Blackstone Mortgage Trust Inc

NYSE:BXMT

Earnings Call Transcript 2019-Q3

[Operator]

Good day everyone, and welcome to the Blackstone Mortgage Trust, Third Quarter 2019 Investor Call. My name is Lesley and I’m your event manager. [Operator Instructions] I would like to advise all parties that the conference is being recorded for replay purposes.

And now I’d like to hand you over to your host, Weston Tucker, Head of Investor Relations. Please go ahead, Weston.

[Weston Tucker, Head of Investor Relations]

Great! Thanks Lesley, and good morning everyone, and welcome to Blackstone Mortgage Trust's third quarter conference call. I'm joined today by Mike Nash, Executive Chairman; Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; Doug Armer, Executive Vice President, Capital Markets, and Katie Keenan, Executive Vice President of Investments. 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 section of our most recent 10-K. We do not undertake any duty to update these forward-looking statements.

We will also refer to certain non-GAAP measures on the call, and for reconciliations you should refer to the press release and our 10-Q. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. So a quick recap of our results.

We reported GAAP net income per share of $0.56 for the third quarter, while core earnings were $0.64 per share. Last week we paid a dividend of $0.62 with respect to the third quarter. If you have any questions following today's call, please let me know.

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

[Steve Plavin, President, Chief Executive Officer]

Thanks Weston and good morning everyone. The third quarter was one of our most productive ever as we closed $3.7 billion of loans and again demonstrated the power of the Blackstone Real-Estate platform.

With the strong origination pace and $200 million of funding for existing loans, we grew the portfolio by $730 million in the quarter to $16.4 billion. The two largest originations, accounting for about $2 billion of the quarterly total are secured by office properties that are almost fully leased or pre-leased.

We do not typically originate loans of fully leased office buildings, that's the domain of banks and insurance companies that lend at lower rates, but for these very large loans the borrowers need quick and definitive commitments. So our speed, certainty and ability to commit in large size are the keys to winning versus our bank competition.

The biggest origination of the quarter was a €1.2 billion 70% of cost loan commitment to back Henderson Park’s acquisition and take private of greenery, the leading owner of office properties in Greater Dublin. Henderson Park, a repeat BXMT client needed a financing commitment to bid and satisfy Irish regulatory requirements for public M&A transactions.

By leveraging Blackstone’s experience in public to private real-estate transactions and market knowledge from property ownership experience in Dublin, we're able to quickly and definitively commit to the loan and support our clients bid, which subsequently won the support of the seller and its public shareholders. We expect a full funding of this commitment to occur in the fourth quarter when the acquisition closes.

The second largest origination of the quarter was a $746 million construction loan for an office development in the Greater LA market, 100% pre-leased to an investment grade tenant. Our experience and execution capability of large scale major market construction lending was key to capturing this opportunity. The borrower was very focused on closing quickly to establish maxim schedule flexibility to complete the buildings to the tenant and we were best positioned to facilitate that timely closing.

Our underwriting of this loan was further validated by the positive experience outlook of the Blackstone equity real estate funds, which are a significant owner of assets in the strong performing sub-market. With these very large loans came very large financing of syndication requirements.

For the LA Construction loans, we've already syndicated the senior components to one of our strongest bank relationships. For the Dublin loan we've agreed terms for euro finances from two of our largest lenders that will cover the entire senior execution. In both cases the efficiency of the senior execution reflect the strong leasing and will enhance our expected returns.

Also during the quarter we originated additional loans secured by properties in major markets including Los Angeles, New York, Chicago, London and Spain, and our closing pipeline remains robust with another $3.3 billion of loans closed post-closing or currently in the closing process, which should lead to more portfolio growth in Q4.

Through all this pipeline activity, lending spreads have remained generally stable despite a very competitive market environment. This is explained in large part by lower LIBOR and the possibility of further declines that reduce lender ROAs.

To mitigate this impact of BXMT, we've been requiring rate flows at almost all of our origination. At quarter end we had $3.5 billion of loans in the money LIBOR floors. These floors meaningfully reduce the impact on our earnings from declines in LIBOR, which we further described in our earnings release.

To keep pace with our portfolio and pipeline growth, we continue to expand our credit facility capacity in multiple currencies. During the quarter we closed facilities with two new lenders and established more low cost capacity.

Lower borrowing rates enable us to add higher credit quality loans to our portfolio and still achieve our target ROI. The lower credit facility pricing, along with the premium equity we have raised and enhanced it back to our capital structure from our term loan also helped offset the impact from vintage higher spread loans repaying and being replaced by lower spread originations.

We continue to have about 100% credit performance across our 129 loans and had six rating upgrades and no downgrades during the quarter. A weighted average origination, LTV remains a very calm 62% and the major property markets where we are most active continue to generally perform well with healthy tenant demand.

Our originations this quarter again reflect the ability of Blackstone Management to source and close undifferentiated lending opportunities. Our stock at yesterday's closing price yielded a highly compelling 6.8%, which we believe is even more attractive given lower market interest rates and asset yields.

Our focus for BXMT remains on dividend quality and stability, and with that I'll turn the call over to Tony.

[Tony Marone, Chief Financial Officer]

Thank you Steve and good morning everyone. As Steve mentioned, we had a strong origination quarter with $3.7 billion of new loans closed, as we continue to deploy the capital we raised last quarter.

We funded $1.4 billion under new and existing loans this quarter; generating $730 million of net portfolio grow after modest repayments of $682 million. Notably the €1.2 billion loan to finance the Green Reed [ph] acquisition we originated this quarter will fund entirely in 4Q, so it had a limited impact on our earnings during the quarter.

We closed the quarter with a record $16.4 billion loan portfolio, which is fully performing with no not-accrual defaulted or impaired loans and a stable weighted average origination LTV of only 62%. We upgraded six loans during the quarter with no downgrade, resulting in a weighted average risk rating of 2.7 consistent with 2Q.

The only risk rated four loans in our portfolio are the same three loans we highlighted last quarter, which we downgraded conservatively at that time in response to changes in New York City rent control laws. These loans have been stable since the second quarter and borrowers continue to make all payments due and other wise comply with the terms of their loan agreement.

We were also active on the right hand side of the balance sheet this quarter, closing two new credit facilities with total commitments of $577 million, with attractive pricing terms in our standard term match structure with no capital markets based mark-to-market provisions. In addition we closed at $594 million senior loan syndication and completed several up-sizes, term extensions and rate cuts on existing financing agreement.

As of quarter end the blended cost of our credit facilities was LIBOR plus 1.67%, down slightly from 2Q as some of our legacy borrowings with higher rates repaid and were replaced with lower cost advances on new loans. In addition to our asset level credit facilities, we continue to benefit from the attractively priced and structured $500 million term loan deed we issued last quarter, providing another form of stable capital for our business.

We closed the quarter with debt to equity of only 2.6x, up modestly from 2.5x as of June 30 and liquidity of $796 million available to fund the pipeline deal Steve mentioned earlier.

Our originations and financing activity this quarter produced GAAP net income of $0.56 per share and core earnings of $0.64, both down slightly from 2Q levels. We expected some reduction in EPS this quarter from the capital we raised in 2Q and the decline in LIBOR; however, these were offset by a strong origination pace in 3Q and the active interest rate floors of $3.5 billion on loans in our portfolio.

In addition, I would note that with modest loan repayment volumes, we did not generate material prepayment income or fee acceleration this quarter. While such fees are variable, they generally provide a few cents of earnings in any particular quarter.

I would like to close with some brief remarks about a new accounting standard, the current expected credit losses or CECL standard, which will be effective for BXMT and similar sized public companies January 1, 2020.

CECL has received a fair amount of attention in the banking industry and specialty finance industry as it will effectively require all lenders to record an estimated life of loan loss reserve against all loans in their portfolio, other than those carried at fair value.

Importantly, with very few exceptions the CECL reserve cannot be zero even for well collateralized low risk loans. As a result, we expect that we will record a modest CECL reserve on January 1, which will run through our balance sheet as a reduction to book equity. This CECL reserve will modulate in future periods through an adjustment to net income as our portfolio expands or contracts, the credit quality and risk attributes of our loans improves our decline or our overall market conditions strengthen or weaken.

We will provide more details on our CECL reserve amount and methodology next quarter, but anticipate a relatively modest reserve reflective of our senior lending strategy focused on quality assets in major markets.

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

[Operator]

Thank you, and thank you everyone. [Operator Instructions] And our first question comes from the line of Doug Harter from Credit Suisse. Your live in the call Doug. Please go ahead.

[Doug Harter, Credit Suisse]

Thanks. Given, can you just talk about how you kind of you your capital position in light of kind of the large funding’s for this quarter's originations and you know kind of expectations for the ability to continue to drive pipeline with kind of your existing capital base or kind of the thoughts around raising additional capital?

[Doug Armer, Executive Vice President, Capital Markets]

Yeah, hey Doug. Its Doug Armer here. You know Tony you know referred to the roughly $800 million of liquidity that we you know currently have on the balance sheet. I'd say in addition to that there are probably a couple of $100 million, maybe a little bit more in terms of shadow liquidity in potential changes to asset level leverage in our existing portfolio and that could be around CLO execution or you know further optimization of our credit facility. So we feel very good in terms of our ability with our existing capital structure to fund portfolio growth through the fourth quarter and really into 2020.

That said, we’ll remain opportunistic, you know particularly about you know additional corporate debt capital. We were very pleased with the term loan execution in the first half of the year. The on call on that piece of paper has expired and so you know market conditions are generally favorable for us to revisit that execution, perhaps improve it. So I would say, we'll continue with the fine tuning, but we feel very good about our capitalization with regard to the existing pipeline and perspective portfolio growth in the near term.

[Doug Harter, Credit Suisse]

Great, and then I guess shifting gears here, can you just talk about your view of kind of the office market and kind of major markets, kind of with the pull back of WeWork and how that might impact your kind of leasing trends and leasing rates and values for office properties.

[Katie Keenan, Executive Vice President of Investments]

Sure. Hey Dough, its Katie. You know I think our view continues to be consistent. We're obviously very focused on the fundamentals of each individual market and we're not buying the market. We are very selective about which markets have positive fundamentals, which submarkets in those locations, which buildings, looking carefully about whether the characteristics of the building appeal to the types of tenants that are using space in the market. I think our focus on West LA where we are seeing very positive fundamentals driven by content creation is a good example of that.

You know our direct exposure in the portfolio that we work is extremely minimal. It's less than 1% of the square footage in our office portfolio, so I don't think that's a factor really for us in portfolio. But you know we're closely looking at the overall impact. But I think really it does come down to asset and sub market selection and then also importantly our low leverage lending strategies.

So when we lend, you know we're focused on making 60% to 70% loans on high quality assets with high quality sponsors and I think we'll continue to do that. You know what we've seen in the markets for WeWork and other tenants like that is they tend to space that is a little less desirable, maybe buildings that are a little less desirable and so while I think there may be broader market implications that we're focused on, for the assets that were landing on, you know we’ll continue to be focused on low leverage, good real-estate, good sponsors.

[Doug Harter, Credit Suisse]

Great! Thanks Katie.

[Operator]

Thank you. And your next question comes from the line of Don Fandetti from Wells Fargo. Your live in the call Don. Please go ahead.

[Don Fandetti, Wells Fargo]

Yes hi. Steve can you expand upon a little bit on the Dublin deal? I mean I understand that you know speed is important and that's something we hear a lot, but you know what – were banks really not able to sort of move that quickly? Was there some type of unique structure around this that kneads out the case, and then also the yield or the spread over LIBOR on the Dublin loans seems a little bit lower. Can you talk about how you view their credit and you know this and the LA deal since they are sort of – I think you had mentioned, where at least the LA deal was highly leased or 100% leased. Are they shorter duration type loans? And can you talk about kind of the levered return around Dublin? Just a little more color.

[Steve Plavin, President, Chief Executive Officer]

First, I would start off by saying in both cases the levered return is consistent with the returns that we generate on our portfolio overall. They in each case have spreads that reflect a very strong leasing for each of the properties, but you know there is a corresponding liability side as well, which also reflects the strength of the asset. So we just are able to finance those more efficiently than we otherwise would have there with more leasing risk and generate very similar returns.

In the case of the Dublin deal, the portfolio was almost completely leased. Prices are very strong, cash flow, debt yield. The asset quality is very good and so it was a portfolio that we knew, because again we have a large office in London that buys properties and so we knew the market, we knew the sponsor very well from prior loans we made to them.

So when they went in to proceed in trying to buy this company, we were in regular dialogue with them, sharing our view on the properties and we thought it was a great lending opportunity for us. It was a deal, top sponsored, a market that’s performing very well and top quality assets and it was a unique opportunity for us to make a large loan, leverage our banking relationships as well in terms of what we think will ultimately execute on the financing side of this.

And so just a special situation where we could generate a high return on a great pool of assets with a sponsor we knew well. We competed with the banks, but we were very aggressive and we were very confident that we could get this done quickly, independently and that having a Blackstone commitment supporting his bid for the company would be well received by the seller and its shareholders and that proved to be the case in that bit with the support of our funding commitment. It did prevail in the M&A process. So you know a great deal for us and for the REIT we’re really excited about it.

On the LA construction loan, again another special situation in that; a property that was fully leased to an invest grade tenant in a market that we knew very well or very active in the market. The developer wanted to close very quickly, just to create as much schedule cushion as possible for the tenant, and all these build the same type of transactions. The developers are very focused on delivering buildings quickly to the tenants; its typically penalties if they don’t.

In this case there was a lot of scheduled cushion, but they still were very focused on getting loan quickly and definitively. We've done a lot of large construct loans and we did the Spiral loan here in LA which is meaningfully larger than this. So I think we had a lot of credibility in terms to be able to commit on a great asset and a great market and large size.

The underwriting was very straight forward because the economics of the lease was strong. It was very good real-estate and yet we did compete primarily with banks, but we could provide at the highest degree of confidence that we could be there very quickly for a closing, enable the developer to get started sooner and so I think that was the primary benefit. And we ultimately ended up syndicating the senior to a bank and providing a great return for the transaction and also a great execution to the borrower.

[Don Fandetti, Wells Fargo]

Thank you.

[Operator]

Thank you. Your next question comes from the line of Rick Shane from JP Morgan. Your live in the call Rick. Please go ahead.

[Rick Shane, JP Morgan]

Thank you guys for taking my questions this morning. Steve you made comments about potential syndication of the Dublin and LA loans. I'm curious how we should think about that in terms of the potential caring value on your balance sheet, and also whether or not there will be syndication fees and the tightening of how we should be thinking about those? Is that a fourth quarter event?

[Steve Plavin, President, Chief Executive Officer]

I’m going to have Doug give you the sort of the more detailed answer. On the LA construction loan, the loan and the syndication both are already closed. In the case of Dublin though we have agreed terms on the financing, but the loan hasn’t funded yet. So the lenders to us haven’t funded yet as well, but maybe Doug could give a little bit more color.

[Doug Armer, Executive Vice President, Capital Markets]

Yeah, so in both cases we have executed a financing strategy. And so in terms of our total loan portfolio and control of the transaction, we own the whole loan. In the case of the Dublin loan, we're going to use some existing credit facility technology with existing credit facility counterparties. So that will show up just the way the majority of our loan portfolio shows up in our financial statements, you know with on balance sheet, limited recourse leverage that's very efficiently priced as Steve mentioned, which will drive you know an accretive or in-line ROI on that transaction.

Same story, slightly different, variation on the theme. With regard to the LA deal where we've done a mortgage mez syndication that's more typical in the construction loan contacts, limited recourse, which may actually result in a unconsolidated presentation on our financial statements. So you know that balance sheet or leverage would be off-balance sheet, but in both cases the economics are consistent with our financing strategy generally and will drive ROIs that are consistent with our investment strategy generally for the senior whole loan product that you know dominates the portfolio.

[Rick Shane, JP Morgan]

Got it, okay great. And then in terms of the Dublin loan, generally speaking and again this is domestic, so this maybe an international issue. But generally speaking, I would think that that would be a 10 year fixed rate type loan given the type of collateral. I'm curious, obviously you guys have structured this more consistently with your floating rate product. I'm wondering what the borrowers incentive is and is there high refinance risk ultimately.

[Katie Keenan, Executive Vice President of Investments]

Yeah. So you know I think with all the loans we do, one of the reasons borrowers come to us is because we can be a little bit more flexible with their general strategy. This is a portfolio of very high quality, well leased, but there are also some elements of value add that they’ll pursue, whether it's looking at selective sales for assets that may be appropriate at this time, whether it's you know trying to move some tenants around and drive additional revenue, whether it's you know small amounts of potential – additional development potential, and working with a lender like us gives them the flexibility where they can pursue those business plans without needing to do a lot of gymnastics with sort of a long term fixed rate loan.

So I think you know our ability to develop you know more of a floating rate loan with a little bit more flexibility, it's what they needed to implement their business plan.

[Steve Plavin, President, Chief Executive Officer]

Hey Rick, the sponsor of the deal is a real-estate opportunistic fund, you know a life funds. So I think they are thinking that their holders of these assets. I mean as Katie mentioned, some of the assets that are leased long term and stabilize, they are more likely to sell earlier in the transaction. But I think that will ultimately exit the entire transaction and so that three to five year time frame as is typical with that profile of borrower.

[Rick Shane, JP Morgan]

Got it. Okay, that makes sense. When you were talking about your – the advantages of your positioning, I was thinking being able to bid as a principals as opposed to an agent and I suspect that's a big element of it, but it's also structural in the back end as well.

[Steve Plavin, President, Chief Executive Officer]

Yeah, as Katie mentioned – this is sort of – was this a very large version of what we do all the time and that you know the difference being its bigger, it’s an RO and the properties are almost fully leased. But we are still providing a flexible loan for interim holder who is going to on some of the assets, there is some improvement plans and others it’s just, you know I think they’ll sell over time in to what is today a very, very strong Dublin market.

[Rick Shane, JP Morgan]

That’s a lot clear. Thank you guys.

[Operator]

Thank you. And your next question comes from the line of Jade Rahmani from KBW. You’re live in the call Jade. Please go ahead.

[Steve Plavin, President, Chief Executive Officer]

Hi Jade. You might have us on mute there.

[Jade Rahmani, KBW]

Hi! Can you hear me?

[Steve Plavin, President, Chief Executive Officer]

Yeah, we can hear you.

[Jade Rahmani, KBW]

Okay, great. Just thinking about the earnings and dividend outlook and the dynamic that you spelled out with potentially some higher yielding loans repaying and replacing those with lower yielding assets, potentially being able to offset that with either higher leverage and/or lower financing costs. Do you think something around the third quarter's earnings level should be viewed as sustainable, which equates to roughly a 9% levered return or in fact our levered returns in the transitional lending business declining as some have commented you know in the media and at conferences.

[Doug Armer, Executive Vice President, Capital Markets]

Hey Jade, it’s Doug. I think you put your finger on all of the relevant dynamics. You know obviously LIBOR is moving around as well and there are some implications around that.

We've maintained the dividend at $0.62. I think you know we are very confident that you know that dividend coverage is sustainable and so you know the mid-sixties level that we’ve seen in the third quarter, I think you know stands to reason as you know a level that we’ll be able to maintain going forward.

I think there's the potential for growth around additional portfolio growth, you know future changes in LIBOR and as you mentioned you know additional balance sheet leverage and deployment, you know additional efficiency at the corporate level, which has driven growth you know over the past year or two in spite of all those dynamics that you referred to.

So we feel very good about where the dividend is at and we feel very good about you know where our core earnings are coming in and the prospect for growth in core earnings going forward.

[Jade Rahmani, KBW]

And what kind of leverage should we think about, you know all in leverage, including non-consolidated senior interests, corporate leverage, CLO’s, even though some of those may have been on recourse non mark-to-market, you know still in terms of target leverage. I mean I think in the second quarter it’s around 2.9x and including all of those things and what you disclosed is 2.6x. So something in the three turns of leverage or do you think something higher than that?

[Doug Armer, Executive Vice President, Capital Markets]

Well, you know first the difference between 2.6 and the total leverage number is exactly you know what you referred to in terms of the exclusion of the off balance sheet or you know non-debt you know leverage in the portfolio. I think including all of that and sort of looking at the total loan portfolio and internal leverage, which from a risk management point of view is a different number, but from a deployment and earnings power point of view I think is a relevant metric.

We would expect to be you know running in that – you know between 3x to 4x in terms of total leverage I think, and is a little bit different than the number that you cited, so we can work offline to close that disconnect. But I think we're currently in the you know roughly 3.4x and as we continue to deploy the capital that we have on balance sheet and grow the portfolio, you know that could take up to you know the high threes. But we'll be in that zone I think going forward given the mix of debt and equity capital that we've been you know raising on the balance sheet over the last couple of years.

[Jade Rahmani, KBW]

Thanks. Just a couple of quick ones; the Dublin loan in the 10Q chosen April 2020 maturity, but it sounds like you are anticipating a longer duration than that. Can you just comment on that nuance?

[Steve Plavin, President, Chief Executive Officer]

Yeah, I can do that Jade. The way the loan is meant to work is an initial bridge period, which will ultimately be replaced by some longer duration loans. We're still working on the refinement of that, but met to facilitate the sponsors’ flexibility with holding and improving some assets and selling others. But we ultimately expect this to be sort of a three to five year total term finance.

[Jade Rahmani, KBW]

Okay. Just also wanted to revisit, we were co-working – again, I mean their market share was dramatic, especially in places like New York and San Francisco, London as well and in the transitional lending space where you're really targeting that last mile of occupancy, you know I think a lot of players may have viewed them as sort of a tenant of last resort. And in fact I think they were actually setting the rents in certain asset classes, in certain markets.

So you know broadly speaking, do you think that underwriting assumptions are going to change and there will be an impact on either what people think effective rents should be or overall office valuations in the transitional lending space.

[Steve Plavin, President, Chief Executive Officer]

You know Jade, obviously there were a major tenet that influenced the market. You know our experience in most of your locations would have been open for a period of time as they are so highly utilized. You know I think they've been successful generally as an operator of co-working space and so I would be much more concerned if I saw a lot of co-working spaces where there was no one inside working and it looked like the model wasn't executing well.

So I think you'll see there’ll be some impact in some of the markets, especially the markets that have maybe a little bit more of a tech focus. But in our view, the way we’ve looked at it as we work in other co-working tenants, as a non-credit tenant that we’d like to see in a minority of the space, we have very little WeWork as Katie mentioned, very little WeWork in our portfolio.

We didn't rely on WeWork to take up vacant space. We think they are additive to some buildings and that incubate new tenants and add a little bit of a different vibe to the assets. But I think you'll see that as long as there's underlying tenants for the co-working spaces that these buildings with these markets will still perform well.

[Jade Rahmani, KBW]

Thanks for taking the questions.

[Operator]

Thank you. And your final question comes from the line of Steven Lewis from Raymond James. You’re live in the call Steven. Please go ahead.

[Steven Lewis, Raymond James]

Thanks, good morning. Two questions left I’d like to touch on. First, can you maybe revisit the three multi-family loans in New York that you moved to a four rating I believe in the second quarter. Really from an LTV standpoint, kind of have you seen any assets trade post the rent regulation? How do you think your LTV exposure there has changed from the time of origination to the current LTV on the asset today?

[Tony Marone, Chief Financial Officer]

Sure. So this is Katie. There really haven't been enough trades in the market to establish a new price level; we've been watching it. You know there's been very much a wait and see mode in terms of both buyers and sellers in the market. You know the few trades that have happened have generally been sort of a force down situation, so we don't think that there is a lot of information out there about where things are settling out.

I would say as far as our loans as Tony mentioned, they continue to perform, our borrowers continue to be committed there to be paying at the grade and so we still feel they are very stable. You know when we originated these loans, they were you know mid-sixties LTV and we think that they are higher now, because the cash flow trajectory is lower than what it was when we were originally under oath, but we still believe and feel strongly that they are covered by values, just up 100%.

You know where exactly we are in that range, you know I think it's a little bit too soon to tell, but you know [inaudible] continue to be performing and then ultimately it will be covered by value.

[Steven Lewis, Raymond James]

Great, thanks for the comment Katie. Lastly, the spiral funding, I think April of ‘18 press release talked two years and so we're looking at beginning to fund that loan first half next year. Can you maybe update us for our models, just how we should think about that $1.8 billion of funding occurring, you know how much do you anticipate next year? Are there any terms you can share with us about the expected drawdowns from that loan?

[Doug Armer, Executive Vice President, Capital Markets]

I think – Steven, its Doug. I think our expectations in terms of the funding schedule remain unchanged. The project is on plan and so we funded an initial slug of capital in the form of a mezzanine loan, you know which is yielding an ROI that works for our business.

You know going forward we’ll be funding the senior loan which we've syndicated and so the right way to think about that is that it’s essentially a new loan that'll fund over time at our levered ROI and that'll be a sort of straight line funding over the course of – and Katie, maybe you can refresh my memory as to what the funding schedule will be over the course of the next several years, you know starting in 2020 on a relatively straight line basis.

So you won't see a big pop or you know decline. Either way, it'll be part of the ongoing portfolio growth you know that you see in the portfolio over the next couple of years.

[Steven Lewis, Raymond James]

Great! Thanks very much for your comments.

[Operator]

Thank you. And now your final question comes from the line of Arren Cyganovich from Citi. Please go ahead.

[Arren Cyganovich, Citi]

Thanks. Just on the C4 commentary, did you provide any specific range of how much that might impact your day one. I didn't catch that if you gave any nominal percentage range.

[Tony Marone, Chief Financial Officer]

Hey Arren, it's Tony. We didn't provide a range at this point and we’re not ready to provide a range. We’ll be providing in the next quarter. I do think as I commented earlier, you know we expect that the reserve will be reflective of our business model and our continued focus on senior loans with quality sponsors and quality markets and quality assets. So we will have to book a reserve, because the rules say it can't be zero, but we don't have a number that we're sharing at this time.

[Arren Cyganovich, Citi]

Okay, thank you.

[Operator]

Okay, thank you. And I would like to hand back to Weston Tucker for final remarks.

[Weston Tucker, Head of Investor Relations]

Great! Thanks everyone for joining us and please give me a call after this call if you have any questions.

[Operator]

Thank you everyone. It concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.