Blackstone Mortgage Trust's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: Blackstone Mortgage (BXMT)

Blackstone Mortgage Trust Inc (NYSE:BXMT)

Q2 2013 Earnings Conference Call

July 31, 2013 10:00 AM ET

Executives

Stephen D. Plavin – Chief Executive Officer and President

Geoffrey G. Jervis – Chief Financial Officer, Treasurer and Assistant Secretary

Analysts

Don Fandetti – Citigroup

Jade J. Rahmani – Keefe, Bruyette & Woods, Inc.

Daniel K. Altscher – FBR Capital Markets

Joel J. Houck – Wells Fargo Securities LLC

Kenneth Bruce – Bank of America

Richard B. Shane – JPMorgan Securities LLC

Stephen Laws – Deutsche Bank Securities Inc

Operator

Hello and welcome to the Blackstone Mortgage Trust, Inc., Second Quarter 2013 Results Conference Call. Before we begin, please be advised that the forward-looking statements contained on this conference call are subject to certain risks and uncertainties, including but not limited to the performance of the Company’s investments; its ability to originate investments; its capability to repay debt as it comes due; the availability of capital and the Company’s tax status; as well as other risks indicated from time to time in the Company’s Form 10-K and Form 10-Q filings with the Securities and Exchange Commission.

The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events or circumstances. There will be a question-and-answer session following the conclusion of the presentation. At that time I will provide instructions for submitting a question to the management.

I will now turn the conference over to Stephen Plavin, CEO of BXMT. Please go ahead.

Stephen D. Plavin

Thank you, Misty. Good morning, everyone, and welcome to our first earnings call as Blackstone Mortgage Trust. With me are Mike Nash, our Executive Chairman and Geoff Jervis, our Chief Financial Officer.

Hopefully, you have had time to review our earnings release and 10-Q, which we filed last night. The second quarter 2013, we earned $0.22 per share driven by the continued strong results in the legacy portfolio, which continues to outperform. But the true highlights of Q2 relates to the exciting kickoff of our senior mortgage lending business under Blackstone management, even though the full financial impact is still a quarter away.

This is an excellent time to be in the senior loan origination business. Transactional activity in the real estate capital markets is expanding the demand for floating-rate mortgage loans. Market forces boosting the prospects for our business include larger amounts of maturing fixed and floating-rate loans, expanding property sales volume, and increased resolution to the peak of the market loan workouts.

We are also seeing greater demand for financing to bridge lease-ups, renovations, and operational improvements or simply the hold period prior to a future property sale. Bernanke’s remarks in May caused rippling effects to the credit markets, including higher rates and wider spreads. This led to a 125 basis point increase ion the borrowing rates for long-term fixed rate mortgages from CMBS loan originators, which impacted new origination activity in that market.

However, in our market, the private short-term floating-rate senior mortgage market, spreads held, LIBOR didn’t move, and originations continued unabated, allowing us to meet our volume in return objectives. The second quarter was very active for BXMT. We commenced our senior mortgage lending business designed to produce high current income with low volatility for BXMT investors. We began originating loans and arranging credit facilities to finance them on a term and index matched basis.

In late May, we completed our equity offering raising $660 million in growth proceeds, a great endorsement of our simple floating-rate senior mortgage business plan and our sponsorship as a Blackstone managed company. By the June 28 quarter end, we’d closed $765 of loans and $1 billion of credit facilities.

To-date less than three months from our capital raise and initial loan closing, we’ve closed over $1 billion of loans and $1.3 billion of credit facilities. In addition to the closed loans, we have another $376 million of prospective loans with agreed terms in the closing process.

Blackstone deal flow, proprietary property market information, and industry presence provide is with significant competitive advantages in originating and financing senior mortgage loans for BXMT. You can see this in the magnitude of the capital we raised and the loans and credit facilities we closed in a very short period of time.

Jon Gray, the Global Head of Real Estate for Blackstone is a member of the BXMT Investment Committee. Michael Nash, our Executive Chairman and Chief Investment Officer of Blackstone’s Real Estate Debt Strategies Group; and John Schreiber, the Co-Founder of Blackstone’s Real Estate Investment business are active as both BXMT board members and investment committee members.

The competitive advantages of being part of Blackstone hold true, not only in the U.S. but also in Europe, where we expect additional lending opportunities. The greater distress, inefficiency, and reduced liquidity in these markets should produce significant opportunities for us to make loans with attractive risk adjusted returns. We will focus in the countries with the most favorable, legal and regulatory structures. We anticipate that our initial European mortgage loan closings will occur later this year.

As you can see, we’re off to a great off start, ahead of the origination pace we anticipate when we were on the road show in May. We are very pleased with the risk profile of the first mortgage loans we have originated. Our forward pipeline of senior loan opportunities looks equally strong. We remain confident that we will deploy our equity capital prior to year end.

We anticipate paying our first dividend as BXMT following the third quarter. Going forward, we expect that our dividend will track our average deployment during each quarter as we go from approximately 50% invested to fully invested. We continue to target a fully ramped LIBOR indexed dividend of 8% on book value, and believe that we should trade at significant premium to book as a result.

A final point about our business, our short-term floating rate assets benefit from rising short-term interest rates, as their current yields increase with these rates. REIT investors tend to fear rising rates particularly investors in residential mortgage REITs, where many of the assets are fixed rate, but the liabilities float, but BXMT is different.

Our loans are LIBOR based and insulated from the valuation impact of rising rates. Our credit facilities are also LIBOR indexed and matched to our assets. As a result, our equity returns directly benefit from the increases in LIBOR. When rates rise in tandem with better economic activity, which is a scenario that we anticipate, then the real estate underlying our loans will generate higher cash flows as well.

In summary, we are very excited about the progress we have made. We are exceeding our origination target, our products and platforms are resonating with real estate owners, our credit facilities are best in class, and the synergies with Blackstone are providing enormous benefits.

And with that, I’ll turn it over to Geoff.

Geoffrey G. Jervis

Thank you, Steve, and good morning, everyone. As Steve mentioned, last night we reported our earnings for the second quarter and filed our 10-Q. This filing represents our first quarterly filing after our successful re-IPO, reverse stock split and name changed to Blackstone Mortgage Trust. And more important, our first filing after commencing our new mortgage lending business, needless to say, an extremely productive quarter by any measure.

For the second quarter, consolidated GAAP net income was $2.7 million, or $0.22 per share. The period’s results were driven by the activity in our CT legacy portfolio as we effectively commenced our new loan origination business in the final month of the quarter. At quarter end, total consolidated assets on the balance sheet stood at $1.1 billion, increasing by $722 million as we funded $757 million of new loans in the lending business, offset by $99 million of repayment in the CT legacy portfolio.

As a result of the repayment activity, the CT legacy portfolio shanks to $268 million, representing less than 25% of total assets and only 9% of book value. While the accounting for the CT legacy portfolio continues to cause a degree of complexity in our financial statements, our new lending business model is simple, produce attractive returns on equity by prudently leveraging a portfolio of newly originated first mortgages.

During the period, we originated $765 million of loans with an average loan to value of 65% and a weighted average yield of LIBOR plus 5.26%. The volume, risk metrics, and yields are all in line or better than our targets. As our loan origination segment continues to grow and our CT legacy portfolio continues to experience repayments, our GAAP financial statements will continue to clarify and become a more straightforward expression of our business and performance.

On the liability front, we have secured significant credit for our new business. During the quarter, we closed $1 billion of credit facilities with four distinct providers and are in the process of adding significant additional credit capacity in both the U.S. and Europe. Our revolving credit facilities provide us with the ability to efficiently finance first mortgages at leverage levels of three or four times and all-in cost in the range of LIBOR plus to 2.75%, allowing us to generate returns on equity at or above our target levels.

In addition to the attractive economic terms of our liabilities, we have designed our credit facilities to create a stable right-hand side of the balance sheet. Specifically, our credit facilities are partial recourse term-matched financings with modified mark-to-market provisions that do not allow from marks to market other than those associated with underlying collateral or property level performance, eliminating capital markets-based marks to market and the associated volatility. On the equity front, book value at quarter end was $713 million or $24.67 per share, increasing as a result of the May 29 equity offering.

As Steve mentioned, we’re in place to deploy the capital from our May equity offering before the end of the year. Net proceeds from the offering were $634 million and accounting for protective liquidity in anticipated leverage levels, we believe the equity raised supports the origination of approximately $2.2 billion of senior mortgage loans. With $765 million closed at quarter end and $289 million closed subsequently, we have originated $1.1 billion of loans to-date, representing 50% of the total loans we expect to fund from the May equity offering.

With the addition of $376 million of loans that are currently in the closing process, we will have originated $1.4 billion of loans, representing 65% of the capacity from the May equity offering. At this pace we expect to be fully deployed at some point in the fourth quarter.

Turning to the CT legacy portfolio; the quarter saw more solid gains as we continue to resolve the remaining loans. During the quarter, we received $99 million of repayments, representing 27% of the portfolio, and experienced $6 million of fair value increases on the portfolio as a whole.

As a result of the repayment specific to CT legacy partners, we were able to eliminate the last of the repurchase facility debt on the portfolio, as well as all of the remaining interest rate hedges, both significant milestones for us. Over time, we expect further reductions from repayments in the legacy asset base and as a percentage of total assets and book value.

Looking forward, as we digest the progress we have made in executing our new loan origination business plan, we expect to be able to pay a partial dividend after the third quarter and expect to be in a position to pay a stabilized dividend after the fourth quarter.

As we have consistently said, our expectation for a stabilized dividend is a LIBOR indexed 8% dividend on our book value. As Steve mentioned, our objective is to provide protection in terms of asset value and cash flows in a raising interest rate environment. We expect to accomplish this by originating floating rate, LIBOR-indexed mortgages, and financing them with floating rate LIBOR-indexed liabilities. The result is effectively a LIBOR-indexed dividend and attractive feature in the current interest rate environment.

On a final note, last Friday we filed a shelf registration statement that will allow us to issue various debt and equity securities in the public markets should we deem the market conditions to be appropriate. While we have no plans to offer equity immediately and continue to be subject to the 108-day lockup agreement we entered into in connection with our re-IPO at the end of May.

The filing will allow us to have sufficient access to capital in the future, a valuable tool as we continue to grow this platform and become a larger scale industry-leading lending business.

And with that, I’ll turn it back to Steve.

Stephen D. Plavin

Thanks, Geoff. Misty, please open the call to questions.

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions) We’ll take our first question from Don Fandetti with Citigroup. Please go ahead.

Don Fandetti – Citigroup

Yeah, first Steve and Geoff, the yields came in pretty strong this quarter. I was just curious on your outlook for the sustainability of spreads and your senior floating-rate loans, just given the competitive dynamic as it increases. And secondarily, Geoff, just to quickly make sure I understand, the Q3 dividend would be paid after Q3, and based on your ramp up would probably be somewhere in the 50% to 65% of full capacity type level?

Stephen D. Plavin

Don, I’ll take the first part of the question. I think that we’re seeing the spread environment to be stable today. We do think it’s likely tightened over time. I think we have room in our business model and also we have the benefit of our liabilities being floating rate and then we have the ability to reprice the liabilities in the event that our assets get repriced to tightening spreads.

In general, we are originating loans in the LIBOR plus 400 to 500 range all-in. So I think the results you see from Q2 were a little bit skewed by one very high rate loan that we did on a land site in Manhattan; but in general, it’s a. LIBOR plus 400 to LIBOR plus 500 business.

Geoffrey G. Jervis

And Don with respect to your question about dividend timing, yes, my comment – to clarify, the third quarter dividend would be paid in early October and the fourth quarter dividend would likely by paid in early January. And with respect to the size of the dividend, or as you put as a percentage of the stabilized dividend we pay in the third quarter, I think our current expectation is somewhere in the range of 50% or greater of the stabilized dividend.

Don Fandetti – Citigroup

Okay. Thank you.

Operator

Thank you. We’ll take our next question from Jade Rahmani with KBW. Please go ahead.

Jade J. Rahmani – Keefe, Bruyette & Woods, Inc.

Thanks for taking the question. The activity you announced so far in the third quarter including the expected closings equates to a monthly pace of roughly or in excess of $200 million per month. Do you view that as a sustainable rate?

Geoffrey G. Jervis

Jade, I do. I think that, it’s difficult to predict loan originations on a monthly basis or even on a quarter basis, because we’re always making sure that the loans that we see and will close are of appropriate credit quality. But I think as you see, our pace is very strong. We are faring very in the market on a competitive basis. So I do think that pace or more significant paces will be achievable going forward.

Jade J. Rahmani – Keefe, Bruyette & Woods, Inc.

Okay, thanks for that. And then beyond the actual originations, can you just comment on deal flow and overall activity levels, the number of conversations that are ongoing, the number of interactions? Has that been increasing, or are you seeing that lessen somewhat, given interest rate volatility?

Stephen D. Plavin

The deal flow is very good. I think one of the things to note is when we originated our original portfolio earlier in the second quarter, we hadn’t rolled out the platform, we’re still really in the process of doing that of creating more awareness that Blackstone is in the senior mortgage lending business. As we do that, we’re seeing the opportunities that are available to us expand pretty significantly. And we have great market access to our real estate business here overall. And I do think that we’ll see opportunities continue to expand not only in the U.S., but in Europe as well.

Jade J. Rahmani – Keefe, Bruyette & Woods, Inc.

Thanks. And just a clarification on the high-yield urban land site you mentioned in Manhattan. Would you expect any potential prepayments on that over, say, the next 6 to 12 months?

Stephen D. Plavin

Well, it’s a possibility. A lot of your floating-rate loans are become open to repayment at various stages of their lives. I think in this case, we do expect to be taken out by a construction loan sometime in the next 12 months. I think the exact timing of that is still subject to the process that the property owner has in terms of securing that debt financing. But one of the nice things that we liked about the land loan was that, we saw the identified source repayment, it was in an established location with a development plan very far progressed.

Jade J. Rahmani – Keefe, Bruyette & Woods, Inc.

Great. Thank you very much.

Operator

Thank you. We’ll take our next question from Dan Altscher with FBR. Please go ahead.

Daniel K. Altscher – FBR Capital Markets

Thanks, good morning, everyone. I was wondering, the all-in yields that LIBOR plus 5% to 6%, is there a apples-to-apples number for the financing cost of that? Because that LIBOR plus 1.98%, if cash is there, are there other fees or anything that makes this a little bit more GAAP comparable to the 5% to 6% that we can think of?

Geoffrey G. Jervis

Yes. And you’re right the LIBOR plus 198 that’s in the press release is a cash cost of debt. The reason that we didn’t put in the book the GAAP cost was that given the fact that we are only borrowing $165 million of credit, yet we have paid fees and expenses for the $1 billion of credit, it wasn’t an applicable number. On a stabilized basis, our GAAP cost of debt should be somewhere in the range of LIBOR plus 2.5 to LIBOR plus 2.75.

Daniel K. Altscher – FBR Capital Markets

Great, that’s perfect. That’s exactly what I was looking for. And then the opportunity in Europe, that’s obviously pretty interesting. And I think you alluded to maybe more safer countries or whatnot. Can you maybe elaborate a little bit more as terms of property types or specific geographies or even potential returns that you think that you can get out of the region?

Michael B. Nash

Sure, Dan, this is Mike Nash. So we’ve been lending in Europe through our existing platform for several years as we focus on the UK market, Germany, and France as primary focuses. Those are jurisdictions where we’ve been owning real estate, where the lending jurisdiction and legal protocols make sense and work et cetera. For this business what’s really important is to establish credit facilities, so we can take out currency risk and things like that.

We initiated I think it was 11 meetings over the last month to get some credit for the region, we’re building a pipeline. So we are really optimistic about what that market opportunity looks like. It’s more impaired than it is here in U.S., less banking capacity than we see here in the U.S., no CMBS market to speak of.

So you should expect from us I think our continued evolution of that business plan over the next three months to six months. So – but it has got to start with credit facilities first. And the risk reward proposition, I would say the same or better return, taking less risk just to reflect the fact that there is more systemic risk in that region.

Daniel K. Altscher – FBR Capital Markets

Okay, great. We will be on standby and on watch. Thanks.

Operator

Thank you. We’ll take our next question from Joel Houck with Wells Fargo. Please go ahead.

Joel J. Houck – Wells Fargo Securities LLC

Yeah, thanks, and good morning. Just to kind of clarify on page four of the debt facility, I know you guys added $250 million after the quarter. Can you talk about, I’m sure the advanced rates vary by facility; but give us a sense for what they are, not necessarily by lender, so that we can – I guess what I was trying to get to is you raised net proceeds of $634 million; what’s the maximum amount of leverage available to you guys off your equity?

Geoffrey G. Jervis

Sure. I try to give a little sense of maximum origination capacity of the $634 million of net proceeds. And in my remarks I made the comment that we felt we could originate $2.2 billion worth of the loan, so the difference would be the credit need for the business plan.

Specifically, answering your question on page four of the press release, where we list out the $1 billion of facilities that were closed by quarter end. And you’re right, we did close an additional $0.25 billion up sized to one of the facilities post quarter end. The advance rates for first mortgages range from 75% to 84% on the existing facilities we have in place.

Joel J. Houck – Wells Fargo Securities LLC

Okay. That’s exactly what I was looking for. So what you are saying is that the total based on the equity, 15.66 is kind of the total amount of debt you could employ based on these advance rates?

Geoffrey G. Jervis

That’s not the total amount of debt we could deploy, it’s the total amount of debt that we plan to deploy.

Joel J. Houck – Wells Fargo Securities LLC

I got you. Okay.

Geoffrey G. Jervis

We won’t go – we won’t fully deploy, our equity will maintain liquidity for safety purposes for asset management to bridge to future capital raises.

Joel J. Houck – Wells Fargo Securities LLC

Okay. And the attachment point to LTV of a total of 65%, is that representative of what you guys are seeing with your pipeline? I know obviously it depends on property type. But overall, I mean how should we think about that going forward?

Stephen D. Plavin

I think that most of what we are seeing falls in the range of between 60% and 75%. So I think, 65% in the range, I would say, it’s more typically 70% would the center of the range.

Joel J. Houck – Wells Fargo Securities LLC

Okay, great. Thanks, guys.

Operator

Thank you. We’ll take our next question from Kenneth Bruce with Bank of America. Please go ahead.

Kenneth Bruce – Bank of America

Thank you. Good morning. Firstly, good quarter. Thank you for the clear communications around your guidance for the year. Could you maybe provide a little bit of context in terms of whether you expect any seasonality in the lending volumes in particular coming through the numbers? Or do you think you are going to grow through any normal seasonality that may be evident at the industry level?

Stephen D. Plavin

This is a very good question, because typically the origination market slows down at the end of the summer and then also at the beginning of the year. So far we haven’t seen a slowdown in our pace of originations and the volume of new deals that we’re seeing. We’re also rolling in August, but we have a really, really strong forward calendar. So I don’t think we’re going to feel that this year. So we’re pretty optimistic that the pace will continue right through the end of the summer.

Kenneth Bruce – Bank of America

Good. And then in your prepared remarks you touch on a number of things, in particular being fully deployed by the end of the year, puts you into the market from an equity perspective; not that long after, your shelf registration is in the process of working its way through.

You mentioned about the evaluation, obviously, that market conditions would be important. How are you thinking about the exercise of capital raising going forward? Is this something that you would anticipate relatively small equity raises in tandem with the current production and just doing more frequent raises, or how are you thinking about that?

And then more generically, on the road show you had some discussion as to how big you think the business can grow over a period of time. If you could maybe update that, if there is any update, or maybe just discuss how you think the growth in the business, where would plateau, please.

Stephen D. Plavin

Sure, I’ll answer the first part of the question. With respect to our capital needs, obviously we’re experiencing tremendous demand for our capital from the market and the lending environment is very strong. And as long as that is maintained, we do expect to be fully deployed in the fourth quarter. At that point in time the market continues to be strong and the stock is appropriately valued. We do anticipate a capital raise.

From thinking about the stock, obviously we know where book value is, we know where the last deal price was done, and those will all be significant factors in our decision making. And with respect to the size of the offerings, it really depends upon the deal flow. I think if the deal flow is extremely robust, we would turn towards larger offering. If the deal flow was softer, we might go to the lower end of the range.

Geoffrey G. Jervis

Yeah, I think in terms of the second half of your question, our goals for the business are to achieve large scale, consistent with Blackstone’s footprint in real estate, consist with what we see as being part of the overall Blackstone’s platform. So we’re going to gravitate towards larger loans in larger markets with primary sponsors. And so and I do think that would create the very larger market opportunity for us, which we intend to exploit.

Kenneth Bruce – Bank of America

Okay. And just lastly, the topic of valuation and market conditions is always a little bit of a challenging one to answer. Looking at some of the peers and you went out of your way to differentiate yourselves from some of the more levered rate-sensitive mortgage REIT peers, and I don’t think anybody invested in Blackstone necessarily would put you in a comparable with that crowd. But there are, obviously, a few other commercial mortgage REITs; there is really only one that’s valued currently at a significant premium. What do you think it takes for the market to maybe understand the nature of what you are doing and how it’s different than even those that are more comparable from the commercial standpoint, in order to possibly give you that significant premium to book valuation that you mentioned?

Stephen D. Plavin

Well, we’re hopeful that by having good and clear communication in terms of what we’re doing in the market from a loan origination standpoint asset management, the growth of our portfolio. The competitive advantages we have as being part of Blackstone in terms of sourcing, transactions, and evaluating them. We think those are things that the market will appreciate over time.

We really do think we’re differentiated from our competitors in those regards. We’re staying true to a strategy that is a senior mortgage strategy, so we’re not taking a high degrees of asset level risk in this vehicle. So those are all features that we expect the markets will reward us for going forward. And so and we’ll just have see where the stock trades. We’re very optimistic that the market with greater communication will understand that how differ from the competitors.

Geoffrey G. Jervis

And I would just add to that, as we paid dividend, as we continue to make loans and demonstrate to the market that we can execute, I think that the appropriate valuation will come.

Kenneth Bruce – Bank of America

Well, you’re off to a very good start. So thank you very much for your comments today.

Geoffrey G. Jervis

Thanks, Ken.

Operator

Thank you. We’ll take our next question from Rick Shane with JPMorgan. Please go ahead.

Richard B. Shane – JPMorgan Securities LLC

Hey, guys. Thanks for taking my questions this morning. I would like to talk a little bit about the timing and character of activity-based revenues and expenses. Specifically sort of thinking about were there any structuring fees and origination fees that came through this quarter, and sort of the mix between what you recognize immediately and what you accrete in over time? But also put that in the context of whatever professional fees you incur, so we understand the timing differential between the fees and the expenses.

Unidentified Company Representative

Sure Rick. With respect to – We do have a breakout of G&A in the 10-Q which I would encourage people to take a look at but I think your instincts are correct which was that in these first few quarters we are experiencing probably slightly higher G&A than we expect on a run rate basis because of the transactions that we have executed because we are getting the platform ramped. And I think that overtime, as we have said in the past that we believe G&A on a run rate basis will be a lot closer to the $4 million a year or $1 million at quarter range.

With respect to the differences between cash and non-cash items, the revenue side of equation on the new business is very straightforward. There is a difference, which is simply the amortization of upfront fees, extension fees and offset by any expenses amortized over the maximum life of a loan.

And on the credit front, we do the same thing where we will amortize any drawdown fees or extension fees on our credit facilities, plus any expenses associated with pledging individual assets. We are setting up facilities at the outsets over the expected life of the facility, but those really are probably 25 to 50 basis points of costs or of income on the interest and expense line items.

Richard Shane – JPMorgan

Hey Geoff, so just to be clear then, none of the origination fees are immediately recognized. Those are just included in the yield over time.

Geoff Jervis

Correct, okay.

Richard Shane – JPMorgan

Okay. Great. That’s very helpful.

Geoff Jervis

So, just to clarify the LIBOR plus 5.26% on the existing book is the amortization on a level yield basis effectively, fees and expenses associated with that loan portfolio.

Richard Shane – JPMorgan

Got it. Great. Thank you, guys.

Operator

Thank you. We’ll take our next question from Stephen Laws of Deutsche Bank. Please go ahead.

Stephen Laws – Deutsche Bank Securities Inc

Hi, thanks. Congrats on a very nice quarter of portfolio growth. A number of my questions have been hit on already, but I want to follow up on the previous question. Did I understand that correct, that you take the origination fees and you will amortize that income over the expected life of the investment?

Geoff Jervis

Correct. That is GAAP, given our accounting regimes.

Stephen Laws – Deutsche Bank Securities Inc

Great. So assuming we see anything pay off earlier than expected, we would see a one-time kind of acceleration of all the income that was yet to be recognized?

Geoff Jervis

Correct, or yes. And expenses, well to the extent that we have expenses associated with originating loans. But yes in general, it is a yield enhancement if a loan pays off early.

Stephen Laws – Deutsche Bank Securities Inc

Great. Okay. And then can you talk maybe a little bit, you hit on Europe a little earlier in the call; but maybe US competition. I know while the BXMT vehicle has only been around for a couple of months, you guys have been in this business for quite some time. So how have things changed in the market with what you are seeing on the competitive front in the last three, six, or 12 months? Kind of whatever time frame you feel is most informative. And then what things do you feel like BXMT does that really differentiates itself the most? Is it flexibility of structure? Is it larger deal sizes since you’re willing to do a little bit larger deals than some of the peers? Can you maybe talk about your positioning here in the competitive environment in the U.S.?

Geoff Jervis

Sure. I think from a competitive standpoint, I mean, there is really no true one-to -one competitor with what we are trying to do. We have – on any one transaction we see a lot of different competitors. Sometimes, we’ll see other commercial mortgage rates, sometimes we’ll see other private lenders maybe in private equity fund format. Occasionally we’ll see commercial banks. But in general, what we are finding is that the competitive environment is good for us. We have the ability to do large loans, we have the ability to transact quickly and definitively.

That’s one of the big advantages we have over banks and other finance companies. And that, for borrowers we need either quick execution or certainty of execution, that’s a big advantage to us. I think a lot of the advantages that we have in the market relate to being part of the overall Blackstone platform. So we really have great information, as it relates to the properties that we own or control.

For example, one of the loans that we made in the quarter was in Silicon Valley and Blackstone through the equity side of the house is the largest property owner in Northern California with 15 million square feet of owned property. They literally own properties all around the property that we are evaluating. In many cases Blackstone tried to buy the properties or formally own the properties that we are looking to finance. So a big advantage there.

Our relationships with intermediaries and mortgage brokers are also very helpful. And we tend to be very, very large client of the firms that control the mortgage market form brokerage standpoint. It gives I think another competitive advantage others don’t have.

So all those features that why we are able to originate at the pace we are originating. And why the quality of our portfolio will continue to be strong because we have such great information and a very strong investment process.

Stephen Laws – Deutsche Bank Securities Inc

Great. I appreciate the color there. One last question. You mentioned in the presentation on your website the amount of loans you closed and the amount that has been funded, which is relatively similar. But can you maybe talk about just the nuances there? What is the typical timeline between closing a loan and funding it? And what, if any, impact does that have on when you start receiving the interest income from those new investments?

Stephen D. Plavin

When we describe a loan is closed, that means it has been funded. In some cases, the commitment amount maybe slightly larger than the initial funded amount. Some of our loans have future funding provisions for additional cost that property owners will incur as we go forward. For example, tenant improvement dollars and capital expenditures dollars for buildings where this renovation work is ongoing.

But in general, the vast majority of our capital goes out at the closing of the loan. In terms of how long the origination process takes, it really varies loan to loan. Sometimes when we hear of a loan till when we close, it can be as short as 30 days, sometimes as long as 90. Generally, the gestation proof for our loans is in that 30 to 90 day band.

So for the loans that we talk about as being in closing. And if the timeframe for those is probably in that sort of 30 to 60 day window since most of those loans were have been originated in the past few weeks. And on a go-forward basis, and we continue to have good visibility on a large pipeline potential opportunities for the fourth quarter and hopefully are as we roll into later in the year. The pipeline that will roll in to the first part of 2014.

Stephen Laws – Deutsche Bank Securities Inc

Great. Appreciate you taking my questions. Thank you.

Operator

Thank you. We’ll take our last question from Joel Houck with Wells Fargo. Please go ahead.

Joel J. Houck – Wells Fargo Securities LLC

Yeah, just a follow-up on the, you mentioned a robust pipeline. Can you put any numbers? Or how should we think about that in terms of size, likelihood of closings, or size of term sheets issued? Just any color would be helpful on that.

Stephen D. Plavin

I think if you – what we’ve indicated to the market in our communications, is that we feel that we’ll get to the $2.2 billion of total originations at some point in the fourth quarter. I think that, given a current pace, we have the potential for that to occur earlier in the fourth quarter as in later. But, it is difficult to predict exactly when the loans will close.

In terms of what we are evaluating, and the market opportunities is very strong right now for us, and we are winning a lot when we compete. At any point in time, we are probably evaluating between $1 billion and $3 billion of perspective loans. The vast majority of what we see, get rejected in our screen process. And so we really focus on, again, what we are typically focused on is larger loans in major markets with top sponsors. So a lot of the loans are either smaller size or don’t need to leverage a risk profile of our platform to get rejected.

Joel J. Houck – Wells Fargo Securities LLC

Did I hear you right? You are evaluating up to $3 billion in total potential opportunities?

Geoffrey G. Jervis

Yes.

Joel J. Houck – Wells Fargo Securities LLC

Okay. So that would mean, so roughly if you get to $2.2 billion you’re going to close about half of that. I understand the timing is subject to…

Geoffrey G. Jervis

No, we will actually close – that sort of on the – that’s incremental. We have between closed and closing we are at about $1.4 billion. So we have approximately $800 million of capacity left. I mean, it will vary depending upon the nature of loans that originate and how we choose to finance them.

For that $800 million, that’s what we are looking at. Today, we are looking at – again that sort of $2 billion to $3 billion worth of opportunities. But we’ll see – Before we get that $800 million deployed, we’ll see many additional opportunities as we roll into the late summer and early fall. So relatively small percentage of the deals that we initially evaluate may get through to the closing process.

Joel J. Houck – Wells Fargo Securities LLC

Okay.

Stephen D. Plavin

So I think that’s sort of an important thing to understand.

Joel J. Houck – Wells Fargo Securities LLC

Okay, great. Thank you.

Stephen D. Plavin

You’re welcome. So I think – I believe that one was our final question. Thank you everyone for participating. We look forward to reporting to you next quarter.

Operator

This does conclude our conference. You may disconnect anytime. Have a wonderful day.

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