Blackstone Inc. (NYSE:BX) Citi’s 26th Annual Global Property CEO Conference 2022 Call March 8, 2022 11:15 AM ET
Company Participants
Katie Keenan – Chief Executive Officer
Doug Armer – Executive Vice President, Capital Markets
Austin Peña – Executive Vice President, Investments
Conference Call Participants
Arren Cyganovich – Citi
Arren Cyganovich
Hi, welcome to the session of Citi’s 2022 Global Property CEO Conference. I am Arren Cyganovich with Citi Research. And we are pleased to have with us Blackstone Mortgage Trust and CEO, Katie Keenan. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those joining us here today in-person to ask management questions, just step up to one of the mics that we have in the middle of the room. If there – if you guys are joining us remotely, simply type them into the question box on the screen and they will come directly to us. We will do our best to ask them during the session.
So Katie, maybe you could introduce your company and any members of management that are with you here today just to start off.
Katie Keenan
Great. Thanks, Arren for having us. We are very happy to be here in-person. So I’m Katie Keenan, CEO of Blackstone Mortgage Trust. We are a floating rate first mortgage commercial real estate lender backed by Blackstone, which gives us really fantastic scale reach and information across the industry. I am joined here today by Doug Armer, Executive Vice President of Capital Markets and Austin Peña, Executive Vice President of Investments.
Question-and-Answer Session
Q – Arren Cyganovich
Thanks. So what would you say the top three reasons investors should buy your stock today versus other mortgage REIT peers?
Katie Keenan
Absolutely. I think the first is our platform. I mean, we sitting within the Blackstone platform, we truly have, I think unparalleled access to real-time information from around the world. We are typically the largest owner, the largest player in all the markets and sectors that the BXMT is lending into. That gives us the information to make the right credit decisions. And I think you can see that in our performance. And it gives us access to the broadest possible pipeline globally of investments from which to select the portfolio that we’ve put together. I think the second is we are fully scaled. We have a $24 billion portfolio. The best borrowers in the market, many of whom are repeat relationships we have done 5, 10 deals with, it gives us access to a diversified balance sheet, well structured, many sources of capital. And all of our assets are well-positioned for the inflationary environment that we think is coming. And I think the third thing is the attractive durable dividend that we pay, 8% from a portfolio of first mortgage loans. And critically in this environment as a floating rate lender, our earnings are positively correlated with rising rates over time. So when you take a step back, low leverage lending assets that are well positioned for inflation and a floating rate lending position, I think we are uniquely well-positioned in the environment today.
Arren Cyganovich
Maybe you can talk about your CRE lending strategy, how that works to help your REIT and then also how that may differ from some of your peers?
Katie Keenan
Sure. I think that when we started the business, we have a very clear and consistent approach. We are a first mortgage lender low leverage 65% LTV. We target institutional quality assets with dynamic sources of demand and really high-quality, well-capitalized experienced sponsors, the Brookfields and Oaktrees of the world. One of our key advantages is scale with a $24 billion balance sheet, we can act at a size of lending opportunity that is not – that others not can’t necessarily address and that gives us a competitive advantage on larger scale deals, where we have very well-capitalized sponsors, significant amounts of equity capital. And the scale also extends globally. We have well established teams in Europe and Australia and around the U.S. that again really just results in the access to investment opportunities that we can use to comprise our well performing portfolio.
Arren Cyganovich
And what are you seeing in the CRE lending environment today and how does that differ from 2 years ago when the pandemic started?
Katie Keenan
Yes, I think the environment today is really well balanced. There is a lot of experienced, well capitalized lenders and borrowers. What we have seen really post GFC and into today is the very high-quality institutional sponsor seeing real estate as a good place to make investments. The fundamentals have been very positive, continue to be positive today. And people are not trying to make their returns through high leverage. They are trying to make their returns through picking the right assets, implementing value-add business plans and borrowing at reasonable leverage levels. And I think that, that really translates to a fruitful environment for a lender like us. I think that’s even more so true to today. It is a well balanced environment. Some of the volatility we are seeing I think is resulting in spreads coming out a little bit, which in our position as a lender is not necessarily a bad thing. And I think the environment today has a lot of opportunities. In our last year 2021, we made $14.6 billion of loans. It was the banner year, and 50% of our loans were on the multifamily and industrial side. So again, I think just a credit to the breadth of opportunities that are out there and our ability to access them.
Arren Cyganovich
I guess on that last point, the multifamily and industrials, an area that you have been focused on, what are the areas that you prefer from property type right now and are there any that you are avoiding?
Katie Keenan
Sure, Austin. Do you want to hit one?
Austin Peña
Sure. So, we see opportunities in the same sort of bread and butter asset classes, where we have the highest conviction multifamily, just as Katie said, was 50% of originations activity. But we see opportunity in other sectors as well. Office is a significant component of our portfolio, but it’s – but we are targeting the type of new builds, high-quality office products that’s attractive to the tenants of today and where we are seeing stronger demand. We also see opportunities in the growth markets. In the Sunbelt, we are seeing that’s our largest market exposure and in the high-quality office properties that we see in those markets, we find attractive opportunities to lend in those types of deals. To other asset classes, where we see opportunity, in leisure resort hospitality, which we’ve obviously seen extremely strong performance coming out of COVID, we are seeing selectively attractive opportunities there. And essential retail, there is some select opportunities that we will pursue in that space as well. Areas that will continue to sort of shy away from commodity office product, certainly in closed malls, those types of properties, which we just haven’t seen perform well through cycles and we continue to pull that view.
Katie Keenan
I think even more today, I mean, obviously, thinking about the real estate fundamentals, has been the primary focus of our business over the long-term. But thinking about the last year, I think we have been in particular focused on assets that really have the pricing power to drive top line growth in inflationary environment and that’s multifamily, industrial, value add office, where people are leasing up into a strong demand environment for the high-quality new build office that we lend against. And really critically, just making sure that our portfolio is well-positioned for the inflation that we know is coming and is here frankly.
Arren Cyganovich
You had mentioned that spreads have been kind of widening out a little bit recently, where do you view them today versus where they were pre-pandemic? And do you feel like this current geopolitical volatility will create some new opportunities for it?
Austin Peña
I’d say heading into the end of the year spreads on most of the deals that we are pursuing were pretty much in line with pre-COVID, with the exception of hospitality, which still had a bit of higher yield. Heading into the beginning of this year, we did start to see a bit of volatility in the market and a bit of spread widening, I think is the prospect of rising, increasing interest rates and sort of the Fed changing their policy as well as obviously concerns around inflation. And so, we did start to see a bit of that spread widening earlier in the year and obviously the volatility, the horrible situation going on in Ukraine, I think is added to that volatility. So, the opportunities we are seeing today are a bit wider than we were seeing heading into the last year or relative to pre-COVID.
Arren Cyganovich
Your firm and some others have been growing private capital in very large funds, very successfully bringing in new capital. Does that in your mind create any issues in terms of always needing to deploy the new funds that you are raising or do you feel like the competitive dynamics aren’t so much where it would really impact the environment that much?
Katie Keenan
Yes. I mean, I think from our perspective, being part of Blackstone and the growth that we have had in the overall Blackstone real estate platform, it’s just a critical component to the capabilities and sort of differentiated opportunities that we have for all of the Blackstone investment platform. So, we have this virtuous cycle where the more active we are across markets, we gain more information, we need more borrowers, more borrowers have great experiences with us and come back. $11.5 billion of our loans last year were with repeat borrowers. And as our real estate debt business expands as well as the overall Blackstone real estate business that reach, that positive network effect just multiplies. So from our perspective, I’ve been at Blackstone 10 years and just the continuation of the virtuous cycle of growth and how that gives us really differentiated access to markets to players within markets information. I think that, that’s a key competitive advantage of our overall business.
Arren Cyganovich
We do have an investor question here. What percentage of the lending do you plan to deploy overseas or outside of the U.S.?
Katie Keenan
Sorry, can you – I just…
Arren Cyganovich
I’m sorry, the – what percentage do you expect to deploy in terms of your new investments to overseas or outside the U.S.?
Katie Keenan
It’s a tactical and strategic decision over time. We obviously having the global platform and reach that we have gives us the advantage to look at relative value in different markets in sort of a deal by deal and market by market basis. Historically, Europe and Australia has comprised about 30% of our portfolio, and I think that’s a good number. I think that both Western Europe and Australia provide really attractive relative value as a lender. Like-for-like assets tend to be lower leverage, wider spread. The structure is very good as a lender. And our competitive position in both Europe and Australia, I think is in some ways even more differentiated than in the U.S., because it just tends to be a less liquid market where information is even more important. We have had longstanding, well-established teams in both of those markets for a long time. And I think that, that has translated to really attractive lending opportunities. So, could it be bigger? Potentially, there are certain periods of time where it’s a little bit smaller, I think in 2021. Roughly, 20% of our business was outside of the U.S., really a factor of those markets taking a little bit longer to reopen post-COVID. But we really liked the opportunity. And I think most importantly, we really like the option that we have within our business of being able to look across all of the sort of lender favorable markets in the world and identify the best relative value.
Arren Cyganovich
Moving into switch to how interest rates might affect you and we are going to start to see short-term run-rates start to rise again for the first time in a while, how is your portfolio positioned currently. I know you invested quite a bit last year, which helped remove some of that proportion that you are benefiting from that floor, LIBOR floors?
Doug Armer
I can jump in on that one. We did at the end of the year have almost 75% of our portfolio with at-the-money LIBOR floors. Today, that number is higher and it will continue to increase organically as the portfolio continues to grow and to turn over. And what that percentage really represents is a return to asset sensitivity that’s inherent in our business model as a floating rate vendor. The hypothetical retrospective calculation, looking back at year end and thinking what if interest rates have gone up 25 or 50 basis points can be a little bit tricky. The math is a bit complicated given the leverage on the balance sheet. I think a better way to think about it is really prospectively. And taking a step back understanding that our business model as a floating rate lender is inherently asset sensitive, we run a match-funded book. And so our ROI is one for one correlated in the long-term with LIBOR so for whatever the relevant index or base rate is. And so I sort of – I think it’s more useful to fast forward to the end of 2022 think about 100 basis point or potentially greater increase in interest rates and look at that impact in terms of our earnings. And that’s a fairly material and positive impact in terms of our forward cash flows. In today’s rate environment, it’s difficult to quantify in the hypothetical, because there is a lot of all else equal assumptions. But you are talking anywhere between $0.02 and $0.04 a quarter on a quarterly basis, again, assuming all else equal. So, that positive correlation with interest rates is a real plus to our business model. We saw that in 2020 that we didn’t really suffer because of the floors and the loans. We didn’t suffer the converse in a precipitously rate declining environment. I mean, it’s one of the great hedges in our business model that our floating rate loans have LIBOR floor struck at the money and we benefit from rising rates and we are somewhat insulated from precipitous declines in rates as well.
Arren Cyganovich
Your CRE portfolio grew very well last year with a very active investing year. What’s your anticipation for growth in 2022? And is there an optimal level of size that you’ll eventually reach in terms of your portfolio?
Katie Keenan
Sure. I think the best way to answer that question is a little bit looking back and then looking forward. And I think one of the things we are really proud of is that we’ve seen portfolio growth in every year of our business. And so really, what that means is it gets back to I think one of the great sort of inherent hedges in the business, in addition to the interest rate sensitivity, originations and repayments tend to be quite correlated. And so in periods of increasing transaction activity, we grow and increasing in periods of reducing transaction activity, repayments also tend to slow down and we are able to maintain a very stable, well invested portfolio as well. And so, I think that depending on how the volatility sort of shakes out or levels out, 2022 could be a year that looks a lot like sort of 2018, 2019, 2021. And we expect to see that continued growth, maybe not at the same level as 2021, because I think that really was in some ways, unique situation in terms of overall volumes. But again, looking at the balance between originations and repayments, and therefore portfolio growth, which is really what drives the earnings power of our business. I think that business or that correlation is very strong. And we would expect to see that continue.
Arren Cyganovich
What’s your expectation for repayments in general this year, should they be kind of normal cycle or do you have a higher proportion than normal expected to repay?
Katie Keenan
No, I think it will be normal cycle. And I think the important thing to think about is the best sort of predictor number to look at when we think about repayments is what our portfolio looks like 2 or 3 years ago, because our business model is making roughly 3-year loans for value-add business plans to sponsors that are implementing a CapEx strategy or releasing strategy. And so the loans that repay this year will be, by and large, the loads that we made in 2018 and 2019, sponsors have spent the last 2 years implementing their business plans and now they are ready to sell. And so from that perspective thinking about roughly a third of the portfolio turning over year to year that sort of the numbers that we generally think about and again, it really is very correlated. So, we saw in 2020 obviously repayments slowed down a lot, originations slowed down a lot. We still saw some portfolio growth and the sort of wheel and the correlation was very positive in terms of keeping the portfolio fully invested.
Arren Cyganovich
So, with 27%ish currently invested outside the U.S., UK, Ireland, Spain, what’s the environment like there now and because of all of the geopolitical risk associated with the region, has that changed your risk appetite at all?
Austin Peña
I think, as Katie mentioned earlier, we have been an investor in those Western European markets as you mentioned concentrated mostly in the UK, Ireland and Spain for many years. And that’s sort of on the back of very longstanding platforms. It’s very possible that we will see some level of slowdown in investment activity given the volatility and obviously the horrible things happening in Ukraine could create some slowdown in that market. But as far as an investment approach or strategy, I think we remain consistent.
Arren Cyganovich
So from a credit performance, you have continually done very well. You have maneuvered through the pandemic well despite having decent exposure to hospitality and not so much to retail. How are those proportions of your portfolio doing today as we, I guess, relative to what the borrower’s plans are?
Katie Keenan
Yes. Well, I think, first of all, thank you, we are really out of the credit performance of the portfolio in COVID and obviously, over the term or over the whole history of our business. And I think it’s really a validation of the approach we take to the low leverage lending, well capitalized sponsors and really our asset selection, which is informed by all this information and real estate experience we have within the platform. I think that the strategy is the investment strategy is the assets that we like as Austin mentioned. We have really been very consistent over time pre-COVID, post-COVID. We like assets that have dynamic sources of demand, where we can really underwrite value and cash flows that we think are going to have liquidity over time with the sponsors that have the expertise and the capital to implement the business plan. So, I think you will see a continuation of the trends we have seen over 2021. I mean, we continue to be very constructive, obviously on multifamily, on growth markets, industrial but also resort hotels, essential retail, high-quality office. And I think that, that mix will sort of – the trend will continue and the overall mix, it’s a $25 billion or $24 billion portfolio, it doesn’t change that much quarter-to-quarter.
Arren Cyganovich
We have another investor question, how does your funding structure look today, compared to where it was in March or April of 2020.
Doug Armer
I will take that one, our funding structure, similarly to the investment strategy, or the portfolio composition is relatively consistent year-over-year and has been since the IPO in 2013. What we did see really going into 2019 and going into 2020 was an increase in securitization in our capital structure. SASB, CMBS, CRE, CLO, that trend continued through 2020. As a matter of fact, we did two CLOs in 2020, in the first quarter and the third quarter, and it’s continued into 2021. And I think that’s probably the single biggest difference, an increase in the proportion of securitized liabilities on our balance sheet. We have also grown very significantly and evolved in structural terms, our credit facility, the credit facility component of our capital structure. We have diversified the number of counterparties. So, I think we are up to I want to say 15 relationships, one of which is, of course, Citibank. And that product fared very well during 2020, proved to be a stable funding source for us, and continues to provide significant flexibility in our business, which is very important, given the portfolio growth that we are seeing, It’s also very important in terms of enabling us to pivot between different capitalization options, different capital markets, access opportunities, so that we can optimize our cost of capital and also maintain strategic access to funding to support growth of the portfolio. Today, where you have a sort of technical driven or supply – somewhat oversupplied CRE CLO market, for example, we are seeing significant spread widening in that market. The geopolitical events are contributing to that more recently. And we are not dependent on that market. And that’s in large part because we do also have syndication, alternatives, we have credit facility alternatives. We have got existing securitizations that are well structured in terms of being reinvesting or replenishing. So, that stability in the balance sheet is something that’s been consistent from 2013, through 2020 and today. But our approach to it in terms of the technology is continuously evolving with the Northstar being running a match funded and well risk managed liability structure.
Arren Cyganovich
We have had a difference of opinions from some of your peers on the use of CLO financing. Why do you find that, that you are – that you find that option is an attractive use of your attractive funding source versus some of your peers?
Doug Armer
The first thing I would say is that how our CRE CLO program is very uniquely tailored to match our business model. And I think it’s worth stepping back, even from CLO, our entire capital markets franchise is oriented around our investment strategy, so that the driver for us is the investment strategy, that what are the loans that we want to make, where do we want to be from an investment exposure point of view. And then following from that where we device the most efficient capital market strategy that will enable that investment strategy. And so our CRE CLO program works in tandem with our credit facilities and with our syndications to deliver into that market, substantial diversification but also very high quality loans, the quality of loans that are on our balance sheet, which didn’t typically make their way into the securitization or certainly the CRE CLO markets prior to our entry into the market. And having had sort of broken the seal on that quality of product in the market, the market has grown very significantly, $40 billion of CRE CLO issuance last year. And it represents a very significant increasing capacity for us and for really the space in terms of non-bank lenders. That capital has got to come from somewhere and the CRE CLO market is a very important piece of delivering from the capital markets the leverage that non-bank lenders like BXMT need. So, it works in concert with our other funding strategies, but is a very significant contributor to the overall capacity in the system for non-bank lenders like BXMT.
Katie Keenan
I think the key as Doug said is, we run a diversified balance sheet. We have got the CLO syndication, the credit facilities. Within the credit facilities, we have domestic banks, international banks, insurance companies, all different sources of capital who have different views at different times. We have a corporate term loan. We have a high-yield bond. And really the key is just having that diversification, so we can be strategic about which markets we access at which times. I think what CLO can be challenging is if you are running a business that’s wholly dependent on the CLO market, then when you have situations like we have today, that can be a challenge. But when you are running a diversified balance sheet, and you have many different sources, it’s a really good option as one of those potential sources.
Arren Cyganovich
Got it. We have another investor question, how would further dislocation in the capital markets impact your pursuit of new business?
Katie Keenan
I think we really start with the assets and the investments that we think are attractive. And I think as we look at the world today, the result of the dislocation of capital markets really is, I think a little bit of a unique opportunistic investment environment for lenders like us. I mean we see interestingly, the CMBS market, which we haven’t talked about much today is certainly widened as well. Here at the beginning of the year, in large part driven by just a supply-demand technical. I mean I think the key to keep in mind right now is the fundamentals in real estate on the ground are very strong. And what we are seeing is sort of a capital markets dislocation driven by the rates picture, obviously, the geopolitical volatility and some technical supply demand dynamics. And so with CMBS spreads widening, there are large portfolios of stabilized multifamily industrial assets that typically would have been done very tightly in the CMBS market from a price perspective, that are now pricing more in the range that can be attractive for lenders like us. And so I think that will be an interesting dynamic. I am not sure how long that will last. But I think there is a moment here for opportunistic investing in terms of the profile of the deals that would typically have gotten done by banks or CMBS that might be more in the purview of lenders, such as us.
Arren Cyganovich
From a leverage perspective, the end of the year, about 3.2x, that was up from about 2.5x year-over-year. Is that an area that you expect to continue to expand your leverage I know that we had a fairly cheap financing environment? It sounds like it might not be as cheap today. So, do you think leverage should – could potentially expand?
Doug Armer
I think there is room on our balance sheet and I think in our strategy for increased leverage. Quite frankly, we were somewhat under levered, I think coming into 2021 and so that 3.2 ratio, I think represents a more normal range for us. I would expect to see leverage and we would be comfortable with leverage anywhere between 3x and 4x in terms of debt-to-equity. I think the most important point there is, is really the one that Katie made relative to our capital markets strategy. Generally, we want to maintain optionality in terms of funding growth in our business. So, we are not going to necessarily see ourselves all the way at the top of the range. But we are also going to make sure that we have – that we have the capital markets options available to us to operate on a more levered or less levered basis, so that we can be opportunistic and strategic about our capital markets options. We don’t target a specific level, I mean I think what the level that falls out of our optimizing the capital structure generally will likely be in the 3x to 4x range. But when – but what we are ultimately pursuing is a maximum return on equity and the most integrity in our balance sheet and from a risk management perspective. And so being matched funded is much more important to us than being 3.2x versus 3.0x versus 3.7x levered in.
Arren Cyganovich
I guess, the ROE point is a good point of view, do you expect with potentially rising short-term rates, your ROEs might expand over the next couple of years?
Doug Armer
I think they will, I mean again, over time I think we are virtually one-for-one correlated in terms of ROEs with LIBOR so far. I think again, looking at it hypothetically can be very tricky. But more broadly speaking increase in base rates for a floating rate lender is going to result in higher ROAs and higher ROEs.
Arren Cyganovich
Some of your peers have expanded into different asset classes or not necessarily asset classes, but investment types, property investment, residential etcetera. Do you have any expectation that you might alter your diversification into new areas?
Katie Keenan
So, we certainly look at the whole range of what’s out there. And I think one of the benefits of being part of Blackstone is we have the knowledge, the access, the ability to execute on anything that we think is interesting. I think the key for us is, we love the stability, their performance, the high quality current income that’s produced by our current business model. And so anything that we added on, we would want to make sure stuck with that Northstar kind of performance and predictability, and was really additive to sort of complementary to the existing business. And I think those are really the frameworks that we think about when we think about new business lines. And there is certainly things out there, we are always looking at them, but again, just really want to be true to producing the highest quality dividend, the most predictable, attractive dividend we can for the risk that we are taking. And I think where we are starting from today, at an 8% dividend yield off the portfolio of 65% LTV mortgage loans, it’s just we have created a very high bar for ourselves, which we are proud of and we want to make sure that anything we add is complimentary.
Arren Cyganovich
Got it. We have another investor question with the turmoil in capital markets slow your expectations for loan repayments?
Katie Keenan
For loan, sorry?
Arren Cyganovich
Loan repayments?
Katie Keenan
I think again, it gets back to what we were talking about before. It’s really very correlated. So, we don’t have a crystal ball. I don’t know how volatile the markets will get and for how long. But I think what we have seen in periods of calmness and in periods of volatility is that the originations and repayments are well correlated. And so that has resulted in a very stable portfolio and sort of level of investment of our capital and our balance sheet and again, that’s really the driver of earnings.
Arren Cyganovich
And then just lastly, maybe you just close out by reminding investors why you think your stock is an attractive value to them?
Katie Keenan
I think it’s exactly what I just said. I think the dividend yields, when we think about the assets that are producing that current income stream, and how stable that has been over time, in high LIBOR, low LIBOR, periods of turmoil, periods of stability, different fundamental environments, we have just been able to produce, in my view, just a highly attractive stream of current income, which is reliable and transparent and predictable and producing that from fundamentally first mortgage loans to the best borrowers in the market, on top quality real estate assets. I mean where I said, we look across all different markets public, private, and I really think that the 8% yield we are producing from our first mortgage portfolio is one of the best things out there.
Arren Cyganovich
Great. And then just, we end each session asking folks to use their crystal balls to predict where the 10 year treasury yield will be a year from now. It’s currently around – I mean that – yes, I think there may be a house view and I think 3% is what…
Katie Keenan
I think that’s 5% or something. I just told you we didn’t have a crystal ball though.
Arren Cyganovich
Great. Well, thank you for joining us, really appreciate you having in here.
Katie Keenan
Thank you.
Doug Armer
Thank you.
Arren Cyganovich
Thank you.
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