Blackstone Mortgage Trust's (BXMT) CEO Stephen Plavin on Q4 2015 Results - Earnings Call Transcript

| About: Blackstone Mortgage (BXMT)
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Blackstone Mortgage Trust, Inc. (NYSE:BXMT) Q4 2015 Earnings Conference Call February 17, 2016 10:00 AM ET

Executives

Weston Tucker - Head of IR

Stephen Plavin - President and CEO

Paul Quinlan - CFO

Doug Armer - Head of Capital Markets, Treasurer and Managing Director

Analysts

Ben Zucker - JMP Securities

Donald Fandetti - Citigroup

Cole Allen - FBR Capital Markets

Rick Shane - JPMorgan

Jade Rahmani - KBW

Kane Bruce - Bank of America

Operator

Good day ladies and gentlemen and welcome to the Blackstone Mortgage Trust’s Full Year and Fourth Quarter 2015 Conference Call. My name is Mark and I’ll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Weston Tucker, Head of Investor Relations. Please proceed sir.

Weston Tucker

Great, thanks Mark. Good morning and welcome to Blackstone Mortgage Trust’s fourth quarter 2015 conference call. I’m joined today by Steve Plavin, President and CEO; Paul Quinlan, CFO; Doug Armer, Treasurer and Head of Capital Markets; and Tony Marone, Principal Accounting Officer.

Last night we filed our Form 10-K and issued a press release with a presentation of our results, which hopefully you’ve all had some time to review. I’d like to remind everyone that today’s call may include forward-looking statements, which by their nature are uncertain and outside of the company’s control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see our 10-K. We do not undertake any duty to update forward-looking statements.

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

So, quick recap of our results before I turn things over to Steve. We reported core earnings per share of $0.68 for the fourth quarter and $2.36 for the full year, both of which were up sharply from the prior year comparable periods. A few weeks ago we paid a dividend of $0.62 per share with respect to the fourth quarter and that brings us to $2.28 for the full year, up 15% from the prior year. If you have any questions following today’s call, please reach out to me.

And with that I’ll turn now things over to Steve.

Stephen Plavin

Thanks, Weston and good morning, everyone. Despite a turbulent and volatile market backdrop BXMT delivered terrific results in 2015 and enters 2016 in a position of strength. Before I speak about our fourth quarter, I’d like to first address broader capital market environment. As we’ve all seen, public equities and high yield have traded off sharply and CMBS spreads have significantly widened.

Liquidity in the markets has declined as investors have sold off exposures either to derisk or to keep pace with their own fund redemptions. Overall, investor sentiment remains cautious if not negative. The market seem oversold in many sectors including ours. We’re certainly very disappointed by the impact of these market conditions on our stock and don’t believe that our share prices reflective of our performance or prospects.

We feel BXMT to succeed in difficult market conditions with our singular focus on senior loans, sourced and underwritten by Blackstone and backed by major market real estate and top sponsors. We haven’t bought higher risk mezzanine loans to preferred equity positions. We don’t own any CMBS bond, note we have the inventory of loans and tenant for CMBS exit. We have not brought operating properties or ancillary businesses. We have stayed true to senior mortgages, which we continue to believe are clearly the best value proposition for our capital.

We’ve established a large scale balance sheet with $10 billion loan portfolio and $2.5 billion of equity with liquidity of over $600 million. Leverage is moderate at 3.1 times and our liabilities are a low cost and match the expected term of our assets. Our debt is also currency matched and index matched or hedged. Our bilateral credit facilities are diversified among seven different providers and at quarter end we had $1.4 billion on utilized capacity. We do not have capital markets based margin call provisions in our debt nor do we use FHLB credit, which is being phased out from mortgage REITs.

Most importantly the credit quality of our portfolio remains sound as we’ve established a leading reputation as a loan asset manager as well as an originator. Our average LTV has been stable in the 64% range since our 2013 launch. All of our loans are performing. Our portfolio is diversified by geography and asset class and we take advantage of Blackstone’s extensive global network in managing our investments.

We’ve not compromised our risk profile by reaching free yield at the expense of leverage level or loan structure. We’ve avoided higher risk property sectors and have very limited energy sector exposure. Since the BXMT, re-IPO, we have successfully grown the scale, liquidity and earnings power of the company, while building book value by maintaining discipline in our capital raising.

In 2015, core earnings grew by 27% and we paid a fourth quarter dividend of $0.62 which was covered 1.1 times by our core earnings of $0.68. During the second half of 2015 as we saw more aggressive competition and more volatile environment emerging and our capital already well deployed, we tap to break some originations. We closed $391 million of loans during the fourth quarter, which included new loans in New York, LA and London, two of the loans with a strong repeat borrower.

We’ve already closed another $457 million of loans in the first quarter and have an active pipeline of additional opportunities. With more volatile and less liquid market conditions credit spreads and ROIs are trending higher in our pipelines. These market conditions should present improved opportunities for well capitalized portfolio lenders like BXMT. Going forward, we intend to sync our originations with our repayments. This approach given current market conditions will enable us stay active in the market and service our clients while maintaining deployment of our existing equity capital base within our target range.

If repayments slow, we’re happy to maintain our existing loans longer and will calibrate our originations accordingly while equity market conditions remain weak.

As for our stock, given current trading levels, we’ve discussed the possibility of a share buyback program with the Board. We continue assess this option among other investment alternatives including redeploying our investible capital to new higher yielding originations and preserving more of it for potential opportunistic purchases from distressed or forced sellers.

Our goal is to maximize shareholder returns and we will pursue what we believe to be the best strategic path to achieve them. Before I turn the call over to Paul, I would like to first thank him for his service to BXMT as Chief Financial Officer. Paul has been a huge asset to the company and will continue to be very involved with BXMT in his role as Chief Financial Officer for all of Blackstone Real Estate. Tony Marone, who have now worked with for seven years will take the rains from Paul effective March 1st. Tony is being promoted from his current role as BXMT’s Principal Accounting Officer.

He knows our company as well as anyone, he is an accounting guru I have complete confidence and his ability is to continue to lead BXMT Finance and Accounting as CFO. Doug Armer, will continue to report to me as a Managing Director of BXMT Capital Markets responsible for our debt and equity capital raising and strategy. With Doug and Tony we have most experienced and best capital market’s finance and accounting leadership and execution in our sector.

And with that, I’ll turn the call over to Paul.

Paul Quinlan

Good morning, everyone. Thanks Steve for your kind comments. I’d also like to join you on congratulating Tony on the well-deserved promotion. Before getting into the quarter, I would like to comment on our full year 2015 results. It has been a remarkable year for BXMT and this is reflected in all of our key financial results. Loan originations and acquisitions of $8.8 billion drove our balance sheet to over $9 billion more than doubled 2014 levels. We have increased overall financing capacity by $5.7 billion and stockholders’ equity grew 70% to $2.5 billion as we optimize the company’s deployment through increased scale.

This drove accretion in core earnings per share to $2.36, up 27% from 2014; supporting dividends of $2.28 per share, up 15%. Book value per share increased to $26.56, up $1.46 or 6% from 2014. Importantly as Steve pointed out, this growth did not come at the expense of credit quality or balance sheet stability. Looking at the liability side of our balance sheet, total portfolio leverage declined from 3.3 times to 3.1 times in the quarter, while our use of senior loans indications has allowed us to maintained a modest debt to equity ratio of 2.5 times. We continue to negotiate market leading financing terms and have maintained the limited recourse in our credit facilities with no capital markets mark-to-market provisions, a feature we believe will be critically important given current market dynamics.

Lastly, while many market participants are concerned about the potential for interest rate increases coming into 2016, we remain positively correlated to USD and GBP LIBOR, which underpins 74% of our loan portfolio and related financings. We believe that this provides another key differentiator between BXMT and other public REITs and specialty finance companies.

Turning to fourth quarter results, net interest income was $82 million down from $87 million in the third quarter following the expected run-off in the GE portfolio and associated add-on advance financing.

Management and incentive fees were $14.4 million, up modestly from 3Q on a higher incentive fee for the quarter. And G&A included in core earnings was $1.7 million for the quarter down from $1.9 million in 3Q as G&A is returning to more normalized post GE transaction expense levels. This resulted in $64 million of core earnings or $0.68 per share.

Excluding the GE portfolio, repayments in our directly originated portfolio exceeded loan fundings by $55 million, representing the first quarter where our loan portfolio added to liquidity. As Steve mentioned, this is indicative of our continued focus on balancing capital deployed with repayments in the face of recent market volatility.

GAAP net income in the quarter was $0.70 per share as $3.4 million of realized carried interest income from [indiscernible] net of compensation expense added to GAAP earnings. We paid a dividend of $0.62 per share in the quarter, representing a 9.3% yield on book value. We have discussed on previous call that this dividend was sized to our medium term stabilized earnings power following the wind down of the GE portfolio assuming no incremental earnings from increases in LIBOR and so is well supported by our current core earnings and net income.

A few comments looking forward to 2016. The GE portfolio add-on advanced financing will be fully paid off before the end of the first quarter. At this point, repayments from both the GE and directly originated portfolios will provide capital that can be redeployed into new loan originations. We expect this to allow us to effectively manage a continued balance between repayments and originations. While we expect a modest decline in core earnings towards stabilized levels, the recent volatility in capital markets could provide upside to BXMT earnings in a couple of ways.

Repayments maybe lower than we previously expected, preserving our in place higher ROI loans and reducing the interim liquidity drag from undeployed capital. Also decreased competition could lead to wider loan spreads on newly originated product and higher ROIs on our loan portfolio as a result. Both of these potential market impacts would translate directly to BXMT’s bottom-line providing upside to our stabilized core earnings levels.

In closing, our current dividend is securely covered by our earnings. It is supported by a senior loan portfolio with relatively low risk that is prudently financed with non-capital markets mark-to-market leverage. Yet today our dividend generates a 10.5% yields on our trading price, which we believe is an exceptional risk adjusted return. We are proud of our team’s execution of the business in 2015 and expect that overtime; the fundamental results BXMT has generated will translate to outperformance in the market.

Thank you for your support and with that I will ask the operator to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Ben Zucker from JMP Securities. Please proceed.

Ben Zucker

Good morning, thanks for taking my questions guys. I was looking at the portfolio summary that gave loan-by-loan information. And I noticed that you guys are reporting LTVs from when the loan was first originated. I imagine that in your internal review of each loan you’re also looking at changes in the collateral values. So I was wondering if you maybe had a current LTV figure available or could speak to the internal review process a little bit. I just thought that this could be helpful information as the credit concerns continue to persist here.

Stephen Plavin

Thanks, Ben for the question. We report the appraisal values in our disclosure documents. We do review our entire loan portfolio on a quarterly basis and I am very involved with that on a loan-by-loan basis. And we review each loan not only for what we think the underlying value is, but for all the risk parameters. We use a risk rating system, which I would encourage you to look at in terms of how the loans are performing post-closing. And so occasionally loans will migrate from category-to-category, which will sort of reflect our view in terms how they’re performing relative to underwriting and the ultimately risk of the loan. But in general the portfolio is performing very well generally at or better than the levels that we anticipated at initial origination.

Ben Zucker

Okay, that’s helpful. And then just as a quick follow-up it’s more housekeep. I know the weighted average maximum maturity for the fixed rate loans is 2.9 years now. I was hoping you could provide me with the just the weighted average life absent any the extension offers? I think on the last conference call you offered up that figure at 1.7 years I just want to make sure that’s still at like 1.4 or 1.5 years now. And that’s it from me. Thanks.

Stephen Plavin

That’s right. The passage of time has reduced that number by one quarter, but the terms of loans haven’t changed. And so that your figures are accurate.

Ben Zucker

Great.

Operator

Your next question comes from Don Fandetti from Citi. Please proceed.

Donald Fandetti

Steve obviously given what’s going on in the market CMBS pricing it make sense what you’re actually telegraphing that you’re going to halt growth for a while. I was just trying to get better sense on how you’re thinking about it? Is that more of a function of more concerned around commercial real-estate pricing or work concerned around funding? And what would cause you to turn that growth back on or pull it back further and de-lever and is that in the cards potentially?

Stephen Plavin

I think that everything is in the cards as we sort of look forward, but as we see the world today we’re still seeing good opportunities to originate and to make loans. As I mentioned we’re seeing loan spreads and our ROIs trending higher, which obviously is positive for the business. And with and -- but most importantly I think is the concept that we’re sort to synching our originations with our repayment. We’re deployed; our equity capital is deployed within our target range now.

And so what that really means is we’re not going to raise new capital at the current share price. What that means is that we’ll be looking to originate based upon what we see is repay. Now we’ll adjust the pace of originations up and down depending upon the quality opportunity and the risk profile that we see as we look forward. Obviously if things trended downward we would adjust the risk profile of our loans accordingly or we would slowdown the originations further.

Donald Fandetti

Got it. And then one of the interesting things coming out of the credit crisis has been the -- as you mentioned the credit facilities having no capital markets mark-to-market provision. I guess the question is can that change on your current facilities, is it up to the bank and do you see that going away now as it was just largely a function of kind of how could things work?

Doug Armer

Hey Don, it's Doug. No that can’t change for our existing agreements. So that’s hard word into those agreements and we don’t see it going away it’s something that we’re committed to and we’ve set as a standard. So none of our funding, none of our credit has capital markets mark-to-market and that won’t change going forward.

Donald Fandetti

Okay, thank you.

Operator

Your next question comes from the line of Dan Altscher. Please proceed.

Cole Allen

Good morning this is actually Cole Allen on for Dan. I guess real quick I had a question on your one risk rated for loan. Is that still the same loan from 3Q ‘15? And if so I guess what is the update on that and what kind of the path that resulting that going forward?

Stephen Plavin

Actually that is the same thing. So I think we reached an agreement with the bar to extend the term of the loan to February working on a longer term extent with the borrower now. We reset some of the release pricing in the loan and asset were sold in the fourth quarter at a slightly better price and what we had expected, which was sort of a positive deal than the loan. Couple of the other assets in the portfolio are under contract for sale. And if they close it will meaningfully reduce the balance of the loan further. But we have good constructive dialogue with the client. We continue to believe that the loan will be fully repaid. It’s going to be a serial sale of the assets overtime that is sort of Boston area office and industrial assets and most of the assets are in various stages of being marketed for sale.

Cole Allen

Awesome, thanks so much. And then I guess secondly you guys were saying there is still a bunch of opportunities out there. Is there specific markets that you guys are targeting are you staying away from specific market but I guess where are these areas of opportunities that you guys are seeing right now?

Stephen Plavin

We tend not to red line anything, but there are certainly areas where we are more cautious. I mean secondary and tertiary market we have a strong preference for major markets was more liquidity, better quality real estate and typically more institutional sponsors. Where we’re looking for opportunities would be distressed seller of loans. That will be a different opportunity than what we saw over the last couple of years. It may perhaps apart from the GE transaction. But at people with the aggregated loans for securitization where the securitization no longer makes sense.

Banks who are concerned and maybe looking to lighten their balance sheets. We’ve seen a couple of opportunities in the market none of which has been super compelling yet. But it’s a positive trend that I think and I do think we’ll have some new and different opportunities if the current market conditions continue.

But the regular way origination activities continues primarily with spreads being a little wider and as a result we should be able to achieve slightly higher ROIs than we’ve been historically achieving.

So, the market conditions are improving, a little bit of volatility the market is good for us it sort of shakes out some of the lower cost providers and puts us into a much stronger competitive position, certainty of executions become much more important in the current market and that’s something that we provide much more so than the lenders who require capital markets exit on their loans. So, we’re enjoying the current market conditions with the exception of how our stock is being treated.

Cole Allen

Yeah, I agree. I guess touching on that higher yields right there are you guys kind of changing your internal models to I guess forecast higher yield to with this extra volatility or you kind of -- what is your thought process going forward is it kind of just like a benefit if they go higher or you kind of building instead at this point?

Stephen Plavin

I think we’re sort of still in the mode of seeing whether the current volatility is temporary or signaling a more a longer-term shift in the market opportunity for us. So, I don’t know that we’ve sort of changed our model, but we’re certainly more focused on trying to generate a little bit of yield when yield opportunities are available in the market. When the market gets very, very competitive we obviously always feel good about the risk profile of the loans, but sometimes there is price competition, the price competition is definitely reduced from where it was say in the first half of last year.

Paul Quinlan

Looking out from sort of a corporate finance perspective, I would say that the upside potential to the yield just provides more support and coverage for the $0.62 dividend. The $0.62 dividend isn’t assuming any sort of increase in yield relative to where we were six months ago when we declared the $0.62. So, an increase in yield there would be upside to core earnings and the dividend at least in terms of coverage if not in terms of a payout if it comes to past.

Cole Allen

Awesome. Thanks so much guys.

Operator

Your next question comes from the line of Rick Shane from JPMorgan. Please proceed, sir.

Rick Shane

Hey, guys. You’ve really answered my question, but let’s just explore this a little bit more deeply. You talked about the sort of virtuous impact of a little bit of extension on loans keeping higher yielding loans on balance sheet. Can you just talk about how you manage that from a liquidity perspective and also given what we saw and again not the same type of situation, but the risk associated with extension in 2008 and 2009 how you manage the risks as well?

Doug Armer

Hey, Rick its Doug. I think two key points there and I think you’ve put your finger on the issue, which are debt maturities. The sequential pay advance, which is linked to the GE portfolio part of which we’re anticipating perhaps a slightly longer life on. Is at this point fully repaid given that the pay-offs we’ve seen during the first quarter.

So there is some liquidity continuing to occur even if it does slowdown out of the short-term component of the debt has been fully repaid. The remaining portfolio is financed with a seven year facility, which is in two years in excess of the final maturity on the terms of the loans. So we’ve got a lot of cushion in terms of our asset liability match both in our directly originated portfolio and in particular in the GE portfolio.

Rick Shane

Got it. Thank you very much.

Operator

Your next question comes from Jade Rahmani from KBW. Please proceed.

Jade Rahmani

Thanks for taking my questions. Regarding 4Q originations can you comment on the extent to which the lower volume reflected you’re being more selective as suppose to a market slowdown for example, did your pipeline decrease in size?

Stephen Plavin

I think our pipeline decreased in size because we raised the economic standard that we were requiring for deals in the fourth quarter because we saw what we thought were the early stages and opportunity to have loan spreads increase and spread have been sort of steadily -- spreads steadily tightening from when we relaunched in May of ‘13 until sometime in the second half of this year sometime sort of late Q3 early Q4.

And so when you see sort of the spread widening trend, we sort of paused to not load up during a period of time where we thought there will better opportunities up forth coming. So and we’re also -- so also we mentioned we’re deployed within our target range. So we’re -- so we can afford to be more selective on assets and still generate our earnings. So obviously we’re going to be looking for assets that we think are appropriately risk-adjusted and able to earn higher returns. And so we’re seeing a better environment now than we saw in Q4. So I think that we were rewarded for that strategic decision.

Jade Rahmani

And can you quantify the extent to which you raised spreads?

Stephen Plavin

I think the sample is too small to generalize, but on our portfolio specifically, but I will say in general we’re seeing spreads for the loans that we pursue sort of 25 to 50 basis points wider.

Jade Rahmani

Okay. And are there other terms that you’re looking to adjust that you’re looking to advance less proceeds or are you also looking at potentially lending on stabilized assets?

Stephen Plavin

Great question on stabilized assets. I think we may have some opportunities in stabilized assets so we haven’t previously seen because of the dislocation in the CMBS market. We’ll see; most of what we’re doing is still thematically similar transitional assets. We do have a couple of assets that we booked at that are little bit transitional. And I think that is reflective of the slowdown in the bank market and in CMBS.

Jade Rahmani

And in terms of proceeds you’d advance?

Stephen Plavin

I think a lot of it will depend upon what the client wants, how we view the risk profile of the loan. And what we think we’re getting paid for the incremental dollar as it relates to return. If we think the incremental dollars is safe then we’re getting paid a higher return than we’re okay lending them. We think that incremental dollars at risk than we won’t lend against them regardless of the return.

Jade Rahmani

The -- in terms of banks extending credit to specialty finance players like yourselves through credit facilities. Are you seeing any potential pull back, any banks looking to reduce exposure not necessarily to you guys, but to potential other smaller players?

Stephen Plavin

Let me first speak to our experience and Doug you should jump in if I miss anything, but we’re actually talking to our lenders about increasing our credit facilities not reducing them. We’ve great relationships with our lenders we benefit from being part of the Blackstone platform where generally our lenders largest real estate clients and we get great treatment and the nice thing about an environment like this where capital is less readily available is that we have the greater ability to differentiate ourselves relative to our competitors. And capital is readily available and available to all it becomes more challenging for us to differentiate our cost of capital. In this capital I think we’ll be able to outperform more significantly on a relative basis.

Jade Rahmani

And how about the market overall?

Stephen Plavin

I’ve heard a few anecdotal things about potentially repo becoming more difficult I think for those people who aren’t in the market I think it would be difficult to attract a new facility I think the repo providers are not nearly as willing to provide facilities to smaller platforms as they may have been 6 months or 12 months ago. And I think you have to presume the cost of credit will go up if spreads across the entire market increase and then the repo providers will look for increased spreads as well.

Jade Rahmani

And you mentioned distressed sellers of loans. In the specialty finance sector overall and some of the stock prices are reflecting huge discounts to book value or net asset value. Are there portfolios from publically traded companies that could be attractive or could it be attractive to acquire such firms.

Stephen Plavin

I think that potential exists. We’ve seen a couple of portfolios that I think would fit that build. But not wholesale opportunities that we would hope to see reflective of current -- of the current distress or perhaps greater distress as some of these companies may feel when they’re trading at really significant discounts to book value or maybe are under pressure from shareholders or otherwise.

So we think as those pressures in those market forces increase, the chances of seeing portfolios that will be attractively priced increases. We’re very particular on credit. Still a few of the things that we’ve seen in the market that were available were not sufficiently creditworthy for us to proceed. They were priced right, but again just not consistent with our credit standard. So we did not further pursue that.

Jade Rahmani

Thanks for taking my questions.

Stephen Plavin

Thanks, Jade.

Operator

Our final question comes from the line of Kane Bruce from Bank of America. Please proceed.

Kane Bruce

Thank you and good morning. Could you just clarify the response to the last question in terms of what basically was a consolidation question. Did you -- are you referencing portfolios or companies that are actively for sale?

Stephen Plavin

Portfolios.

Kane Bruce

Okay, thank you. And I guess a lot of the questions that have been asked and it get to a similar theme in that so you’ve got a lot itself referencing that’s going on in the market and it seems to have started in CMBS and kind of percolated into a lot of different asset classes. But the question that I think I’d like to kind of get your sense or your response would be what if nothing changes, what if the market does not change substantially either in terms of the way that your stock is being value, which obviously curtails your ability to grow or the asset prices have essentially re-priced and basically stay at the same, what do you think you’d do in this case?

Stephen Plavin

Well we certainly hope that doesn’t become the scenario and we’ve talked a lot about why we don’t think our stock is -- our current share prices isn’t reflective of value and especially when you look at on a dividend yield basis. But while we’re in a period of time where we’re raising equity capital is unattractive are just a bad idea. We’ll originate again we’ll originate and sync with our repayments to maintain the absolute level of deployment to achieve the highest returns we can for our shareholders. If our stock stayed below book for a prolonged period of time we’d have to certainly take sort of reassess and see if there is anything that we could do in response to how the market was evaluating our company. But we’re again we’re positive of our prospects we think in general the current market works to our benefit and we’re hopeful that we’ll see some near-term upward movement in our shares as we’re able to distinguish our performance from others.

Kane Bruce

Great. And then to the degree that you get a situation where there are either distressed sellers or you just come across a large opportunity. How do you think about the debt versus equity or alternative sources of capital to fund that? Would you be willing to run leverage higher than the 3 times total leverage that you’re running today? How would you kind a go about that in the current market backdrop?

Stephen Plavin

I think we just have to evaluate the opportunity and the decision and our liquidity situation and what we see is a risk of the leverage level at the time. I mean we’ve delevered a little bit as we said we would post the GE transaction. And I think we’re in a comfortable range now on leverage level as Doug mentioned the well add-on advances been repaid that was sort of the extra leverage we took on in order to buy the GE loan without having sort of over issue equity.

So we’re sort of back now to our sort of run rate leverage level. And if there was another great opportunity to invest and would we consider on some sort of interim basis increasing our leverage I think if the opportunity was attractive enough we’re comfortable with the risk associated with that that we would seriously consider that.

Kane Bruce

Okay, thanks. And final question if there is obviously a lot of anxiety in the market as to how transitional loans may perform over some period of time. On the front end, are you approaching other than maybe having a higher bar, are you approaching the underwriting of loans differently in terms of how these business plans would in fact perform overtime? Has there any change in terms of how you’re thinking about the exit I guess for some of the loans that you’re currently underwriting?

Stephen Plavin

I think we’ve always been cautious in terms of viewing our borrowers’ business plans. And I think the perfection and the achievement of the business plan needs to be the risk of the equity and not the debt. Obviously we do underwrite some degree of transition and improvement overtime. But there is a large margin for era again we’re lending on average 65% LTV. We have strong sponsors.

So I think we’re comfortable with the transitional risk that we have and the transitional risk we’re willing to take on will be a function of the markets and leasing velocity and supply and demand all the factors we consider when underwriting an asset at the time. And we always underwrote higher exit cap rates than we’re at current market higher interest rates as it relates to coverage. So what we’re seeing in the market and when you’re making a five year loan it’s not -- you can’t rely on a spot valuation you have to obviously have an underwriting that’s going to withstand the test of time and we’re confident t out of that underwriting and loan structures we’ll do so. And as we evaluate new loans we have sort of the same standard and I think it’s a dynamic standard and that we look at the world and the loan opportunities based upon how we see things for the time and how we see thing evolving. But we feel great about the loans that we’ve closed and are managing so far and we are excited about the opportunities that we think may come from the current market.

Kane Bruce

Great, thank you very much.

Stephen Plavin

Thanks.

Operator

I would now like to turn the call over to Weston Tucker for closing remarks. Please proceed.

Weston Tucker

Great, thanks everyone for your time and please let me know if there is any questions.

Operator

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

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