Blackstone Mortgage Trust Execs Talk Growth, Strategy at New Commercial REIT on Heels of 2Q13 Results
Carl Gaines Sept. 5, 2013, 2 p.m.
In early July, Jonathan Gray, Blackstone’s global head of real estate, appeared on CNBC in an exclusive interview with the network. Dubbed Most Powerful Man in Real Estate—this ran in a banner during the 12-minute segment—Mr. Gray outlined the strategy behind Blackstone’s recently launched mortgage REIT, Blackstone Mortgage Trust.
With a mid-summer rising of rates at the front of most minds, Mr. Gray explained what, at the heart of it, apart from the Blackstone name, makes the endeavor a safer bet. “Blackstone Mortgage Trust is a floating rate lender,” he told David Faber, the co-anchor of Squawk on the Street. “Rising rates for this vehicle are better.”
The need to underscore this aspect of the business and the need to distinguish commercial mortgage REITs from their residential counterparts is understandable.
A report from SNL Financial on mortgage REITs as a whole, ominously titled “‘Swath of destruction’ as mortgage REIT book values crumble in Q2,” catalogued what followed a 100-basis-point rise in 10-year Treasury yields over the quarter.
However, it noted that commercial mortgage REITs—such as BXMT and Starwood Property Trust—had been left “mostly unscathed.”
BXMT, which reported its Q2 2013 results July 30, launched in its current form under the auspices of Blackstone, the world’s largest private owner of real estate, in May. Blackstone had completed its purchase of Capital Trust’s investment management platform—CTIMCO—in December of the following year for $21.4 million.
Over the course of several interviews with Mortgage Observer, both before and after the mortgage REIT’s Q2 2013 results were announced, BXMT executives Michael Nash and Stephen Plavin talked about what distinguishes the newly launched platform from competitors like Starwood Property Trust and the process of integrating the Capital Trust team into Blackstone’s offices and culture. Hint: It was both literally and figuratively a short walk.
“In a sense, it’s a very simple business plan,” Mr. Nash said in mid July, high above Park Avenue in one of the firm’s wood-paneled executive dining rooms. “We do first mortgage lending, and it’s by and large a floating rate product. We lend money on a floating rate basis, so as rates rise we make more return. If rates stay where we are, we make the same return.”
Mr. Nash Joined Blackstone in 2007 as a senior managing director, after 10 years at Merrill Lynch, to launch its debt business—Blackstone Real Estate Debt Strategies. He’s the chief investment officer of BREDS. “Historically, the firm in real estate has been an opportunity fund GP manager since 1992, and they had looked at debt investment opportunities off and on for many, many years,” he explained.
At the time, banks weren’t lending, and so the firm saw an opportunity to extend credit via BREDS, which today has in excess of $9 billion of assets under management.
Then, early in 2012, Blackstone expressed interest in expanding its debt offerings and growing the business through an acquisition of the Capital Trust platform, which had been plodding along during the financial crisis. It seemed like a natural fit.
Capital Trust announced on May 15, 2012, that its board of directors had formed a special committee made up of independent directors to explore strategic alternatives. Taking the public company private, taking on a partner or selling part or all of Capital Trust were all considered.
“We had a lot of alternatives, and over time it became clear that the alternative of selling what we call the CTIMCO, which is the management arm, to Blackstone was the best alternative for our shareholders and the best alternative for our employees and investors as well,” Mr. Plavin told Mortgage Observer. “We struck a deal with Blackstone in July, it closed in December, and we moved to 345 Park on Feb. 1st.” It was essentially a diagonal move, across Park Avenue, for Mr. Plavin and the other Capital Trust employees who made the move.
Mr. Plavin joined Capital Trust as chief operating officer in 1998 at the behest of Sam Zell, becoming chief executive officer in 2009. Mr. Zell, chairman of Equity International, had been a client during Mr. Plavin’s time as co-head of global real estate at Chase.
The Blackstone alliance made sense to him, he remembered, because of the complementary nature of what each party would bring to the table.
“The ability to add the public company to Blackstone’s real estate business was good for Blackstone, because it enabled them to expand the debt business and tap a whole new universe of investors,” he said. “The BREDS private funds and the Blackstone equity funds essentially tap a similar investor universe—pension funds and sovereign wealth funds.” However, Capital Trust was tapped into investors in specialty finance and real estate companies—different pools of capital as well as different investors.
Richard Shane, senior equity analyst at J.P. Morgan Chase covering specialty and consumer finance, who initiated coverage of BXMT in mid-summer, said that the Capital Trust legacy business, which may prove to be profitable but “is a little bit confusing,” will shrink as a percentage of the balance sheet. As of the 2Q 2013 results conference call, it had in fact shrunken to $268 million.
“But more importantly, what’s going to happen is that, as they generate originations in their core business, which is first lien commercial mortgages, they will deploy their capital,” Mr. Shane continued. “They will leverage that capital, which will enhance returns, and they will basically achieve scale on their platform, and as that occurs profitability should increase.”
And BXMT is already ahead of schedule in deploying the $660 million capital that it raised in May. Mr. Nash said that they would like to completely deploy this by year-end, “which suggests that we’ll do lending in excess of $2 billion from now until the end of the year.”
On the July 31 conference call, Mr. Plavin also pointed out that equity raised in May supported about $2.2 billion of senior mortgage loans for the year. In all, there were eight loans closed during the quarter—totaling $756.6 million—and an additional $376 million in loans with agreed terms in the closing process.
Specifics were difficult to come by on these eight loans—both Messrs. Nash and Plavin declined to disclose borrowers or addresses. However, HFF announced in June that it had arranged $300 million in financing from BXMT for a 59-building office/R&D portfolio in Silicon Valley.
Also in June, the REIT provided $109.8 million to Miami-based developer Crescent Heights to finance the acquisition of the former Paris Hotel, at 752 West End Avenue.
And sources told Mortgage Observer that the REIT was behind a $105 million loan that facilitated the Meridian Group’s purchase of three Class A office towers in Tysons Corner, Va. Eastdil Secured arranged the equity and debt financing for the buildings, which are occupied by Science Applications International Corp.
There was also during the quarter a $64 million land loan to a money management firm and JDS Development Group, sources said, for some 80/20 housing on the east side of Manhattan.
With the exception of the land loan, these were consistent with the types of properties and projects that Messrs. Nash and Plavin said that the REIT will focus on. Mr. Nash explained that its capital is best applied “when an asset is dramatically changing on some level—when conventional sources aren’t willing to invest into that story.”
BXMT expects to be out of the land loan within the next 12 months, when the borrower secures construction financing from another lender.
They’ve looked at doing construction loans, Mr. Plavin said, adding that he believes they’ll be added to BXMT’s roster in the future. But for now, “we don’t red-line,” he said. “I do think that we’ll make some construction loans and that we will compete with Starwood on deals like the office tower at the West Side rail yards.”
Starwood Property Trust, as a competitor, came up several times, with both execs referencing the REIT as main competition for BXMT as the business grows.
“Starwood started with about $900 million of equity raised, and today, top of my head, I think their market equity capitalization is close to $4 billion,” Mr. Nash said. “Today, they have a size advantage on us, but I think we’ll close that gap in a very short period of time.”
Richard Shane, the J.P. Morgan analyst, said that the group has been meeting or exceeding expectations. J.P. Morgan’s ties to BXMT, it should be noted, include serving as underwriter on its offering.
“The quality of the loans seems to be in line with what their plans have been. I think the yields were moderately higher, frankly, than what we were looking for, but I think that was more reflective of a single loan than a trend in the industry,” Mr. Shane said, referencing the Manhattan land loan, which had a yield of 9.67 percent. “But all in all, it’s very consistent with the spreads that we’ve anticipated and the leverage levels.”
As a public REIT, the first dividend paid as BXMT is expected following the third quarter of 2013—effectively a Libor-indexed dividend.
“The market wants us to prove the theory of the case, which is we can be a value-add, first-mortgage floating-rate lender—we can do it in scale, we can pay a reliable dividend,” Mr. Nash said. “There’s no limit to how we can scale and grow the company.”
- 752 West End Avenue
- Blackstone Group
- Blackstone Mortgage Trust
- Blackstone Real Estate Debt Strategies
- Capital Trust
- Eastdil Secured
- Equity International
- J.P. Morgan Chase
- JDS Development Group
- Jonathan Gray
- Meridian Group
- Merrill Lynch
- Michael Nash
- Paris Hotel
- Richard Shane
- Sam Zell
- SNL Financial
- Starwood Property Trust
- Stephen Plavin