Welcome everyone to the Blackstone Mortgage Trust first quarter 2022 investor call. At this point, all participant lines are in listen only mode. If you'd like to ask a question later, please press star one on your telephone. With that, I would like to turn the call over now to Weston Tucker, Head of Shareholder Relations. Please go ahead.
Great. Thank you, and good morning, and welcome to Blackstone Mortgage Trust's first quarter conference call. I'm joined today by Katie Keenan, Chief Executive Officer, Austin Peña, Executive Vice President, Investments, Tony Marone, Chief Financial Officer, and Doug Armer, Executive Vice President, Capital Markets. I'd also like to introduce Tim Hayes, who recently joined the BXMT leadership team and will be working across a number of initiatives, including shareholder relations. This morning, we filed our 10-Q and issued a press release for the presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements which are uncertain and outside of the company's control. Actual results may differ materially.
For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements and will also refer to certain non-GAAP measures on the call. For reconciliations, you should refer to the press release and our 10-Q. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the first quarter, we reported GAAP net income per share of $0.59, while distributable earnings were $0.62 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the first quarter. If you have any questions following today's call, please let me know. With that, I'll now turn things over to Katie.
Thanks, Weston. We had another strong quarter of investment activity, portfolio growth, credit, and earnings, further demonstrating the strength and resilience of our business model in a dynamic market environment. Perhaps more importantly, as we look ahead, BXMT is particularly well-positioned to continue delivering for our investors. Today, we see four key advantages powering our company forward. First, we have a floating rate business. Put simply, higher interest rates mean we earn more on our loans. The magnitude of rate hikes widely expected this year creates a powerful tailwind for our earnings profile. Second, the credit of our portfolio is secure. With a portfolio of 65% LTV loans on institutional quality assets to many of the best sponsors in the business, our capital is well protected even if we experience a period of greater market headwinds. Third, our ability to generate investments is unparalleled.
We believe we are entering a more opportunistic investing environment for lenders, and BXMT's deep global originations platform allows us to source attractive relative value investments around the world. Fourth, we have broad access to capital. Our fully scaled, diversified balance sheet comprises a wide variety of asset level and corporate debt, as well as premium equity. This gives us the consistent ability to efficiently tap the capital markets, enhance our balance sheet, and deploy capital accretively. Starting with our floating rate model and portfolio. The investment environment over the last 12 months has been highly productive for our growing origination team. We closed $3.4 billion of new loans in the quarter, $16.2 billion over the last 12 months, driving 37% portfolio growth year-over-year to a record $25.6 billion.
Through our strategic portfolio management, we have reoriented both the earnings profile and the collateral mix of our book. While LIBOR floors provided us with earnings stability while rates were falling, they can dampen income growth in a rising rate environment. With the majority of our portfolio originated in recent quarters when rates were lower than they are today, we have now reached our crossover point where any upward movement in short-term rates will positively impact our earnings and flow directly to the bottom line. As a result, earnings in our portfolio today would materially benefit from the rate hikes expected in the coming months. Moving to credit quality. We see positive fundamentals on the ground for high-quality real estate as far as occupancy, rents, and supply and demand.
A rising rate environment naturally creates considerations for real estate valuations, especially for assets that are more fixed income in nature. As a low leverage lender, 65% LTV on average, our investments start from a position well-insulated by substantial equity value. Moreover, our originations this quarter, and indeed over the past 18 months, reflect a strong bias toward markets and assets experiencing outsized growth and the ability to drive NOI increases that can outpace rising rates. Today, nearly half of our loans are collateralized by multifamily, hotels, parking, and self-storage, assets that are able to reprice their rents frequently and are therefore naturally well hedged for inflation. As a transitional lender, the majority of our remaining collateral is positioned to capture rent growth stemming from value add strategies.
For example, newly built office buildings, which are attracting an outsized portion of tenant demand and seeing increasing rent levels as a result. The persistent impact of supply chain disruption and materials cost inflation has driven replacement costs up 10%-30% or more in core real estate sectors, making new supply more challenging to build and supporting the value of our existing collateral. The credit performance of our portfolio this quarter reflects these positive real estate fundamentals, as well as the strength of our borrowers and our investment process. We continue to see 100% interest collections across the portfolio and positive credit migration. We had $1.3 billion of repayments, 91% of which were in office and hotel, indicative of the progression of business plans and liquidity for our collateral in all property sectors. Third, on investment activity.
The first quarter demonstrated our ongoing ability to source and execute on our brand of compelling low leverage lending opportunities in targeted sectors and markets. We closed $3.4 billion of new loans at a weighted average LTV of 65%, in line with our broader portfolio, while achieving an average all-in yield of 3.95 basis points, wider than recent levels, all while continuing to shift the focus of our origination activity toward our highest conviction themes. In line with recent quarters, nearly half of our 1Q loans were in the Sun Belt, including $1 billion of multifamily in South Florida, Nevada, and Dallas, and $500 million of growth market office. We have also seen accelerating activity in the U.K., with $850 million of loans closed this quarter.
Because of our long-standing presence in the less efficient Western Europe and Australian markets, we are well positioned to capture highly attractive relative value lending opportunities. For example, our UK loans this quarter averaged 5 points lower leverage and more than 50 basis points wider spread than our overall portfolio. Given the ongoing flight to quality across all asset classes, we made over $500+ million of new construction loans on assets that will be best in class in their respective markets upon delivery. Looking forward, while broader capital markets volatility may moderate overall transaction volumes, we see an attractive backdrop for our business, which was built for resilience and performance in all market conditions.
Our position within Blackstone results in a constant information flow from over $500 billion of owned and financed real estate, allowing us to make well-informed, targeted investment decisions in a dynamic and fast changing environment. We have an expansive global sourcing platform, and more importantly, deep relationships with major borrowers around the world, which makes us a trusted partner, especially in periods of uncertainty. We see today the makings of a particularly attractive market dynamic for our brand of lending. There is significant accumulation of real estate fund capital in search of ways to earn a real return against rising inflation, $300 billion and growing. At the same time, CMBS and CLO market volatility have driven many smaller scale lenders to the sidelines, rendered securitized executions less reliable, and created more demand for transitional debt capital.
The overall result is a favorable competitive backdrop for scaled, well-capitalized platforms such as ours. This affords us the continued ability to be discerning on credit while capitalizing on the market trend pushing spreads wider. We presently have $2.9 billion of loans closed or in closing post quarter end, a further indication of the attractive opportunity set for our business. Turning to our access to capital. The diversified nature of our fully scaled balance sheet is a critical ingredient to our success. We are an active issuer with well-established relationships across a wide range of capital markets executions, bank facilities, syndications, CLOs, term loans, high yields, convertible notes, and equity. This allows us to be nimble and opportunistic with our balance sheet, tapping various sources of capital when we see strategic executions. Our balance sheet is match funded and well hedged against foreign currencies.
As a result, we are well insulated against basis risk and changes in the yield curve. This high-integrity capital structure underpins the stability in our business despite potential movements in rates, spreads, and transaction volumes. With an opportunistic lending environment before us, we expect to continue to strategically access our various funding sources to support the growth of our portfolio into the compelling lending opportunities we see ahead. In closing, the coming quarters should represent an exciting period for our business. We expect the robust earnings power of our $25 billion performing loan portfolio to accelerate as central banks around the world raise their benchmark rates. Our portfolio has a credit profile that is well insulated from volatility and well-positioned to capitalize on growth. Our platform reach and dynamic balance sheet will continue to allow us to execute on attractive investment opportunities wherever they arise.
Thank you, and I will now turn the call over to Tony.
Thank you, Katie, and good morning, everyone. I'm excited to run through the results for the quarter and as importantly, our position as we move forward in 2022. Starting with the 1Q results, we reported GAAP net income of $0.59 per share and diluted GAAP earnings, a new metric for us, of $0.58 per share. This diluted earnings metric is the result of a new accounting standard that came into effect this year, which requires us to assume all convertible notes will be settled in shares and therefore dilute earnings. We've always settled our convertible notes in cash and have the intention to do so in the future, so EPS was not previously impacted. The new accounting rules eliminate that optionality and require earnings dilution to be calculated for all outstanding convertible notes.
Our distributable earnings per share for the quarter was $0.62, which is unaffected by the GAAP earnings dilution and properly considers only our shares currently outstanding. Our DE is down slightly from the $0.66 cent run rate level we discussed last quarter as 1Q earnings included no material fee acceleration income and has the typical seasonality of the reduced day count compared to other quarters. Importantly, the growth in our portfolio largely absorbed the new capital we raised, which muted some of the J-curve impacts on our 1Q results. Finally, our book value per share of $27.21 was flat relative to 4Q, and our $0.62 cent dividend, a level we have maintained for 27 consecutive quarters, was fully covered by our 1Q distributable earnings, with 106% dividend coverage over the last 12 months.
Perhaps more important than our 1Q earnings is where we ended the quarter from a rate sensitivity perspective. Our business model has consistently focused on floating rate assets matched with floating rate liabilities, creating a positive earnings correlation to rising interest rates. We've discussed on previous calls that the floors embedded in many of our pre-COVID loans modified this direct correlation and contributed meaningfully to our earnings over the past two years, following the precipitous decline in interest rates in April 2020. As of March 31st, the weighted average floor in our portfolio was only 37 basis points, down from 81 basis points in March 2020 and materially below current USD LIBOR. Therefore, we are now once again positioned for earnings growth as rates are expected to continue to rise this quarter.
We provide more data in our earnings release in 10-Q, but as an example, a 200 basis point increase in base rates, implying USD LIBOR of about 2.25% would add roughly $44 million to our annual earnings, or about $0.06 per quarter on a run rate basis. One of the key contributors to our rate sensitivity is the growth of our floating rate senior loan portfolio, which hit another record of $25.6 billion at quarter end as loan fundings of $3 billion outpaced repayments of $1.3 billion. Of course, growth in our portfolio must be accompanied by strong credit underwriting, and we are happy to report another quarter of stable performance on that front.
Our portfolio origination LTV remains at a modest 65% level with 100% interest collection, and we upgraded the risk ratings of 15 loans this quarter with no new downgrades, impairments, or non-accrual loans. Lastly, our CECL loan loss reserve, which impacts our GAAP EPS and book value, but not our distributable earnings, was effectively flat for the quarter at $0.75 per share. Although about one quarter of our portfolio is secured by assets in Europe, we have no exposure to Russia or Eastern Europe, and so the CECL reserve on our European loans was not impacted by the war in Ukraine. This quarter, we saw some turbulence in the capital markets as the world digested expectations around rates and inflation, as well as the evolving geopolitical situation.
With BXMT's diverse capitalization structure and Blackstone's broad banking relationships, we continued to efficiently capitalize our business this quarter despite a more challenging market generally. Notably this quarter, we closed $2.1 billion of credit facility financings, nearly three-quarters of which priced at a spread of 150 basis points or less, including $548 million financed under a new $1 billion credit facility. This brings us to 14 credit facility counterparties, further diversifying our access to capital and improving our ability to drive the best execution for each of our loan financings. We also closed two syndications totaling $445 million this quarter, providing another source of financing at attractive levels for these assets.
Lastly, we issued $300 million of convertible notes in March, effectively refinancing the notes maturing in May, our only corporate debt maturing this year. Other than our $220 million of convertible notes due 2023, we have no corporate debt maturing until 2026. This, combined with our term matched asset level financing, translates to a stable balance sheet designed to endure any potential turbulent market conditions. Taken together, our financing activities increased liquidity to $1.2 billion at quarter end, net of the upcoming May convertible note repayment. Finally, given the attractive investment environment and robust pipeline Katie mentioned, we also launched a new seven-year term loan this morning to add further flexibility to our balance sheet. With our current liquidity and access to diverse capital sources, we are well positioned to invest in today's dynamic market conditions.
With our floating rate portfolio, we are poised to organically grow earnings in a rising interest rate environment. For these reasons, we believe BXMT is in a strong position as we move into 2022 to generate robust, high-quality earnings for our stockholders. Thank you for your support. With that, I will ask the operator to open the call to questions.
Everyone, your question and answer session will now begin. Just a reminder, if you would like to ask a question, please press star one. We kindly request that you ask one question and only one follow-up. If you'd like to ask additional questions, please press star one to be re-entered into the queue. Our first question comes from Don Fandetti with Wells Fargo. Please go ahead.
Hi. Good morning. Katie, I was wondering if you could talk a little bit about are you positioning the portfolio for a recession? It feels like you're not. If you did feel like a recession was imminent, you know, what kind of actions would you take?
Thanks, Don. You know, I think we feel that it's a little early to, you know, be focusing too much on a recession. Record low unemployment, 6% wage growth. We see strong demand for the types of real estate we invest in on the ground. You know, I think as I mentioned in my remarks, the critical piece to our portfolio, which we've really been focused on for years, is low leverage lending to very well-capitalized, experienced sponsors who can withstand volatility. We feel that our portfolio and our overall investment strategy, which has been consistent over time, puts our loans in a position of being, you know, really insulated from, you know, any market volatility. I think that strategy was really validated during COVID when, you know, our credit performance was very strong.
You know, we think that it continues to put our portfolio in a strong position.
Okay. You know, it sounds like you think this is a good environment where some of the marginal players have stepped to the sidelines because of volatility. Does that mean that you think you can have pretty strong asset growth again this year or loan growth?
Yeah. You know, I think that. Sure. You know, we've seen asset growth, you know, every year in the history of the company, I think in strong environments and less active environments. You know, I think that the key part of our business is that originations and repayments tend to be correlated. Over time, we've been able to very consistently grow the portfolio in various market environments. I think that, yes, right now, you know, the competitive dynamic is such that scaled well-capitalized platforms with diverse access to capital, I think will be in a better position. That's what we're seeing out there in the market.
I think that will result in us being able to be, you know, very discerning on credit, very selective on the assets that we're doing, and capture, you know, a broader market share of the opportunities that we find most interesting.
Thank you.
Next, we have Steve DeLaney with JMP Securities. Please go ahead.
Good morning. Thanks for taking the question. Katie, you made positive comments, I thought, about office and obviously rent escalations. About four years ago, Blackstone made a pretty large loan in Hudson Yards. It was a construction loan, I believe, to Related property I think was The Spiral. Yeah, I think it's loan number six that appears in your deck. Just using that as an example of how you view the office market, and you used the term opportunistic, you know, when you were talking about U.K. How is this loan playing out, and do you see this as like an example of what Blackstone, with its relationships with sponsors, is able to consistently accomplish? Thank you.
Yeah. You know, I think that The Spiral is a great example of our philosophy and thesis on office. That is a sub-50% loan-to-cost construction loan to Tishman Speyer, actually, who's one of our strongest, most experienced and, you know, most strategic sort of development sponsors. We've been in that loan. The leasing has been very favorable. There's been a couple of recent news articles about it. Construction has proceeded as expected. Overall, you know, our thesis about newer, higher quality office in the right locations really outperforming has very much been borne out by that asset, and we feel great about that exposure. You know, we actively look to make more loans like that. I think that thesis, as we've talked, you know, I've spoken about consistently, is really true throughout markets.
You know, we see that the newer well-amenitized office, it provides an office environment for employees, for users that is really differentiated and really fosters the type of collaboration that drives companies ahead, being in office. You know, we are looking for those opportunities as lending opportunities. We like being in best-in-class assets. We like being at very low leverage points, obviously. We're seeing a lot of those types of opportunities around the world.
Great. Well, I appreciate that color, and I'll just leave it with that. Thank you.
Next is Jade Rahmani with KBW. Please go ahead.
Thank you very much for taking the questions. Do you agree that mark-to-market portfolio LTV ratios would be lower than the 65% you're showing, considering that, you know, in terms of your recent originations, still probably at least half the portfolio might be originated prior to the middle of last year, and we've seen a big run-up in commercial real estate prices. Do you think something in the mid-50s is reasonable to assume?
I think directionally, your philosophy is right. You know, I think that, A, there's been increase in real estate values driven by demand fundamentals, driven by lack of new supply, rising replacement costs, especially in the markets and assets we're focusing on. And even more importantly, you know, as a transitional lender, we're lending into value add business plans. So, you know, the value of the assets we lend on by virtue of the capital going into them, the repositioning that our sponsors are typically doing should increase value in assets over time. You know, in terms of the magnitude, you know, I'm not sure exactly where that would land, but I think directionally you're on the right track.
Thank you. Secondly, do you believe that the overall commercial real estate market is positioned to absorb the higher rate environment without experiencing an uptick in loan defaults? What we experienced during COVID was a shock to the system with an immediate spike in loan delinquency rates and defaults, then a lot of government assistance as well as forbearance that mitigated that impact and then, of course, the improving economy. Delinquency rates have continued to improve. But at this point, we will have a substantial amount of debt maturing this year that will be refinancing into likely a 5% coupon, potentially higher depending on term. Do you think that the market can absorb that coupon rate based on fundamentals, or do you expect the market rate of delinquency and default to increase?
I think it's important to think about the fact that, you know, we see the market as not monolithic. You know, we're most focused on the parts of the market, obviously, that we think are well-positioned to absorb the types of rising rates we're looking at. You know, our borrowers are sophisticated. They're investing in assets, as I mentioned, that have value add plans that should increase cash flow over time. Importantly, you know, rising rates obviously, you know, very driven by the inflation that we're seeing, which when you're investing in hard assets is really a place that can realize the benefit of increasing income, you know, in the face of inflation. I think the other thing to really focus on is that leverage in the system is still quite low generally.
You know, looking at the refinancing opportunities for assets that are in the market, you know, if we were in a position like pre- you know, last GFC when leverage was 80%-85%, that's a completely different story than today when leverage really has been more in that mid-60s level across all markets and asset classes. It's a much lower level. And in particular, obviously in our portfolio, you know, we think that the combination of low leverage assets that can grow their incomes in the face of rising inflation to outpace rates, and importantly, sponsors that are sophisticated and have been preparing for the prospect of rising rates for a long time, really should inure to the benefit in terms of the performance of the assets and the loans that we're making.
Thank you.
The next question is coming from Rick Shane with J.P. Morgan. Please proceed.
Thanks, everybody, and hope you're well. I just wanted to talk a little bit about execution on the loans, given the transitional nature. I'm curious if you were seeing any delays in terms of build out or construction. Are you also seeing any delays in terms of absorption of properties?
Thanks, Rick. That's a great question. You know, I think that we talk a lot about sponsor selection, and that's important from a financial perspective, but it's also really important from an execution perspective. As far as value add business plans, when we're lending to some of the most active and experienced developers in the world, that really creates a difference in their ability to source materials in their relationships with the trades, with GCs, and their ability to really get their projects done. On the margin, you know, have we seen one-off examples of, you know, one particular material, you know, that's been a little bit delayed? Of course. You know, I think no one's immune from that.
I think that by and large, because we're lending to sponsors that are really the best able to manage these pressures, we've really seen very on track performance for our assets in terms of the execution of the value add business plans. I think on the absorption side, you know, it really depends on, you know, the asset in the market obviously. I think the growth markets have exceeded all expectations in terms of, occupancy, rent growth, absorption, really across all sectors. Multifamily is the most obvious example of that, but we're seeing it in all sectors. I think that in some of the, you know, New York and San Franciscos of the world, I mean, those markets have been a little bit slower, but we're still seeing positive trends for the types of assets that we lend on.
Great. Hey, Katie. Thank you very much.
Next we have Derek Hewett with Bank of America. Please go ahead.
Excluding the prior quarter, I believe prepayment fees were still remained well below pre-COVID levels. Could you provide any additional color when prepayment fees could potentially normalize?
Hey, Derek, it's Doug. Prepayment fees are, you know, lumpy. Of course, in the fourth quarter, we did have, you know, an outsized amount of prepayment income. This quarter, we happen to have, vanishingly little, you know, effectively none. Typically, we've had, you know, close to $0.04 on average, if you look back over, you know, over the last three-four years. It does fluctuate quarter by quarter. I think with the velocity that we've seen return to the portfolio in 2021, which is, you know, maintained, through 2022 thus far, we would expect to see that $0.02-$0.04 of prepayment income on a normalized or annual basis, going forward.
I think we're through the slowdown in prepayment income that we saw, you know, due to you know the stasis in the portfolio during COVID. We're never gonna be away from the fact that it's generally very lumpy and it can fluctuate quarter to quarter.
Okay, great. My follow-up is just given the asset sensitivity disclosures, are there other factors that we investors need to potentially consider in terms of either maybe tighter credit spreads to mute those higher rate resets or maybe even the higher delinquency rates that could potentially offset at least a portion of that asset sensitivity?
Hey, hey, Derek, Doug, again. That is a good question. You know, no doubt this is an all else equal analysis that we've included in the earnings release and that Tony alluded to, and there are lots of variables that go into, you know, our earnings. We certainly don't expect in our portfolio any drag from non-performance. There are no signs of that. You know, with regard to the loans that are currently on the books, obviously the spreads are locked in, our financing spreads are locked in as well. We wouldn't expect a lot of variability in that in the timeframe that we're expecting these rate changes, you know, to happen. Is there an inverse correlation between rates and spreads generally? You know, we think there probably is.
It's not necessarily one for one. I wouldn't, you know, wouldn't read too much into that. Generally speaking, we're able to maintain the net interest margin that ultimately drops to the bottom line by, you know, moving the spreads on our debt and our assets in tandem. I think, you know, an interesting sort of beneath the surface layer, you know, to the interest rate sensitivity is really the sensitivity to the different rates and the different currencies. If, for example, LIBOR, US dollar LIBOR moved-
Further, faster than Euribor, we would see significant upside in these numbers due to the way our FX hedges work. There is a lot, you know, to it in terms of variability as you suggest. We think there's probably variability to the upside into these numbers, you know, which we've presented.
Thank you.
Our final question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks. Following up on that last question about the rate sensitivity, you know, how are you thinking about the dividend, you know, given the potential for higher per unit earnings coming from higher short-term rates?
Sure. Thanks, Doug. You know, we obviously review the dividend with the board quarterly and, you know, it's a discussion every quarter, around, you know, our thoughts on earnings and the sustainability of the earnings profile. You know, the increasing earnings and creating the most attractive stable stream of dividend income for our shareholders is our key priority. You know, we also like the benefit of building book value through retained earnings along the way. We feel very good about the trajectory of our earnings. We've talked a lot about that today, especially given interest rate sensitivity and our ability to continue seeing portfolio growth. I think with that context, yeah, we'll continue to reevaluate the dividend on a quarterly basis.
Great. Just on that, you know, how much or how do you view your flexibility about how much capital or how much earnings you could retain versus kind of needing to pay out for the retest?
We passed our retest pretty cleanly, so the $0.62 dividend level that we have today, I would say from a technical perspective isn't in jeopardy. You know, to Katie's point, it is something that we're regularly, when I say in jeopardy, meaning that we would need to increase the dividend just for compliance purposes. To Katie's point, we do reassess this quarterly and at some level, if you started to get really far out, you know, along the table, you may hit that point. At present, we don't have a lot of technical pressure on the dividend level.
Great. Appreciate that.
With that, I would like to turn the call back to Weston Tucker for closing remarks.
Great. Well, thank you everyone for joining us, and if you have any questions, please follow up with Tim or myself after the call. Thank you.