Earnings Call Transcript - BXMT Q4 2021

Operator, 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. 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; Katharine 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. 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 Katharine.

Katharine Keenan, Chief Executive Officer

Thanks, Weston. Fourth quarter's outstanding results capped off a banner year for BXMT with record originations and 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; over time, 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 heighten 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 benefits 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 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. These 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 in Manhattan's Hudson Yards. The West Side submarket has led the city in absorption and rents both pre- and post-COVID. We made the loan in 2019 to finance the construction loan payoff and lease up of the building. Following take-up from users in 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 and the location, and we acted swiftly to provide our client 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 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. We 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, Katharine. And good morning, everyone. This quarter concludes a record year for BXMT with strong results across all of our key metrics. Distributable earnings, or DE, were $0.78 per share for the quarter, while full year earnings were $2.62, up $0.06 from 2020, and dividend coverage was 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 double 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 than is typical this quarter. Separately, in connection with a 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 is deployed into the $3.6 billion of new transactions Katharine mentioned earlier. Katharine discussed one of the central features of BXMT's business: our focus 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 floors at or below 25 basis points. We expect this trend to continue in 2022 with incremental portfolio turnover, 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 and decreased overall this year. 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. Katharine 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 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 to 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

And your first question comes from Rick Shane from JPMorgan.

Rick Shane, Analyst, 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 the two one-off items that I mentioned earlier.

Rick Shane, Analyst, 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. We feel very good about our positioning on rates today, and that's really for three reasons. The first is the decrease in the proportion of floor income 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. 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 points, 100 basis points increases in LIBOR, we're going to see a much more meaningful positive contribution to interest income going forward. Stepping back, I think 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 for our shareholders. It's really unique to our business model in this space.

Rick Shane, Analyst, 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, Operator

Your next question comes from Don Fandetti from Wells Fargo.

Donald Fandetti, Analyst, Wells Fargo

Katharine, I guess two 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 or 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 when we look at the rate picture for our business, we think it spells a really positive dynamic for our floating rate lending portfolio. On your second question, in the history of the business there's certainly always been competitors, new funds coming into the market, others leaving. What we've really seen year after year is that the combination of the scale of our platform, the incredible relationships we've developed through repeat business with borrowers over the years and all the information that we have coming in allows us to stay ahead of the curve in terms of investment decisions. That has translated into very significant market share and competitive advantage on the origination side throughout market cycles and competitive dynamics in the industry. So we see no reason for that to change even if new competitors come in or others leave. We think that the advantages we have—scale, strength and experience of our platform—continue.

Donald Fandetti, Analyst, Wells Fargo

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

Operator, Operator

Your next question comes from Doug Harter from Credit Suisse.

Douglas Harter, Analyst, Credit Suisse

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

Katharine Keenan, Chief Executive Officer

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 five years. This year our growth is accelerating, not leveling off, and that speaks to the large and growing addressable market, the growth of our overall platform and our origination team, and that translates to more touch points in more markets. Over the years, we have expanded geographies and asset types, built up a large stable of repeat, experienced borrowers, and continue to see more pipeline from that virtuous cycle 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 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—the fourth quarter was a great example. Our balance sheet is large and our capitalization is fairly flexible, so we're able to manage those ebbs and flows in terms of our debt and equity, producing, as Katharine mentioned, consistent earnings through those peaks and valleys in deployment.

Douglas Harter, Analyst, Credit Suisse

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

Katharine Keenan, Chief Executive Officer

Yes. I think there continue to be untapped markets for us. This year we made our first loan in Sweden and a large loan in Australia. We see continued flow coming out of Australia. In the U.S., we've been more active in growth markets. We've expanded the scope of loan sizes we're doing, particularly on the multifamily side. We've made our processes more efficient and invested significantly in our team. So we continue to find complementary areas we weren't perhaps investing in five years ago that are driving more growth.

Operator, Operator

Your next question comes from Tim Hayes from BTIG.

Timothy Hayes, Analyst, BTIG

Just a follow-up on Doug's last question. At the parent company or the broader Blackstone platform, you guys have made a lot of equity investments—in resi platforms with the Bluerock acquisition, extended stay, industrial portfolio acquisitions in BREIT. These are asset classes that typically have not been major concentrations at the BXMT loan portfolio level. Do they create opportunities for you to get lending opportunities in the years ahead as you grow deeper there on the equity side as well?

Katharine Keenan, Chief Executive Officer

Yes. You really put your finger on it. As our platform across the real estate business expands, all of those new partnerships and touch points translate into new relationships to which we can bring our capital. We've seen that in multifamily this year—our equity side has always been a significant player, but continues to expand and introduce new partners, sellers and buyers. We can talk to them and bring the same high-integrity approach on the lending side. That creates a powerful network effect across the Blackstone business and in our real estate platform, where we have expansive reach over market players that continues to expand with the growth of our overall real estate business.

Timothy Hayes, Analyst, BTIG

Right. Yes, definitely makes sense. And then just a follow-up on the capital structure: 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 a fully senior loan portfolio. I know you have an upcoming maturity this year. It sounds like you're doing some A-note sales, which is pretty routine for you, and the CRE CLO market remains really active. So with all those options at your disposal, how do you see the capital structure evolving and expectations for future growth?

Douglas Armer, Executive Vice President, Capital Markets

Hey, Tim, it's Doug. I think we expect to continue diversifying our balance sheet, opportunistically accessing different sources of capital at both the asset and corporate level. The CLO market is an important part of our capital structure and we expect to be an issuer there. We're also exploring securitized debt in the European market. We're increasing the amount of syndication we do across syndication, securitization and bilateral credit facilities. We'll continue to be active in capitalizing future portfolio growth. On the corporate finance side, we've entered the high-yield market, have convertible notes outstanding, the term loan market has been important, and we've been active issuers on the equity side as well. So it runs the gamut and we'll remain opportunistic and focused on balance sheet integrity and cost-of-capital efficiency.

Timothy Hayes, Analyst, BTIG

That's helpful. If I can part B that question on leverage: 3.2x being net debt to equity, how should we think about leverage going forward? Should we look at it more on a total leverage basis or on a recourse leverage basis if you were to do more syndication and securitization, 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 total leverage. At the existing capitalization and a 3.2x debt-to-equity ratio, we can see room for another $3 billion to $5 billion of portfolio growth before being constrained in terms of debt capacity. So what you saw in 2021 is more of what you'll see in 2022, where we'll fluctuate between about 3x and 3.5x—potentially higher, potentially a little lower—as we move across different capital market executions. You'll see a lot more of what you've seen in the recent past in terms of managing that debt-to-equity ratio.

Operator, Operator

And your next question comes from Jade Rahmani from KBW.

Jade Rahmani, Analyst, 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 first-order driver is the overall growth in transaction activity across the market. 2021 versus 2019, total transactions were 35% higher this year, and in some of the favorite sectors like multifamily, transactions were 74% higher than 2019 levels. So we saw a very significant uptick in overall transactions. Second-order drivers are what real estate investors see in the macro picture: potential for growth, some inflation, and positive macro outlook combined with reopening trends and demand coming back into the real estate market. Large real estate investors are seeing this as an opportune time to buy into the market. Real estate historically has been a good hedge in a potentially inflationary environment. So the combination of positive macro fundamentals, reopening, the rate picture and significant capital searching for yield is driving transaction volumes. We, and many in the space, have been able to maintain market share and see continued activity from borrowers, which drives these trends.

Jade Rahmani, Analyst, KBW

Secondly, on credit: it seems like COVID was the cyclical turn folks anticipated but we didn't see many credit hiccups, probably due to government support and pent-up demand. What is your outlook now? How would you compare the credit quality of the surge in originations versus the prior vintage?

Katharine Keenan, Chief Executive Officer

The credit performance of our portfolio through COVID was a significant validation of our balance sheet lending. Government interventions helped, but our strong credit performance reflects low leverage lending, well-capitalized sponsors with long-term horizons, and quality assets with equity support. As Tony mentioned, our origination LTV of 64% has remained very stable through our history, and we've been doing a lot more lending into multifamily, Sunbelt markets, and markets with strong growth. So we expect credit performance to remain consistent and strong. As we look at growth in originations, we continue to see low leverage lending, great borrowers, positive fundamentals, and sectors we consider winners—all of which should translate into continued performance.

Operator, Operator

Your next question comes from Stephen Laws from Raymond James.

Stephen Laws, Analyst, Raymond James

First one, Katharine—you touched a bit on Australia earlier, but it looks like Australia and the 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 or is it coincidental? Can you talk about the opportunities you're seeing in those markets?

Katharine Keenan, Chief Executive Officer

We have always seen attractive relative value in Europe and Australia. Those markets were a little slower to reopen after COVID due to policy and economic factors, but we're seeing the impact of reopening now. Europe has always been a big part of our business—around 30% over time—and it's been growing this year; I think we'll continue to grow. Australia is an exciting opportunity; while it's not a huge market, it offers positive lending dynamics, great lender protections and a stable economy. We have a large real estate presence in Australia, which translates into more opportunities. So you'll likely see continued uptick in business in those markets.

Stephen Laws, Analyst, Raymond James

Great. Shifting to U.S. office: you said the mix has come down, but it's still a large part of the portfolio. Can you talk about what you're seeing domestically, conversations with borrowers about their outlook, and feedback on the office markets here?

Katharine Keenan, Chief Executive Officer

Absolutely. We're seeing a continued bifurcation in demand in the office market. Newer, high-quality, well-amenitized assets that we focus on—and that our core sponsors focus on—have continued demand from tenants, whether in core markets like New York, where we've seen significant leasing on the West Side, or in growth markets where businesses are expanding. The fundamentals for the type of office we lend on are very positive on both the tenant demand and capital markets sides. I expect that bifurcation to continue over time.

Operator, Operator

Your next question comes from Steven Delaney from JMP Securities.

Steven Delaney, Analyst, JMP Securities

Focusing on the dividend coverage ratio of 106%: with a backdrop of rising LIBOR and your comments that you expect that to be accretive to run rate earnings going forward, as we model where should we think about dividend coverage—how high does that have to go before you would seriously consider adjusting your dividend payout?

Katharine Keenan, Chief Executive Officer

Our most significant focus is making sure we have the most stable, reliable dividend we can for our shareholders. We revisit the dividend every quarter with our Board. If we saw the possibility of a sustained, consistent increase in our earnings, we would certainly discuss it. But we need to think about the sustainability of the dividend first and foremost.

Steven Delaney, Analyst, JMP Securities

I appreciate that. Not to put you on the spot, but should we think about—you've got $0.62; it seems silly to make a $0.01 adjustment. I'm interpreting your comments that the Board would not want to adjust the dividend unless you had high confidence and it would be a more meaningful adjustment than messing around with $0.01. Is that reasonable?

Katharine Keenan, Chief Executive Officer

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

Douglas Armer, Executive Vice President, Capital Markets

And Steve, I would add that retained earnings take a little tension off that question. When we out-earn the dividend, historically we have, that money accrues to book value and ultimately benefits shareholders. To Katharine's point, we're much more focused on stability than squeezing out every last penny.

Steven Delaney, Analyst, JMP Securities

Agree. One quick thing: do we need to even think about SOFR in 2022 as we're modeling, in terms of your loan pricing and capital markets activity? We did notice a CLO printed today using SOFR.

Douglas Armer, Executive Vice President, Capital Markets

Steve, short answer is no. It's something 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 and 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, Operator

And your final question comes from Jade Rahmani from KBW.

Jade Rahmani, Analyst, KBW

A couple of quick ones. In terms of competition, has that changed at all? How would you characterize the competition—would it be a handful of large private equity-sponsored debt funds and credit funds, or primarily banks?

Katharine Keenan, Chief Executive Officer

For our low-leverage lending and the institutional-quality assets we lend on, we certainly run into banks more than much of the debt fund universe. There are some other large strong platforms we run into from time to time, but while the exact contours of competition change, our performance has been consistent in accessing the types of lending opportunities we like for our portfolio.

Jade Rahmani, Analyst, KBW

On LTVs: you report origination LTV at 64%. Given that nearly 50% of the portfolio was originated post-COVID and we've seen meaningful inflation and increases in real estate prices, do you think marking to market the LTV is more like mid-50s?

Katharine Keenan, Chief Executive Officer

There is definitely a case that the value of our collateral, by and large, between origination and today has improved—especially for older vintage loans—partly driven by inflation and rising replacement costs, which I mentioned could be up anywhere from 10% to 30% depending on asset class and market. That translates into value for existing real estate stock. Also, we're lending into business plans that are value-add in nature, so asset values should increase as business plans are implemented. You can see that in some repayments this quarter where exit values were well in excess of initial expectations. But taking a big step back, a 64%-65% LTV has been our bread and butter and is a very good leverage point for a lender in any market cycle. We feel very good about the value support for our loans.

Jade Rahmani, Analyst, KBW

Last question: diversification—any increased attention to different business lines complementary to core first mortgage lending?

Katharine Keenan, Chief Executive Officer

We spend a lot of time evaluating different complementary business lines, and one of the great things about being within the Blackstone platform is the visibility across many markets and asset classes. If there's something interesting and aligned with our investment focus and strategic goals, we evaluate it. The bar is high because the core business has performed strongly, and it's a stable, attractive relative value, particularly in a rising rate environment. But we are constantly evaluating complementary businesses and would pursue something that fits well.

Operator, 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

Goodbye.

Operator, 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.