Blackstone Mortgage Trust Inc

NYSE:BXMT

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen and welcome to the Blackstone Mortgage Trust First Quarter 2018 Investor Call. My name is Janeta and I will 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 Weston Tucker, Head of Investor Relations. Please proceed.

[Weston Tucker, Head of IR]

Great, thanks Janeta, and good morning and welcome to Blackstone Mortgage Trust’s first quarter conference call. I am joined today by Mike Nash, Executive Chairman; Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; and Doug Armer, Head, Capital Markets.

Last night we filed our 10-Q and issued a press release with a 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 sections of our most recent 10-K. We do not undertake any duty to update forward-looking statements.

We will also refer to certain non-GAAP measures in this call and for reconciliations you should refer to the press release and our 10-Q. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

So a quick recap of our results. We reported GAAP net income per share of $0.56 for the first quarter while core earnings were $0.64 per share, up from $0.61 in the prior year first quarter. Last week, we paid a dividend of $0.62 with respect to the first quarter of 2018 and based on today's stock price, that reflects an attractive yield of over 8%. If you have any questions following today's call, please let me know.

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

[Stephen Plavin, President and Chief Executive Officer]

Thanks, Weston. Following a record year for originations in 2017, BXMT entered 2018 with strong momentum. In the first quarter, we originated $1.9 billion of loans, our highest ever quarterly total and grew our balance sheet by $1 billion. Post quarter end, we’ve closed or having the closing process of additional $3.5 billion of loans including our largest ever single asset origination.

The activity so far this year already exceeds all last year’s production. This extraordinary performance demonstrates the power of the Blackstone platform broadly and our outstanding investment team. The origination focus of BXMT generally matches the investment themes of Blackstone Real Estate. This alignment creates our biggest competitive advantage in sourcing, evaluating, asset management loans for BXMT and we really try to scale up in those areas of high conviction.

Two of Blackstone’s favorite real estate investment themes currently or has been in the recovering economy in Spain. Our largest Q1 loan origination is a great example executing on this platform philosophy. A 1 billion euro of participation and 7.3 billion euro acquisition financing of a portfolio of Spanish loans and properties.

Over 63% of the underlying real estate has the residential use is well positioned to participate in the improving housing market. The portfolio was acquired by our borrower, a JV of a Blackstone sponsored real estate equity vehicle in Santander Bank. We love the Blackstone equity sponsorship and its strong asset management presence in Spain. The opportunity to be a scale lender in this investment is a win for BXMT and a great example of special value of being part of the Blackstone Real Estate platform.

Our other Q1 originations was secured by apartment assets in New York, Texas and California furthering our initiatives in the multi-family space, as well as a hotel at Hawaii in – Florida. We also advanced a $180 million of loans originated in prior quarters.

Post quarter end, we closed our largest origination to-date, a $1.8 billion construction loan for the Spiral, Tishman Speyer's development of a world-class New York City office building, 28% leased to Pfizer.

Our loan will be supported by $1.9 billion of equity and funds less than 50% of the total $3.7 billion of project cost. The Spiral loan is a beneficial funding structure; a 10% subordinate portion of the $1.8 billion loan is advanced during the second quarter. After that, the remainder of the equity is fund over a two year period before the senior loan starts to fund in 2020.

So we get good call protection duration on the initial funding and have a long runway to syndicate our finance to senior portion of the loan. Because of the magnitude in construction aspects of the Spiral, there were few other lenders that could compete with us. And it checks our favorite BXMT boxes large size, major markets, top quality, great sponsorship and low bases of $632 per square foot.

The Spiral also exemplifies success in our relationship lending philosophy and it’s our third construction loan for Tishman Speyer of how we scaled an experienced developer with whom we have an excellent relationship. The other two loans financed high quality projects in Atlanta and Boston also on a low loan to cost basis.

Although we continue to build our volume and source it's great origination opportunities the market as a whole is highly competitive. As a result of this competition lending spreads have continued to compress. While some of our largest loan opportunities are more protected, we are having to reduce spreads to win competitive deals.

We have offset much of the spread pressure with more efficient borrowings and the beneficial impacts of higher Libor. To fund our new originations in Q1 and going forward we’ve been very actively raising debt following our Q4 equity offering. We issued $220 million of five year convertible notes and an attractive 4.75% coupon. We borrowed 800 million euros in the bank market on a term index – which is evidence of our participation in the Spanish portfolio.

And we also established a new $1 billion credit facility and upsized two others by $500 million, all in improved terms that will help offset spread compression and fund our loans and closing and as well as future production. Our loan portfolio has overall origination LTV of 61% and remains a 100% performing.

Post quarter end, a $21 million loan acquired from GE on a hotel in Pittsburgh that had been our only 4 rated loan was repaid in full a great resolution from our asset management team. Our focus remains on dividend quality and stability with portfolio floating rates match fund and senior mortgages and very attractive yields BXMT is highly compelling for shareholders.

And with that, I’d like to thank you for your support and interest and I will now turn the call over to Tony.

[Tony Marone, Chief Financial Officer]

Thank you, Steve and good morning, everyone. We are very pleased with our quarterly operating results with GAAP net income of $61 million and core earnings of $69 million. While our earnings are down slightly on a per share basis, in whole dollar terms, our core earnings are up nearly $5 million or 7% relative to 4Q.

As a reminder, we issued 12.4 million shares of Class A common stock in December raising $392 million of new equity. These shares were outstanding for the entirety of the first quarter with only a slight impact on earnings per share in 4Q. We are actively deploying this new capital with a marginal J curve impact on the first quarter, which we view as a testament to the strength of our lending platform and the advantages of our scale business.

Our earnings remains positively correlated to increases in Libor with 94% of our portfolio generating floating rate interest and only 6% earning a fixed coupon, down from a high of 22% in 3Q 2015. All else equal, a 1% increase in USD Libor would increase our annual net income by $0.24 per share. This provides a natural hedging in any future credit spread tightening and represents additional value potential for our stockholders.

As Steve mentioned, we originated a record $1.9 billion of loans including the 1 billion euro of Spanish residential portfolio loan, which increased our European loans to 19% of our portfolio, up from 10% in 4Q. This loan was fully funded at closing significantly contributing to our aggregate $2 billion of loan fundings during the quarter.

These fundings are notably in excess of our 1Q origination volume as we have continued funding of $180 million under previously originated loans. Total loan funding outpaced 1Q repayments by nearly $1 billion increasing our total portfolio to $12.1 billion, up 9% from the prior quarter and a record loan portfolio size for the second consecutive quarter.

Our loan portfolio remains 100% performing with an average origination LTV of 62% and risk rating largely unchanged at an average of 2.7 on a scale 1 to 5. Importantly, our only 4 rated loan was upgraded to a 3 this quarter and fully repaid in April. This $20 million loan was part of the GE portfolio acquisition and following its upgrade, we no longer have any loans rated below a 3 on our balance sheet.

Our origination momentum is supported by dynamic activity on the right-hand side of our balance sheet with $220 million of convertible notes issued during the quarter and $2.8 billion of newer upsize credit facilities. These new facilities, similar to our existing agreement provides term and currency match financing at low interest rates with no capital markets mark-to-market provisions allowing us to generate stable ROIs for our assets.

The convertible notes have a five year term and fixed coupon of 4.75%, an attractive rate for these long-term liabilities and further increasing our positive correlation to rising interest rates. Our debt-to-equity ratio remains a modest 2.3 times and we have ample liquidity of $887 million at quarter end.

One note on liquidity related to the Spiral loan Steve mentioned earlier. Although this loan was a record origination of $1.8 billion for BXMT, only $185 million will be funded in 2Q with a long future funding schedule. As a result, this new loan did not significantly impact our available liquidity going into the second quarter.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Don Vandine with Wells Fargo. Please proceed.

[Don Vandine, Wells Fargo]

Good morning, Steve. A quick question. As you listen to bank earnings calls, it sounds like the non-banks are continuing to gain market share. On one hand that’s good, on the other hand, it could signal that companies like Blackstone are sort of getting a little aggressive towards the end of the cycle. Do you have any thoughts on that?

[Stephen Plavin, President and Chief Executive Officer]

Don, I think that, a lot of the – the reason for you seeing an uptake in non-bank lending is really the couple things. One is the share of non-bank lenders as a percentage of total market has increased. This is more of us. I don’t think it speaks to any kind of negative credit quality aspect.

I think that credit quality of the loans that we are seeing out there is very good. I think in general the banks tend to be more cautious than non-banks. But we are not in an environment – a dangerous environment now. So, to me, I just think it’s – build more effectively – more effective competition from non-banks and while the regular way banks continues to sort of do their business, but not nearly as actively as the non-banks in terms of growth mode.

[Don Vandine, Wells Fargo]

Gotcha. And then, in terms of – do you have plans to syndicate out the Hudson New York’s development loan and also the Spanish loan, because if you look at the size of these transactions which on one hand are very good, because it shows your unique access to pure flow. These are big loans for a company that has about $3 billion of common equity. Can you talk a little bit about the syndication process?

[Stephen Plavin, President and Chief Executive Officer]

Yes, well, the process is complete in the Spanish loan. We borrowed 800 million euros against that loan and so, we have – and so the loan size has been mitigated to that financing and we generate our return on that equity investment in the loan. As it relates to the Spiral, I mean, it has a really favorable funding structure for us.

The higher yield component of the loan gets funded initially and then the equity gets invested after that. So the funding obligation for us in the senior portion of the loan doesn’t begin until 2020, about two years or so after closing. So it’s a really long runway to decide whether we want to finance that or syndicate or how we are going to do.

It’s something that we are actively thinking about, but given the nature of the schedule, it’s a very comfortable disclosure for us. And also, as it relates to the Spiral particularly, it’s a really low risk, low LTV loan. So, it’s a really an attractive piece of paper and one that we feel very good about owning and having the opportunity to distribute into the market or finance.

[Don Vandine, Wells Fargo]

Okay, thank you, Steve.

[Operator]

Your next question comes from the line of Doug Harter with Credit Suisse. Please proceed.

[Doug Harter, Credit Suisse]

Thanks. Can you just talk about your available liquidity sort of heading into the second quarter, how you see that? And how the larger unfunded commitment on the Spiral, even just in the context of that two year schedule, kind of how do you think about holding liquidity against that and other unfunded commitments?

[Doug Armer, Treasurer and Head of Capital Markets]

Hey, Doug. It’s Doug Armer here. We ended the quarter with roughly $880 million of liquidity as Tony mentioned. The Spiral funding on the senior post the $185 million that will go out during the second quarter is back-ended, it’s two years away. So we have a good deal of a runway to deal with that syndication or potential financing.

Generally speaking, we maintain roughly $500 million of liquidity in terms of target liquidity and that’s relative to our unfunded commitments, our covenants and working capital requirement. So we are pretty flush I think at $880 million and we’ve – our policy in terms of maintaining liquidity relative to our various funding sources, we talked about the $2.8 billion of new funding sources that we developed during this quarter, it’s something that we are very comfortable at.

[Doug Harter, Credit Suisse]

Got it. And then, just on the Spiral, I believe you said that the equity providers are kind of Blackstone and Santander. I guess, if you just talk about how you would manage the potential complex of being the lender and Blackstone also being an equity provider in those loan pools?

[Stephen Plavin, President and Chief Executive Officer]

Well, our participation, we have a 14% participation in that loan and while – and for the purposes of voting and control rights in that loan, we stayed down. The reality is that 14% participation does not come with a lot of rights given its relatively small minority interest in the overall loan.

We take great comfort in the opportunity to finance the greatest equity sponsor in the world as it relates to this loan and so, yes, we do give up control, but on a net-net basis, we get this amount of capital investment in such a strong loan at an attractive return, we think it’s a great trade for BXMT and its shareholders.

[Doug Harter, Credit Suisse]

Got it. And then, just on that, I guess, could you talk about kind of when that loan is funded? And sort of the impact on kind of average balances for the quarter? And how much it contributed this quarter versus it will more really be contributing next quarter?

[Stephen Plavin, President and Chief Executive Officer]

Sure. The loan was fully funded at closing and it closed about a week before the end of the quarter. So, your average loan balance during the quarter was roughly $1 billion – less than $1 billion below where it ended. So it will have a bigger impact on earnings actually.

[Doug Harter, Credit Suisse]

Great, thank you.

[Operator]

Your next question comes from the line of Steve Delaney with JMP Securities. Please proceed.

[Steve Delaney, JMP Securities]

Good morning everyone. Thanks for taking the question. In Slide 3, you give us a snapshot of what dividend coverage has looked at. It looks like over the last 12 months and you’ve been, on average covering the dividend by about 2.5 cents.

When I take that backdrop and I look at Slide 7 and the fact that you see your portfolio adding about $0.06 in annual earnings for each 25 basis point hike, it kind of begs the question to me, looking up six months or more, what level of coverage would management and Board like to see before you would be able to entertain an increase in the dividend? Thanks.

[Doug Armer, Treasurer and Head of Capital Markets]

Hey, Steve. It’s Doug here.

[Steve Delaney, JMP Securities]

Hi, Doug.

[Doug Armer, Treasurer and Head of Capital Markets]

Hello. So, we are very comfortable with the level of dividend coveraging at the 104% that you refer to when you look back over the trailing 12 period. When you think about the increase in our equity base, the increase in the size of our balance sheet and leverage on our balance sheet and in the rising rate environments, those are arguments for additional stability and potential increase in the dividend.

We also think about the dynamics in terms of these spreads on our assets and our ability to maintain ROIs. Stability is always the priority. I think in our dividend policy, our Board is focused on stability above all else when it comes to the dividend and quality.

So, we’ve been maintaining our strategy of low leverage, low LTV, senior loans on a match funded basis and produced a lot of stability in that dividend and I think that will continue to be the focus in this environment. We are obviously cognizant of potential for growth that comes with a growing balance sheet and growing scale in our business.

[Steve Delaney, JMP Securities]

Now that’s helpful and I appreciate the thought that we have to watch spreads very closely, because it’s nice if Libor goes higher, but that’s just one part of the equation as you pointed out. One quick follow-up on Doug’s question about the Spanish portfolio and the involvement of Blackstone funds.

Just to kind of clarify, I read the 8-K of March 9 pretty closely and I thought there was some wording in there that really tried to help us understand the role that Blackstone Mortgage had in terms of the financing package for that entire $7 billion and I believe you said, you had – there were other parties, obviously big global banks that were leading that financing and it sounded like you were downplaying your input into structuring the terms.

And I am just curios if that type of situation is – if you are rolling the financing it was one reason also while you were comfortable and I guess the follow-on to that is, would it be unlikely still that you would make a standalone loan directly from BXMT to a Blackstone Fund where the Blackstone fund owned a 100% of the property and you were making a 100% of the financing. Thanks.

[Stephen Plavin, President and Chief Executive Officer]

It’s a great question, Steve, and as much as we love Blackstone and their equity sponsorship, we are mindful of the potential of conflict and so. In the – we did not have an active role in the negotiation of the loan terms of the Spanish loan. So, and that will generally be the case in situations where we consider participating in loans with Blackstone equity sponsorship and it’s essentially how we address the conflict.

So we look at the financing if that’s available on the asset and make a determination as to whether we think it’s something that works well for BXMT or not. We independently evaluate the asset and the loan in terms of how we feel it fits into our portfolio and we make those decisions independently. But we are not leading the negotiations in the loan.

So we are essentially a taker of the terms that are negotiated. So, for that reason, we won’t be a whole loan lender to a Blackstone equity vehicle. We’ll always find us in loans with other participants who are driving the terms and then again, us making the determination as to whether or not we find it’s appropriate for the REIT or not.

[Steve Delaney, JMP Securities]

Okay. It makes sense. Thanks for the comments.

[Stephen Plavin, President and Chief Executive Officer]

Sure. Thanks for the questions.

[Operator]

Your next question comes from the line of Rick Shane with JP Morgan. Please proceed.

[Rick Shane, JPMorgan]

Good morning guys. Can you hear me?

[Stephen Plavin, President and Chief Executive Officer]

Yes, Rick. We can hear you.

[Rick Shane, JPMorgan]

Excellent. So, I’d like to talk a little bit, by our calculations now, north of 15% of your assets are denominated in euros and I understand that you match fund those loans off of your European facilities. But I just want to make sure that we understand from an accounting perspective how this works. I’ve seen you are hedging out some of that with derivatives, but just want to make sure that as rates move around, we understand the implications in terms of the difference between how GAAP and tax might diverge.

[Doug Armer, Treasurer and Head of Capital Markets]

Rick, it’s Doug. That’s a great question. You are right. We are hedging out that exposure in particular, we are hedging out all of the new exposure in euros and other currencies. So that would include the total capital invested in the Spanish asset’s loan. And our hedging strategy produces ultimately a swap for the FX base rate and U.S. dollar Libor.

So that, our results, and particularly in terms of core earnings, reflects the earnings of the leverage spread over Libor as opposed to over euribor or sterling Libor for example. And I think, with regard to the potential for a tax or a GAAP disconnect, I think there is a slight difference in terms of the way GAAP treats those earnings, defers them through OCI, tax treats them sort of real-time.

But in terms of core earnings, we capture that impact real-time as well. So, with regard to our dividend, I think you will see that – the impact of Libor over the FX base rates in our results.

[Rick Shane, JPMorgan]

Got it. Okay. And then, second question, obviously, the – we’ve seen base rates rise. You guys provide income sensitivity on Page 8. Steve had point – or Page 7, as Steve had pointed out, just curious, I mean, look, we are seeing – we’ve seen so far due to spread compression and it’s very low beta to higher Libor within your yields. How should we think about this over the long-term? What do you guys think the real beta to Libor is over the next two to three years?

[Doug Armer, Treasurer and Head of Capital Markets]

Rick, it’s Doug, again. I mean, the first thing I would point out is that, there are couple of other dynamics that play besides the change in Libor in terms of our returns in our earnings. One of them that’s very important obviously is our cost of debt, our cost of capital and we’ve made a lot of progress in reducing that over time.

It’s sort of by definition a lagging indicator if you will, relative to what’s going on in the assets. But if you look at the last quarter in particular, our all-in cost of debt was down by an 8 from the entire portfolio. And so you can get a sense for how big of an incremental change there might be to move the all-in average down by an 8.

And that will go a long way towards catching up our movement in ROAs with our ROIs, with the changes in Libor. But ultimately, the phenomenon that you are referring to where there is an inverse correlation between spreads and change in Libor is going to continue to play through for sometime while Libor is very low.

As Libor gets into a more normal range, so if we are talking about 3% as opposed to under 1%, if you go back a year or two, we think that we’ll see that correlation loosing up a little bit and we think we’ll see some net benefit from the change in Libor. As to when that happens, whether it’s at the end of this year or into the next year or the following year, that will be – that remains to be seen.

[Rick Shane, JPMorgan]

Got it. Okay. That’s very helpful. Thank you, guys.

[Operator]

Your next question comes from the line of Stephen Laws with Raymond James. Please proceed.

[Stephen Laws, Raymond James]

Hi, good morning. Thanks for taking my questions. I guess, first, I want to touch on the GE Capital portfolio. I know that continues to pay down, but can you maybe give us some color on the average duration of the portfolio? And then how much of an impact the remainder of the GE Capital portfolio has? I am guessing that the duration for those assets is quite short at this point.

[Stephen Plavin, President and Chief Executive Officer]

Yes, we don’t have the portfolio broken out by the GE assets in front us. But I can give you a more general answer and that – almost all the GE assets that remains are either fixed rate or swaps in call protected assets, that for the most part a run between now and 2020 or they are assets that we have significantly modified the loans and that would sort of re-characterize those as now BXMT loans as opposed to GE loans.

So I don’t think this is much differential impact from the GE loans relative to the BXMT loans anymore except for the – that little slice to the pie you see the rates – the fixed rate is almost all from the remainder of the GE fixed rate portfolio that we acquired in that 2015 deal. But we are really near the very tail end of it and it’s become a very small percentage of the overall – of our overall enterprise.

[Stephen Laws, Raymond James]

Okay. And then, tied to that obviously is, it looks like about the $560 million of financing on that GE portfolio credit facility, I think it was mentioned in the Q. Is that adjusted to still tied to those loans? Or does it have a shorter pay down period on that financing facility?

[Doug Armer, Treasurer and Head of Capital Markets]

That’s still tied to those loans and as a matter of fact, it’s cross collateralized with the other Wells Fargo credit facility and so overall practical – purposes, if we look at those as one combined facility on a portfolio of not differentiated loans as Steve mentioned.

[Stephen Laws, Raymond James]

Great. And then, I guess, switching to the bigger picture from liquidity and you’ve covered it – few of the debt financers, but leverage is at 2.3. You’ve raised both capital to both debt and equity since December.

Can you talk about where you are comfortable with leverage? How you think about future capital raise as whether to be debt or equity offerings, especially given the longer-term underfunded commitments with Spiral and the growing portfolio?

[Stephen Plavin, President and Chief Executive Officer]

It’s a great question. I think, with regard to debt-to-equity, we are currently at 2.3 times which we regard as very low and I think that there is room for sure in terms of debt-to-equity to be at 3 times or even 3.5 times. So there is a lot of room for balance sheet growth, that would be funded by additional issuance of debt.

And I think, we will evaluate the liquidity position, sort of relative to net fundings on an ongoing basis as we have in the past and make whatever decision in terms of the type of capital that we would raise based on market conditions at the time. Right now, with $880 million of liquidity, we feel like we have ample liquidity to fund additional growth in our business and certainly that additional have turned that leverage or so comes from existing capacity on our balance sheet in terms of liquidity and debt.

[Stephen Laws, Raymond James]

Great. And one last question and a follow-up on something to Steve Delaney mentioned earlier. How are conversations going with borrowers as you talk to them giving rates have started to move and certainly are higher now than six and twelve months ago? How much impact does that have, given its transitional in construction loans? But have you seen any shift in conversations or new discussion points with borrowers as – in this new rate environment?

[Stephen Plavin, President and Chief Executive Officer]

We really haven’t seen anything rate related. The rates are still low and we underwrite our loans to endure a much higher rate environment than what we are experiencing now or what we think we’ll actually experience throughout the term of the loan. So it really – they really built to handle this. The only pressure we feel is on loan spreads, not on base rates.

The compressing loan spreads create a lot of refinancing opportunities for us and as the source of new product, but it also gives our borrowers occasionally an opportunity to refi their loans. So we are really mindful of maintaining our existing balance sheet loan and looking for other refinance opportunities in a compressing spread environment, but not really seeing a lot of impact from base rates.

[Stephen Laws, Raymond James]

Great. Appreciate the color on that. Thanks for taking my questions.

[Operator]

Our final question comes from the line of Jade Rahmani with KBW. Please proceed.

[Jade Rahmani, KBW]

Thanks very much. I was wondering if you could give your thoughts on how much further increase in Libor or the ten year it would take before you think we could start to see potentially some negative credit trends in commercial real estate overall noting that there is still about $1trillion of expected debt maturities over the next, say, four years?

[Stephen Plavin, President and Chief Executive Officer]

Yes. Jade, I think that, we sort of look at Libor, maybe if you look at forward Libor and the Libor curve and listen to what the Fed saying that, we think it’s a reasonably good chance that Libor could get the 3% and you are potentially higher than that. But it’s about 1.90 today one month Libor which is the index for most of our loans.

And so, we don’t – as I mentioned in the last answer, we just don’t see that as a credit issue at this point. It’s just – rates are just historically low. Cap rates are a good place relative to treasuries in terms of the historical gap between cap rates and treasury rates. The market is relatively healthy overall. It feels like, we are still in a good environment.

We are not seeing the same kinds of lending abuses that were prevalent in the market in 2006 and 2007. Our sponsors are still wanting to put more equity in deals rather than less. We are seeing improvement in leasing in business lines across our loan portfolio. All the positive trends that we expected when we underwrote these loans.

So we are just not seeing the – any of the end of the cycle gloom and doom that I think underlies your question. We are sort of seeing very constructive positive environment, good for our business and we don’t see that changing in the near-term.

[Jade Rahmani, KBW]

And if that further increase in Libor to 3% translated in parallel to a similar increase in the ten year, so you would be talking about north of a 4% ten year treasury. Do you think that would impact cap rates? The spread over institutional cap rates, it seem to be quite compressed at this point and would necessitate a higher cap rate to maintain ROEs.

[Stephen Plavin, President and Chief Executive Officer]

Yes, I think if treasuries by that magnitude, sure it would impact cap rates. We’ve actually seen cap rates on the equity side of the house compressing, at the same time we’ve been seeing treasury rates increasing just for the demand for institutional quality real estate. But over time I think you have to presume that cap rates would increase.

But remember, when we make our loan, we are underwriting what we think cap rates could recently go during a five year period of time. We just typically make loans with that putting extents of five years and there is margin in the business plans and in the cap rates. And also, we also expect to see NOI growth in conjunction with increased economic activity that seems to be leading to the higher rate and we are seeing hotel performance begin to improve with increased economic activity.

We are seeing a little bit more rental take up in some of the office markets than more so than what was anticipated, I think prior to tax reform. So, I think on the ground, things are still pretty well balanced.

[Jade Rahmani, KBW]

Okay. Can you comment on where levered returns overall are today in the bridge loan space, maybe a post-1Q snapshot? I mean, some of your peers have press released spreads in the L Plus 250, 275 range, granted Libors increased, but assuming three times leverage and where you are financing, where would you say levered returns are? Is there enough room to support the dividend at that spread level?

[Doug Armer, Treasurer and Head of Capital Markets]

Hey, Jade. It’s Doug. The short answer is, yes. I would note that, our portfolio being a low leverage portfolio, senior loans is levered four times, not three times at the asset level. And we also commented a little bit on the efficiencies we are able to achieve in terms of our cost of financing, our cost of liabilities down an 8th quarter-over-quarter on an all-in portfolio-wide basis, so down significantly more in terms of incremental costs. When you add all that up, I think maintaining low double-digit ROIs is what we see on the horizon.

[Jade Rahmani, KBW]

And can you comment on the – market? It seems that there is starting to be a bifurcation between players like yourselves with Blackstone sponsorship can get more attractive financing rates through warehouse facilities whereas others that are dependent on A note financings have a cost-to-capital advantage. Would you agree with that?

[Doug Armer, Treasurer and Head of Capital Markets]

Hey, Jade. It’s Doug again. Yes, we would agree with that. I mean, I think our credit facilities that are – and our bilateral relationships with our credit providers are a big advantage for us. They are very economically efficient and they are also extremely structurally sound. And they are the main stay of our liability structure and it helps us maintain a very strong competitive position in terms of loan pricing.

[Jade Rahmani, KBW]

And lastly, just given the competitive environment and potential risk of higher interest rates, is it time to start thinking about other businesses that could complement the platform and even be defensive in some respects?

[Stephen Plavin, President and Chief Executive Officer]

I think, Jade, we continue to believe that the senior mortgage business and strategy is the best available use for our capital. We’ve been able to achieve a lot of growth in performance based upon this business model and it continues to work and to resonate well to us and to our Board and to our shareholders. We will always consider other lines of business that might be complementary or additive or that would be beneficial for shareholders overall and we are always thinking about ways to make BXMT better and a more compelling investment.

And that will continue to be the case if we see something from that we believe is additive, then we will definitely combine it with our regular way of business. But, right now, you’ve seen we are able to grow production in our regular way of business, maintain returns, produce very stable results and we don’t see anything environmental that would make, that is going to compromise our existing business in a meaningful way or that would lead us to – feel like we need to have a more defensive offset. So for us, more – we love what we are doing. If we see something else that we think is very beneficial or additive, we’ll add it and if not we think we have a great business and that one that’s going to perform very well.

[Jade Rahmani, KBW]

Thanks very much for the questions.

[Stephen Plavin, President and Chief Executive Officer]

Thank you.

[Operator]

I would now like to hand the call back over to Weston Tucker for any closing remarks.

[Weston Tucker, Head of IR]

Great. Thanks everyone for joining us today. And please let me know if you have any questions after the call.

[Operator]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.