Blackstone Mortgage Trust Inc

NYSE:BXMT

Earnings Call Transcript 2021-Q4

[Operator]

Good day, everyone, and welcome to the Blackstone Mortgage Trust Fourth Quarter 2021 Conference Call hosted by Weston Tucker, Head of Shareholder Relations. My name is Leslie, and I'm the event manager. [Operator Instructions]. I'd 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 for today, Weston, please go ahead.

[Weston Tucker, Head of shareholder relations]

Okay. Thanks, Leslie, and good morning everyone and welcome to Blackstone Mortgage Trust's fourth quarter conference call. I'm joined today by Mike Nash, Executive Chairman; Katie Keenan, Chief Executive Officer; Austin Pena, Executive Vice President Investments; Tony Marone, Chief Financial Officer, and Doug Armer, Executive Vice President Capital Markets. This morning we filed our 10-K and issued a press release for the 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 forward-looking statements. And 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-K. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.

For the fourth quarter, we reported GAAP net income per share of $0.76, while distributable earnings were $0.78 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the fourth quarter. If you have any questions following today's call, please let me know.

And with that, I will now turn things over to Katie.

[Katharine Keenan, Chief Executive Officer]

Thanks Weston. Fourth quarter's outstanding results capped off a banner year for BXMT with record originations and pull portfolio growth translating into one of our best quarters of earnings ever. We originated $6 billion of new investments in the fourth quarter alone, equivalent to a full year of production throughout much of our history. For 2021 in total, originations reached a remarkable $14.6 billion, all while staying true to our rigorous credit standards and return requirements, and at the same time, positioning our portfolio to take advantage of our highest conviction investment themes. How do we do it? It's all about our platform. With $279 billion of real estate AUM, Blackstone is the largest real estate investor in the world, and our access to market information, relationships and investment opportunities is truly unparalleled. We saw the clear benefits of these advantages in 2021, as regular way of lending activity resumed following 2020's uncertainty. We drew upon our market insights to provide tailored lending solutions to many of the most active borrowers in the market with whom we’ve built deep, longstanding relationships through over $100 billion of loans originated in the nearly 15 year history of the Blackstone Real Estate Debt platform.

The strongest endorsement of our approach is our repeat borrower business, which drove $11.5 billion of this year's originations. The strength of our platform enabled us to see recovery trends in real time, move with confidence early and access unique opportunities in scale, while many others remained on the sidelines. The result was a meaningful expansion of our prime portfolio of low leverage, well-structured loans to top sponsors, the hallmark of our business. The quality of our loans is a powerful driver of our track record and our long-term performance. But we also built this business to succeed in any rate environment, including the one we believe is coming. We mix floating rate loans, overtime as rates move higher, we benefit. And with our disciplined focus on low-leverage lending on real assets where cash flows can grow, the credit of our portfolio is at the same time highly resilient to the impact of rate increases, and the inflation driving them. Moreover, in an inflationary environment, rising replacement costs heightens the barriers to entry for competitive new supply, making the collateral we lend against more valuable.

Our $6 billion of investments this quarter echo the themes we've long focused on, high quality assets with dynamic sources of demand, which have the pricing power to drive rent growth, life Sciences with a $362 million new build asset in Berkeley, California, multifamily around the world, where we closed $2.5 billion in loans for both new build and stable cash flowing assets in the U.S., Europe and Australia, modern well amenitized office where we lent on new assets in Miami and Fort Lauderdale, and irreplaceable real estate, where we completed a $770 million refinancing of Industry City in Brooklyn, a one of a kind, mixed use asset that leaves the entire city and tenant demand with 1.6 million square feet of leasing since COVID.

Our ability to innovate and draw on our unique real estate and structured finance experience continues to drive differentiated opportunities. This quarter, we acquired a $400 million portfolio of loan participations from a commercial bank with whom we have a longstanding relationship. The bank has substantial experience in real estate lending and a conservative credit philosophy focused on high quality sponsors that aligns well with our approach. But bank regulations are making commercial real estate loans comparatively less capital efficient, creating an incentive for many banks to reduce their exposure.

We have deep experience structuring customized transactions with banks all over the world. And we worked cooperatively in this case to develop an innovative solution that was a win-win. Adding a portfolio of bank originated well performing loans to our balance sheet. We've also identified compelling investments in sometimes overlooked sectors, where we can make low leverage loans on crossed diversified pools of cash flowing real estate at attractive relative returns.

Asset classes like select service hotels, essential neighborhood retail, and transient travel oriented parking are appealing to a growing universe of buyers searching for yield, because of their stable cash flows, high margins and ability to benefit from inflationary growth. This quarter, we found good relative value here at a well-protected basis, 57% LTV on average. And given the scale of these transactions and complexity of analysis required, we are well positioned to capture them.

In addition to our origination activity this quarter, we also saw continuation of the year’s healthy pace of repayments as our sponsors complete their business plans and find attractive executions for their assets. This quarter, we had $3.5 billion of repayments, including $2.3 billion of office loans. The overall U.S. market saw $139 billion of office transactions this year, in line with the 2018-2019 average, demonstrating strong capital markets demand for the types of high quality office assets we lend against.

While the lingering effects of the pandemic exacerbate longer term challenges for older vintage commodity office, we have long been focused on the segment of the office market most desired by tenants even pre-pandemic, newer, well amenitized assets in dynamic locations that cater to growing knowledge economy businesses. Use assets continue to be highly desired by users who know that in person interaction is a key ingredient in their innovation, as well as investors who recognize the long-term value of assets where demand is concentrating. A prime example of this dynamic in the fourth quarter was the repayment of our loan collateralized by Hudson Commons, a recently built trophy asset with excellent sponsorship and Manhattan's Hudson Yards. The West side sub market has led the city in absorption and rents both pre and post-COVID. We made the loan in 2019 to finance the construction loan pay off and lease up of the building. Following takeup from users and tech, life sciences and financial services, the asset was sold in December for over $1 billion, 43% above our loan basis to a long-term pension fund investor. It's a similar story with another large repayment in Boston.

Blackstone has been a dominant player in life sciences real estate for years, starting with the acquisition of BioMed in 2016 which grew into our more than $14 billion BPP Life Sciences business today. We have deep market knowledge that allows us to act with conviction on investments that address the burgeoning tenant demand we see for the right type of assets. And that's what happened in January of 2021, when a top sponsor identified the opportunity to buy an office building in a prime location in East Cambridge and convert it to life sciences use. Our team knew the building in the location, and we acted swiftly to provide our clients certainty for their acquisition. With their deep local relationships and skillful execution, our sponsor was able to accomplish their business plan adeptly and well ahead of schedule, and sold the asset to a REIT for over $800 million in December, more than double our $325 million loan basis.

With our significant origination activity and the continued flow of healthy repayments, the BXMT portfolio has turned over materially in the last year, and today reflects a younger vintage asset base, 46% originated this year that is even more focused on our favorite sectors and markets. Our multifamily exposure has more than doubled, with $6.1 billion of new loans in this sector in 2021, 42% of our total loans for the year. We continue to see attractive credit opportunities in Sunbelt markets now our largest geographic exposure, and a newer well-amenitized office, logistics and resort hotels.

We've been just as busy on the capital side of our business this year, where we continue to innovate and diversify our funding sources. We raised $5.9 billion of new debt this year across the corporate and asset level markets, all well priced and attractively structured. Completed a $1 billion CLO, added or repriced $623 million in several term loan transactions, and entered the high yield bond market with a $400 million issuance in October. That price is 3.75% fixed for a five year term, all attractive capital for a growing investment pipeline.

We access the equity markets as well, creating book value and allowing us to accretively fund our growth. And we continue to see strong interest in BXMT products of every type from banks and other financing sources, as they love to expand their relationships with our franchise.

The scale of our business and strength of our platform uniquely positions us to tap new sources of capital, break market barriers and innovate products. The result is a best-in-class capital structure with superior scale, efficiency and integrity. And with $1.3 billion of liquidity at year-end, we put ourselves on strong footing to capture the continued momentum of investment opportunities we see ahead, including $3.6 billion of new loans closed and in closing year-to-date.

The growth in our portfolio drove strong earnings momentum over the course of the year. Our results this quarter contributed to annual distributable earnings of $2.62 per share, notching another year of strong dividend coverage, our seventh in a row. Our performing first mortgage portfolio continues to generate a highly attractive current income yield, which is positively correlated with rising rates. There is today over $300 billion of industry dry powder searching for real estate investments, creating a favorable backdrop for continued robust lending activity and BXMT is the lender of choice to many of the largest real estate investors in the world. As we move into 2022, we remain exceptionally well-positioned to deliver for our shareholders.

I'll now turn the call over to Tony Marone, our CFO. Tony?

[Anthony Marone, Chief Financial Officer]

Thank you, Katie. And good morning, everyone. This quarter concludes a record year for BXMT with strong results across all of our key metrics, distributable earnings or AE of $0.78 per share for the quarter, while full year earnings of $2.62, up $0.06 from 2020, and dividend coverage to 106%, reflecting the earnings power of our growing loan portfolio. Our GAAP net income of $0.76 this quarter and $2.70 for the year nearly doubled 2020 levels, reflects the impact of a $40 million decrease in our CECL reserve this year. Our book value increased $0.80 this year to $27.22, driven by a combination of retained earnings, accretive stock offerings, and the CECL reserve reduction.

To unpack earnings a bit further, the 4Q DE of $0.78 per share reflects two particular items. First, we earned significant prepayment income related to a certain loan repayment this quarter, which effectively represents the accretion of the minimum amount of income we otherwise would've earned over the life of the loan into a single quarter, as a loan repaid early. Prepayment income is a normal part of our business, but with this transaction, we saw a larger magnitude that is typical this quarter. Separately, in connection with a four key modification of a loan that was impaired in 2020, we recognized a $0.07 reduction in DE which had no impact on GAAP net income due to the prior impairment. Including both of these items, our DE for the fourth quarter was $0.66 on a run rate basis, up from $0.63 in 3Q. Notably, our rapid pace of deployment and net $2 billion of 4Q portfolio growth, absorbed the $312 million of new capital we raised in September, muting the typical earnings J curve in the quarter following the equity raise. Similarly, the 10 million shares we issued in November had only a slight impact on the 4Q results, as they were only outstanding for a portion of the quarter. We expect to see some modest impact on 1Q just as this new capital that's deployed into the $3.6 billion of new transactions Katie mentioned earlier.

Katie discussed one of the central features of BXMT's business that are focused on floating rate loans, and the general positive correlation of our earnings to interest rates. When rates dropped precipitously in 2020, our earnings did not follow because of the LIBOR floors embedded in many of our loans. Now with rates expected to rise, we are happy to report that such floor income has become substantially less material to our earnings power. We entered 2021 with a weighted-average floor of 82 basis points across our portfolio. But after $7.2 billion of loan repayments this year, and $14.6 billion of originations without the money floors, our weighted-average floor is only 42 basis points as of year-end, and 73% of our loans carry forward at or below 25 basis points. We expect this trend to continue in 2022 with incremental portfolio turning over, which will further position our business to benefit from anticipated rising interest rates later this year.

As we have grown originations, we continue to target consistent asset-level returns with yields of 3.7% for 2021 originations, in line with pre-COVID 2019 levels. Similarly, our average origination LTV this year of 64% has also remained consistent showing that as we have grown the size of our business, we have maintained our disciplined focus on both return generation and conservative risk management. On the subject of credit, performance across our entire portfolio continues to be strong with a weighted average risk rating of 2.8 as of 12/31, consistent with 3Q and improved slightly from 3.0 in 2020. We saw 11 risk rating upgrades this quarter and 43 for the year with only 3 downgrades and no new watchlist loans. Our borrowers continue to execute pre-COVID business plans and collateral performance metrics continue to improve. Our portfolio credit performance is also reflected in our CECL reserve I mentioned earlier, which was effectively flat quarter-over-quarter, a decrease this year overall. On a per share basis, our CECL reserve was only $0.78 as of 12/31 relative to $1.26 at the start of the year.

Katie mentioned we continue to innovate and expand our capital sources to finance the growth of our business. This year, we added $5.9 billion of new financing capacity, including $3.7 billion in new credit facilities, a $1 billion CLO securitization, and $1 billion of financing across our corporate level term loans and unsecured notes. We've also been successful in driving down our cost of capital as we continue to scale, increasing the net interest margin on our asset level financings and reducing our corporate level of financing costs by 43 basis points.

Our debt to equity level remains conservative at 3.2 times in line with pre-COVID levels. And we have $1.3 billion of liquidity at year-end, providing ample room for continued growth within our current capitalization. Reflecting on this record year for originations, earnings and portfolio growth, we are proud of the performance we have delivered our stockholders and we are focused on delivering continued strong, reliable results in the future.

Thank you for your support. And with that, I'll ask the operator to open the call to questions.

[Operator]

[Operator Instructions]. And your first question comes from Rick Shane from JPMorgan.

[Rick Shane, JPMorgan]

Two things. One is that when we back out the prepayment income -- and it sounds like it was about $0.05, what should we see as the runway on interest income exiting the fourth quarter?

[Anthony Marone, Chief Financial Officer]

Sure. What we were focused on to mention is the run rate earnings of $0.63 overall, except $0.36, which compares to $0.63 last quarter. And that's net of all the -- two one-off items that I mentioned earlier.

[Rick Shane, JPMorgan]

And second question. When we compare the interest rate sensitivity chart, from the third quarter to the fourth quarter, there's been a very significant impact in your NIM compression related to a 50 basis point increase, and you guys have done a great job articulating that. I am curious, you basically shaved $0.06 a year of compression with the portfolio rotation. This chart goes out 25 basis points and 50 basis points. At what point does the portfolio become fully asset sensitive again, is it around 75 basis?

[Douglas Armer, Executive Vice President, Capital Markets]

Rick, it’s Doug, I'll take that one. That chart to your point is a backward looking chart or point in time for year end. And I think it's important to think about it in the terms that you are with respect to the prospective. And we feel very good about our positioning on rates today, and that's really for 3 reasons. The first is the decrease in the proportion of floor income that -- in our portfolio that Tony referred to and that you've referred to, that's a function of the portfolio growth and turnover. And that trend will continue very significantly in 2022. It has continued very significantly in 2022. And so that's a big differentiator versus the 12/31 number.

The second factor is the indirect LIBOR exposure we get from the FX hedging strategy in our non-U.S. portfolio and Rick, we've discussed that a little bit in the past. And on the liability side, the fixed rate bond that we issued at the beginning of the fourth quarter also factors in. And when you add it all up, the impact of a prospective 25 basis point increase on earnings is essentially negligible, a fraction of $0.01 per share, and a 50 basis point increase is modestly positive.

What's more exciting is looking a little further out on the curve and thinking about meaningfully higher rates to your point, Rick, in the second half of the year when there would be a meaningfully better contribution to earnings from our floating rate loans. So we're at that crossover point essentially now that you're referring to. And I think when we see 50 basis points, 75 basis point, 100 basis point increases in LIBOR, we're going to see a much more meaningful positive contribution to interest income going forward.

Stepping back I think that -- just to finish the thought, the LIBOR floor story really highlights how well hedged our business model is. When rates drop, our earnings stayed steady, now with the prospect of rates increasing, we're very well positioned to benefit from that. And I think that translates to a stable, consistent, high-quality dividend and income from our shareholders. It's really unique to our business model in this space.

[Rick Shane, JPMorgan]

Great. I'll be careful not to catch you up again. Thank you very much. I apologize for taking so much time, but helpful answers.

[Operator]

Your next question comes from Don Fandetti from Wells Fargo.

[Donald Fandetti, Wells Fargo]

Katie, I guess 2 questions. One, the 10-year yield continues to move up. We've had blockbuster performance in terms of asset sales and purchases in the market. Do you think that continues? And then second, barely on the competitive front, are you seeing any new funds, private funds formed? Or do you feel like as far as you can see over the next year or so that the competitive window looks pretty good?

[Katharine Keenan, Chief Executive Officer]

On your first question, I think I'll leave the rate prognostication to more macro people. But I think as Doug focused on, when we look at the rate picture for our business, we think it spells a really positive dynamic for our floating rate lending portfolio.

I think on your second question, in the history of the business, there's certainly always been competitors, new funds coming into the market, other businesses coming out of the market. And what we've really seen year after year is that the combination of the scale of our platform, the really incredible relationships we've developed through repeat business with borrowers over the years and all the information that we have coming in here that allows us to stay ahead of the curve in terms of investment decisions. That has really translated through to very significant market share and competitive advantage on the origination side really throughout sort of market cycles and throughout competitive dynamics in the industry. So we see no reason for that to change even if new competitors come in, others leave. We think that the advantages we have as far as the scale, the strength experience of our platform continues.

[Donald Fandetti, Wells Fargo]

But just to clarify, Katie, rates moving higher. Do you still feel good that you can generate significant asset growth this year? Or do you see a slowdown because you had this big pent-up demand catch up?

[Katharine Keenan, Chief Executive Officer]

Yes, that's a great question. I think when our borrowers are borrowing from a floating rate lender, it's really as a result of the business plan of the assets that they're looking to execute. So typically, our borrowers are executing some sort of value-add or buy it, fix it, sell it strategy, which really is most appropriate for a floating rate product, given the prepayment flexibility we offer and also given all the ancillary benefits of being able to work with a lender that's thoughtful that understands their business plan that can sort of reframe the loan over time if things go better than expected. I think between that and the significant amount of capital that's been raised, as I mentioned in the script, looking for new real estate investments, I think we'll see continued transaction flow. And I think that should translate into continued demand for our types of loans.

[Operator]

Your next question comes from Doug Harter from Credit Suisse.

[Douglas Harter, Credit Suisse]

Katie, hoping you could talk about, I guess, how you think about sort of portfolio the portfolio concentration that you have and whether that introduces any risks or kind of when those loans do season and that capital needs to be redeployed? How do you get comfortable kind of with the opportunity set a couple of years out into the future?

[Katharine Keenan, Chief Executive Officer]

Sure. I think the best answer to that question is really our track record over the years, where we've grown the portfolio every year in the history of the business, 20% CAGR over the last 5 years. And I think you can see from this year, our growth is accelerating, not leveling off. And that really speaks to the large and, I think, growing addressable market, the growth of our overall platform and our origination team and that translates to more and more touch points in more markets. Over the years, we have expanded geographies. We've looked at more asset types. We've obviously built up a very large stable of repeat, very experienced and skill borrowers. And we continue to see more and more pipeline from that virtuous cycle that we've developed. So we see a very large market that we have many touch points in, and I think that will translate to the consistent performance that you've seen over the years.

[Douglas Armer, Executive Vice President, Capital Markets]

I would just add to that on the redeployment point that when there are significant prepayments or repayments, we tend to experience more prepayment income in the fourth quarter was a great example of that. Our balance sheet is large. Our capitalization is fairly flexible. And so we're able to manage those ebbs and flows in terms of our debt and equity, producing, as Katie mentioned, consistent earnings through those peaks and valleys in terms of deployment.

[Douglas Harter, Credit Suisse]

Great. Thanks, Doug. To follow up on your point, Katie, are there other geography -- or where do you think you are in terms of building out the different geographies and kind of getting up to scale in those? Is that a potential for another acceleration of growth?

[Katharine Keenan, Chief Executive Officer]

Yes. I think there continues to be more untapped markets out there for us. I mean this year, we made our first loan in Sweden. We made a large loan in Australia. We see continued flow coming out of Australia. And it's also the case in the U.S. We've been much more active in gross markets. We've expanded the scope of the size of loans we're doing particularly on the multifamily side. We've done a lot of work on making our processes efficient and invested very significantly in our team. So I think we just continue to find more complementary areas that we weren't perhaps investing in 5 years ago that are just driving more growth.

[Operator]

Your next question comes from Tim Hayes from BTIG.

[Timothy Hayes, BTIG]

Just a follow-up on Doug's last question. I mean at the parent company or the broader Blackstone platform, you guys have made a lot of investments on the equity side, in resi platforms with the Bluerock acquisition, getting deeper and rent to own. And then also, I'm not even going to scratch the surface on everything you guys have done, but extended stay and then industrial portfolio acquisitions in BREIT. I guess my question is, these are asset classes that typically have not been the major concentrations at the BXMT loan portfolio level. And I'm curious if they create opportunities for you to get lending opportunities in the years ahead as you kind of grow deeper there on the equity side as well.

[Katharine Keenan, Chief Executive Officer]

Yes. I think you really put your finger on it. It is exactly the case that as our platform across the real estate business expands, all of those new partnerships, all of those touch points we have in the market, we really see that translate through to new relationships that we can bring our capital to. We've seen that very significantly in the multifamily side this year when our equity side of the business has always been a very significant player in multifamily, but continues to expand and all the new partners and sellers and buyers that they're working with, we have the opportunity to talk to them and bring the same level of high integrity really good way of doing business that we have throughout the Blackstone platform to them on the lending side. And that really creates this very powerful network effect that I think you see across the Blackstone business, but certainly as well in our business, in the real estate platform, where we just have such an expansive reach over the players in the real estate market that just continues to expand every year with the growth of our overall real estate business.

[Timothy Hayes, BTIG]

Right. Yes, definitely makes sense. And then just a follow-up on the capital structure. Just curious how you see that evolving over the course of the year. You seem to have a really solid liquidity position. Leverage seems appropriate for essentially fully senior loan portfolio. So curious, I know you have an upcoming maturity this year. It sounds like you're doing some A note sales, which is pretty nothing out of the ordinary for you guys and the CRE CLO market remains really hot. So a lot of options at your disposal, just curious how you see the capital structure evolving with all that in mind and expectations for future growth.

[Douglas Armer, Executive Vice President, Capital Markets]

Hey, Tim, it's Doug. I'll take that one. I think, again, you sort of put your finger on it. I think we expect to continue diversifying our balance sheet, accessing opportunistically different sources of capital, both at the asset level and at the corporate finance level. The CLO market is an important part of our capital structure. And we expect to be an issuer there. In terms of new horizons that we expect to address the European market in terms of securitized debt. I think that we're also, as you mentioned, increasing the amount of syndication that we do. So across syndication, securitization and our bilateral credit facilities. I think we'll continue to be very active in capitalizing future growth in the portfolio. I mean we've got a whole bunch of different options on the corporate finance side as well.

In the fourth quarter, you saw us enter the high-yield market. We've got convertible notes outstanding. The term loan has been -- the term loan market has been important to us. And obviously, we've been active issuers on the equity side as well. So it really runs the gamut, and we're going to remain opportunistic and focused on the integrity of the balance sheet and focused on efficiency in terms of cost of capital going forward.

[Timothy Hayes, BTIG]

Yes. That's helpful. And if I can maybe just kind of part B to that question is just more pointed on leverage. 3.2x being net debt to equity, how should we think about leverage going forward? Should we look at it more on kind of a total leverage basis or on a recourse leverage basis if you were to kind of do more syndication and CRE,CLO and how do you balance that relationship?

[Douglas Armer, Executive Vice President, Capital Markets]

I would think about it in terms of debt to equity more than in terms of total leverage. When you look at our existing capital structure and the 3.2x debt-to-equity ratio, we can see room for in that existing capitalization, another $3 billion to $5 billion of portfolio growth before we would be constrained in terms of the amount of debt on the balance sheet and the capacity available to us. And so I think what you saw in 2021 is more of what you'll see in 2022, where we'll fluctuate between 3x and 3.5x potentially higher, potentially a little bit lower as we move around the different capital markets execution. But I think we'll -- you'll see a lot more going forward of what you've seen in the recent past in terms of managing that debt-to-equity ratio.

[Operator]

And your next question comes from Jade Rahmani from KBW.

[Jade Rahmani, KBW]

With the material increase in pace of originations, could you talk to, first, what you think the main drivers are of the surge? It's not just evidenced by BXMT, but others such as Starwood have also announced a surge in originations. What would you say is driving that growth?

[Katharine Keenan, Chief Executive Officer]

I think the sort of first order driver is really just the overall growth in transaction activity across the market. 2021 versus 2019, total transactions were 35% higher this year in some of the more favorite sectors, multifamily, 74% higher than 2019 levels. So certainly seeing a very significant uptick in overall transactions. I think the second order for that is really just driven by what real estate investors see as the macro picture, right? When you combine the potential for growth, a little bit of inflation and overall positive macro outlook with the reopening trends and demand coming back into the real estate market.

I think the large real estate investors out there are really just seeing this as an opportune time to buy into the market. And real estate historically has been a very good place to be in a potentially inflationary environment from a hedge perspective. So I think the combination of just positive macro fundamentals with the reopening the rate picture and significant capital flowing into the space, searching for yield, I think that's what's really driving those transaction volumes. And I think us as well as many of them in the space have been able to see very good activity, very good maintenance of market share, continued activity from all the borrowers we work with, which has driven a lot of the trends.

[Jade Rahmani, KBW]

Secondly would be on credit. Wondering what your thoughts are on that. It seems like COVID was the cyclical turn that folks have been anticipating and we didn't really see much in the way of credit hiccups, probably largely related to the amount of government support and then all the pent-up demand that caused things to come surging back. What would be your outlook now? And how would you compare the credit quality, the surge in originations versus perhaps the prior vintage?

[Katharine Keenan, Chief Executive Officer]

Sure. So I think that the credit performance of our portfolio over COVID really was a very significant validation of our brand of balance sheet lending. So certainly, the government interventions helps. But I think that when you look at our credit performance in our business, very strong and I think a testament to the low leverage lending, the strong, well-capitalized sponsors with long-term time horizons and really just the quality of our assets and the equity support that we have in them. And that all translated through to as your point, a very strong credit performance through the period of COVID for our balance sheet portfolio. I think as we look at the credit profile of the loans we've been doing this year, we see really strong characteristics in that portfolio.

As Tony mentioned, our LTV 64% has remained extremely stable really through the history of the business, and we've been doing a lot more lending into multifamily, into Sunbelt markets, into areas where we're seeing a lot of growth. So I think the credit performance will remain consistent, which is to the case that it's been very strong. You can't get much stronger than it's been. But I think that as we look at the growth in originations, we really see continued low leverage lending, great borrowers, markets where we're seeing positive fundamentals, sectors that we see as winners. And I think that will translate through to the performance over the years.

[Operator]

Your next question comes from Stephen Laws from Raymond James.

[Stephen Laws, Raymond James]

First one, Katie, you touched a little bit on Australia earlier, but it looks like Australia and UK ticked up a little bit as far as the portfolio. Are those more international focused? Is that something we're going to see more of? Is it coincidental? Can you maybe talk about the opportunities you're seeing in those markets?

[Katharine Keenan, Chief Executive Officer]

Sure. We have always observed, I think, a really attractive relative value opportunity both in Europe and in Australia. And those markets were a little bit slower to reopen following COVID, driven by some of the policies and the overall economy. But we're really seeing the impact of the reopening now in the recent quarter in those markets. And I think that you will see a continued uptick in activity in those markets. Europe has always been a big part of our business, 30% over time. It's been growing this year, and I think we'll continue to grow. And Australia, I think, is a really exciting opportunity. Like our overall business, we own everywhere we lend. We have large real estate presence in Australia that I think is translating to more opportunities. And while it's not a huge market, so I don't think it's ever going to be a massive part of the balance sheet, I think we will see continued uptick in business there. And it's a very positive environment for lending, great lender protections, stable economy and obviously, the market reopening, we're just seeing now the impact of that.

[Stephen Laws, Raymond James]

Great. And then shifting to U.S. office. You guys said mix has come down, but it's still the majority of the -- or the highest mix. Can you talk about what you're seeing here domestically, conversations with borrowers as to their outlook and kind of feedback you're getting on the office markets here?

[Katharine Keenan, Chief Executive Officer]

Absolutely. I think as we've talked about in the past, what we're seeing is a continued bifurcation in demand in the office market. And what that means for us is that the newer high-quality office, well-amenitized assets that we lend on and really that our core sponsors are most focused on. That area of the market has really seen continued demand from tenants, whether it's in core markets like New York, where we've seen significant leasing take-up on the west side or in the growth markets where we're obviously seeing some material growth in businesses moving to those markets. So I think that looking at the type of office that we focus on, the fundamentals there are very positive both on the tenant demand side and on the capital market side. And I think you'll just see that continued bifurcation over time.

[Operator]

Your next question comes from Steven Delaney from JMP Securities.

[Steven Delaney, JMP Securities]

Focusing on the dividend coverage ratio of 106%. We've got a backdrop, obviously, of rising LIBOR, and you've commented that you expect that to be accretive to run rate earnings going forward. As we model, where should we -- at what point in dividend coverage, whether it's [110], [115], [120]? When -- how high does that have to go before you would consider -- seriously consider adjusting your dividend payout?

[Katharine Keenan, Chief Executive Officer]

I think our most significant focus is making sure that we have the most stable, reliable dividend that we can for our shareholders. And with that being said, we revisit the dividend every quarter with our Board. And I think that if we saw the possibility of a sustained consistent increase in our earnings, we would certainly be talking about that. But I think that we need to think about the sustainability of the dividends first and foremost.

[Steven Delaney, JMP Securities]

Right. Certainly appreciate that. And not to try to put you on the point. But should we think about -- I mean, you're $0.62, it seems kind of silly to make a $0.01 adjustment. I mean, I'm interpreting your comments that you would not and the Board not want to adjust the dividend unless, one, you had high confidence and it would -- it might be a more meaningful adjustment than messing around with the $0.01 or so. Would you say that's a reasonable expectation on my part?

[Katharine Keenan, Chief Executive Officer]

Yes, I think that's accurate. I mean I don't think we want to be moving the dividend around a lot penny-to-penny. You've seen very significant -- or very stable dividend over the last years in our business. We've held it consistent and covered it. So I think we would really be looking at the sustainability and the long-term earnings potential of the business.

[Douglas Armer, Executive Vice President, Capital Markets]

And Steve, I would just add to that, that the retained earnings take a little bit of tension off that question. So when we do out earn the dividend, which historically we have, that money accrues to book value and ultimately benefit shareholders. So -- and I think to Katie's point, we're much more focused on stability than we are squeezing out every last penny.

[Steven Delaney, JMP Securities]

Yes. Agree 100%. And one quick thing, just to follow up, and this can be a short answer on your part. Do we need to even think about SOFR in 2022 as we're modeling in terms of your loan pricing, your capital markets activity, we did notice a CLO printed today or was reported today with the SOFR index, and that's it for me.

[Douglas Armer, Executive Vice President, Capital Markets]

Steve, it's Doug. I can take that. I mean the short answer is no. It's something that we spend a lot of time on, particularly in the middle office, and it is relevant in terms of capital markets, the transition is well underway, complete in some regards. But we don't think it's going to materially affect our earnings or the profile of our business in any way from a shareholder perspective.

[Operator]

And your final question comes from Jade Rahmani from KBW.

[Jade Rahmani, KBW]

A couple of quick ones. In terms of competition, has that changed at all? And how would you characterize the competition? Would it be the couple of the handful of large PE sponsored debt funds, credit funds? Or would it be now primarily the banks?

[Katharine Keenan, Chief Executive Officer]

I think that what we've seen over the course of the business is, for our low leverage lending, the type of institutional quality assets we lend on, we certainly run into the banks probably more than a lot of the sort of debt fund universe. There are certainly some other large strong platforms out there that we also run into from time to time. But I think I would go back to the previous question and just sort of note that while the exact contours of the competition have changed from time to time over the years, our performance has been extremely consistent in terms of being able to access the types of lending opportunities that we like for our portfolio.

[Jade Rahmani, KBW]

In terms of the LTV, 2 things, I think. Number one, it's the origination LTV. And number two, close to 50% of the portfolio was originated post-COVID. We've seen an uptick in inflation that's meaningful. We've seen increases in real estate prices. So do you think marking to market the LTV is more like in the mid-50s?

[Katharine Keenan, Chief Executive Officer]

Yes. I think that there is definitely the case that we think the value of our collateral by and large, between the time it was originated and today has improved, especially when you look at the loans that are older vintage have been around for longer. And I think that is partly driven by inflation, rising replacement costs, as I mentioned, I think replacement cost is up anywhere from 10% to even 30% depending on asset class and markets. And that definitely translates through to the value of existing real estate stock. And then you really look at the business plans, we're lending into business plans that are value-add in nature. So the value of the assets we lend on should increase just in and of themselves away from market dynamics as the business plan is implemented over time.

So I think you can also see that in some of the repayments we saw this quarter, where we saw the ultimate exit value of the assets very well in excess of what we thought the value was going in as -- is appropriate for the implementation of a value-add business plan. But I think taking a big step back, 64%, 65% LTV, which has always been our bread and butter. That's just a very good leverage point for a lender in any part of the market, whether it's COVID, whether it's now. And we feel very good about the value support for our loans.

[Jade Rahmani, KBW]

And just last question would be the diversification question comes up all the time. I think Doug was trying to ask it around new property types, new geographies. But any increased attention being paid to different business lines that would be complementary to the core first mortgage lending business?

[Katharine Keenan, Chief Executive Officer]

Sure. I think that we certainly spend a lot of time in year in and year out looking at different complementary business lines. And I think one of the great things about sitting within the Blackstone platform is it affords us the ability to see across many different markets and asset classes. So if there's something out there that we think is interesting, we definitely see it. We definitely have the opportunity to do it. And we are constantly evaluating complementary businesses that we think would align well with our investment focus and our strategic goals. The bar is very high because the performance of the core business has been so strong over the years, and we think that it's a very stable, very attractive relative value, particularly as we look at a rising rate environment, but it is certainly something that we spend a lot of time on thinking about whether there could be something out there that would be complementary. And if we see something good, we would certainly pursue that.

[Operator]

Thank you. And now I'd like to hand back to Weston Tucker for closing remarks.

[Weston Tucker, Head of shareholder relations]

Great. Thanks, everyone, for joining us today, and I look forward to following up after the call.

[Katharine Keenan, Chief Executive Officer]

Good bye.

[Operator]

Thank you, Weston, and thank you to all your speakers. And thank you, everyone. That concludes your conference call for today. You may now disconnect, thank you for joining, and enjoy the rest of your day.