or is it more dependent on really what you've had in the pipeline and how you like those kind of loan characteristics?.

That’s a great question, Jessica. It doesn’t relate to the types of loans we're going to be originating. We're going to continue to originate our senior and floating rate loan strategy that we are originating thus far. I think it will facilitate originations for us a little bit more efficiently than it would be without it.

And so it’s a liquidity management tool for us. It enables us to coordinate our originations in term financing executions more efficiently. And it’s a step towards a more efficient balance sheet, by providing additional liquidity it does give us a little bit of optionality in terms of our capital markets alternatives.

But it doesn’t affect our originations strategy..

Okay. Great.

And then I just wanted to clarify, you said you've already closed $625 million of loans in the quarter? In the second quarter?.

In the second quarter, that’s a combination of loans that are already closed and loans we have agreed terms and are in the closing process..

Okay..

So, that sort of the things that – and our success rate on converting those – on converting what's – in closing deals to closed deals is very high..

All right. Perfect. I think that's all for me. I think the credit disclosures that you've given and the loan level disclosures are very helpful. So thank you very much for that..

You're welcome..

Thanks, Jessica..

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

Thanks for taking my question.

Can you comment on what drove the stark decline in loan repayments and if you have seen a resumption in repayment activity?.

Yes, sure. I think that it was – the unique nature of loan portfolio to some extent, we just had a low repayment quarter. It was also definitely impacted by the volatility in the markets and especially in January and February.

In order for our loans to get repaid, a new loan has to be closed and in general given where the CMBS market was, a lot of vendors were trenched or revised terms on loans to their borrowers and which caused transaction activity to get cancelled or delayed.

We had a couple of loans we though we're going to repay that didn’t because of either sellers, either buyers getting cold feet or lenders changing loan terms. We have seen a resumption of more regular way activity in the market and expect that repayment activity will increase during the year and starting in this quarter..

And can you say whether that's sort of back to the previous levels that we saw, for example in the last quarter, just as an annualized repayment rate or as a percentage of your portfolio or is it still below what you would have otherwise expected, absent the volatility?.

I think it’s very hard to predict, with floating rate loans when they get repaid. The fixed rate loans is much easier, they tend to go to maturity in near maturity because of the prepayment protection that lenders get on those loans.

But for the floaters they get repaid when a borrower has – when an asset is sold or borrower has an opportunity to borrow on a more accretive basis. And it isn’t tied to the maturity loans. It’s really predicting the behavior of a borrower what he is going to do.

I think if we look at that across our portfolio, I do expect that we'll see a return to more normalized levels of repayment, maybe I don’t know, I can't say though exactly matched to the Q3 or Q4 of last year. But I do think that Q1 of this year was anomaly which is especially well repayment quarter..

Just with regards to your current liquidity position, which is close to what it was last quarter, but slightly lower, do you anticipate any near term need to raise equity? And what would drive your decision to raise equity at the current valuation level?.

We don’t at this moment see any near term need to raise equity. We have about – we talked about $2 billion with the loan capacity, plus the repayments that we expect over the coming quarters and if you match that to where our originations have traditional been to say, you know $700 million to $1 billion plus.

You can sort of see that we have plenty of capacity for our loan origination program..

Okay.

And just with respect to the liability structure, what are your thoughts on potentially diversifying the liability structure by, for example, issuing unsecured debt, which one of your commercial mortgage rate peers recently did? How do you feel about unsecured debt which, although at a higher cost, could be viewed as safer than credit facilities?.

Hey, Dave. It’s Doug. This is an interesting point, we have our eye on the high yield market. And I think high yield debt is a potential alternative for us. There has been some positive activity in the market recently for company similar to ours. We don’t have a public rating.

And so that’s one of the things that we think about when we're looking at the high yield market. But high yield as a capital markets alternative for us is definitely interesting, so are convertible notes for example.

But we're basically happy with the way the company is capitalize now in terms of the asset level leverage that we have and where leverage is on the balance sheet, high yield that would be a way for us to take that up a little bit, maybe half a ton. So it’s something that we think about..

And lastly, you guys have done a nice job expanding and upsizing credit facilities, including in the past quarter. We have gotten some investor questions about how credit facilities would perform in a downturn, or a hypothetical stress environment.

Would you care to comment on whether you have any concerns about how these repo facilities could perform in a downturn scenario, for example? What events could trigger a margin call and what level of margin call could you experience on say, a 65% LTV loan?.

Sure. So I think the thing to keep in mind is that, you know, our credit facilities are different from the 1.0 generation or what's out there in the market today. People tend to focus on economics, but the real difference is in the structure.

Our credit facilities are term matched or long-term, they are currency and index matched, limited recourse and we have no capital market space mark-to-market provisions. You mentioned potential for non-performance or so to credit base marks. And our facility is collateral non-performance is not a repurchase event.

Our lenders look to the relevant real estate fundamentals and have to make judgment about the collectability of the loan according to a commercially reasonable standard. So keep in mind what commercial reasonable means in the context of a cross collateralized pool of 63% LTV mortgages. It’s a relatively high bar we think for potential margin call.

So we don’t believe there is any scope for material deleveraging in any realistic scenario in our portfolio.

And I'll just underscore again, that during the last quarter which was a quarter where there was some stress in the market for sure we didn’t not quite stress in our portfolio, but there was stress in the market generally, we extended an upsize to almost $2 billion of credit and I think that’s the best indication of the stability in our facilities and the strength of our relationships with our credit providers..

That’s very helpful. Thanks for the color..

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

I'm glad that we kept things simple and we're going to stay on that track?.

We're certainly glad that we kept things simple and we had this strategy which we think among the alternatives faired the best. And yes, you raised interesting point because obviously those activities are sure highly volatile, will cycle up, as well as cycling down and it’s certainly easier to talk about not participating when they cycle down.

But I think that ultimately in a vehicle like ours stability is hugely important and I do think that reads as yield vehicles, we're at best when we produce low volatility, reliable income that people can – and so people can visibility on core earnings and dividends and feel good about the safety of those.

So we always look at potential new opportunities, new business lines. We're always evaluating things that could create additional shareholder value, and if there are activities out there that we think would fit that well, we do them, but not a fair high volatility activities..

Got it. Thanks..

The next question will come from the line of Joe Ho, Wells Fargo..

Good morning, guys. So the….

Hi, Joe..

The spread widening we saw in CMBS in the first quarter did not - I don't think it was expected to, but it certainly didn't really extend into kind of the senior loan market, as evidenced by you've still got L plus 4.40, which is pretty close to what the overall yield is.

I guess the question is, is there some point where dislocation or distress in capital markets, particularly CMBS, could result in you getting wider spreads on new originations or do you see it more as your segment is more insulated and the sell-off we're seeing away from you guys is more technical in nature?.

I think the sell-off that we're seeing is more technical and not fundamental. So I think the spread widening isn’t reflective of bad quality credit, but just unique market factors that are impacting CMBS perhaps more heavily than other like securities.

In our market because the participants are not exiting their loans through the capital market, it’s a less volatile activity. And so we didn’t see – we did not see and nor did we expect to see spreads increase nearly to the extent they did in CMBS related loans.

They did trend a little bit wider, so I would say sort of 25 to 50 wider and we've seen as the volatility diminishes, I think we've seen those spreads sort of stabilize, I don’t think they could get any wider from here. So I think it’s unlikely we're going to see an environment of higher spreads.

Our market is still pretty competitive and as long as we can maintain the very efficient financing that we have – that we have been able to thus far than we see a stable deposit that trended our ROIs, because I always think we'll be answer a little bit better than most of our competitors and originate a little bit better.

And so its gives us a nice trend line on our deals, but not anything that’s going to really deviate from the pattern that we've seen over the quarter since we started up in 2013..

All right. Great. Thank you..

Sure..

Our final question will come from the line of Ben Zucker, JMP Securities..

Good morning, guys and thanks for taking my question. I was going to ask about the strategy, matching originations with repayments. But it sounds like you kind of touched on that. I wanted to look at the fixed-rate portfolio really quickly.

When that GE portfolio first closed it added something like $2.1 billion, $2.2 billion in fixed-rate loans and those were always highlighted as very short duration at the time.

We might have even started to talk about this last quarter, but as we sit here now the portfolio's nearly $2 billion in size and I saw the commentary in the Q mentioning the percentage that are subject to early repayment and not.

I was just wondering, based off your updated conversations with borrowers, specifically the 36% that have the eligibility to repay, what your feeling is or understanding, on how this fixed-rate portfolio that has kind of not really shrunk as much as we might have thought, how that might play out during the year..

I do think that we'll see some significant reduction in the fixed rate loans, especially in the manufactured housing sector across our portfolio. The loans that we have in that property category are very stable, strong performing loans and there is now a very strong agency bid for those loans. Fannie and Freddie are very active in the sector.

And the loans that we have in general are stabilized enough where they work in that model. So as we progress through the year I think and we get to the point where those loans can be economically prepaid, I think you will see a lot of movement in the fixed rate loans in that sector and our balance sheet sort of out to Fannie and Freddie..

Okay. That's very helpful. And then just lastly, and this is maybe a little technical. I just wanted to ask about the target leverage. I feel like I've always been kind of hearing the term that you're comfortable running this up to a 3. But we kind of here these, like, different leverage ratios.

I think previously you were including the non-consolidated senior interests. And this quarter I heard you reference a 2.6 figure, which I calculate for myself also, which kind of includes your senior converts as equity capital.

When I'm thinking about the 3 times leverage level to run this business, just in what element should I be thinking about that, in the context of the 2.6 that you called out, or including those non-consolidated senior interest that you include in your marketing deck when you list the leverage?.

Hey, Ben. It’s Doug. I think that’s a great question.

The difference between the two number is exactly what you are referring, the 2.6 is the debt to equity ratio, so the actual credit facilities that we have, the 3.2 takes into account our the senior loan participation, some of which are on balance sheet as loan participation sold and some of which are off balance sheet in the form of mortgage mezzanine splits essentially..

Right..

And so if you think about the portfolio, the portfolio of 100% senior mortgages that are financed in a couple of different ways than the right way to look at it is 3.2 times levered.

If you are thinking about our debt to equity ratio, and with regard to the sort of leverage level and thinking about debt maturities and that sort of thing, then the 2.6 times ratio apply.

So from a modeling point of view, I would like at the 3 times leverage level and think about that being carried forward and that being are sort of stabilized leverage level. And from a sort of a credit point of view, I would think about the debt to equity ratio because that’s the amount of debt that we actually have maturities on..

Right. Okay, that’s very helpful. I appreciate your comments, guys. Thanks again for taking my questions..

You're welcome..

And at this time, I will like to turn the conference back over to Mr. Weston Tucker for any closing remark..

Great. Thanks, everyone for your time today. And please reach out with any questions..

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a wonderful day..