Blackstone Mortgage Trust, Inc. (BXMT) Q3 2018 Earnings Report, Transcript and Summary

Good day, and welcome everyone to the Blackstone Mortgage Trust Third Quarter 2018 Investor Call. My name is Derina, and I'm your event manager. [Operator Instructions] And with that, I would like to hand over to Weston Tucker, Head of Investor Relations. Please proceed.

Great. Thanks, Derina, and good morning to everyone, and welcome to Blackstone Mortgage Trust's third quarter conference call. I'm joined today by Steve Plavin, President and CEO; Tony Marone, Chief Financial Officer; and Doug Armer, Head of Capital Markets. Last night, we filed our 10-Q and issued a press release with a presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures 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 $0.67 for the third quarter, while core earnings were $0.75 per share, up from the prior year comparable period. Last week, we paid a dividend of $0.62 with respect to the third quarter and based on yesterday’s closing price, the dividend reflects an attractive yield of 7.6%. If you have any questions following today's call, please let me know. And with that, I'll now turn things over to Steve.

Thanks, Weston. Continuing the momentum from the first half, BXMT reported strong third quarter results with core earnings of $0.75 per share. Our originations team maintained its high productivity, closing $1.4 billion of loans in the quarter and continuing to build our pipeline. We now have another $2 billion of originations in the closing process or to close since quarter end. We have grown our portfolio more than 20% year-to-date to $13.8 billion with a combination of new originations and fundings on existing loans, far exceeding repayments. Our quarterly originations include office, multifamily and hotel loans in California, Hawaii and Australia. We also had our single best quarter of Walker & Dunlop originations since we formed the JV with almost $200 million of closings, a nice addition to our productivity. Prepayment penalties again boosted our baseline earnings this quarter, contributing to our outperformance. The largest contributions came from two construction loans that were repaid soon after build and completion, one from the sale and another from the recapitalization of high quality underlying real estate, while call protection was still in effect. These prepayment penalties totaled $9.2 million. While prepayment fees tend to be unpredictable in timing and magnitude, over time, they provide a consistent source of supplemental earnings. BXMT continues to benefit from the power of the Blackstone global real estate franchise. BXMT originations ramped up this year in Spain, the UK and Australia, where the Blackstone equity business is driving with strong teams of investment and asset management professionals on the ground. We also have loan originators in the BX offices in London and Sydney that have been able to export our low cost debt capital to regions that have not seen the same magnitude of spread compression as in the US. So, origination ROIs in these markets are higher. Deal flow is still episodic outside the US where our ability to source and lend internationally and take advantage of global market inefficiencies adds to the scale, dynamism and quality of BXMT overall. In the US, our year-to-date originations were up 50% over the same period last year. Our real estate private equity fund sponsored clients have been active and the CREE equity fund universe still has more than $175 billion of dry powder, so we expect to see continued strong demand as that equity is invested in new acquisitions that will require financing. We are still seeing refinance opportunities as well. The market remains competitive with spreads trending tighter. Fundamentals and demand generally are stable, especially in the major markets that we target. We achieve our best economic results when we can leverage our scale and target in real estate expertise, especially on larger loans, special situations with speed and certainty matter most, construction loans and loans in markets outside North America. The credit quality of our 113 loan $13.8 billion portfolio remains high. The average LTV of Q2 director originations was 59% and the overall origination LTV stands at 62%. To help fund the growth in our portfolio, we issued $270 million of premium equity in the quarter and year-to-date, we've also added $2.2 billion of efficiently priced senior secured credit capacity with more in process. We continue to expand our multi-currency capability to cover the origination potential outside the US. The scale and quality of our capital markets initiatives matches our origination capability and it also benefits from our group -- from the global Blackstone real estate platform and its great track records of borrower and banking client. We've built a market leading global senior mortgage lending business with a $13.8 billion portfolio, almost $4 billion of equity capital and a highly efficient match funded liability structure. Our focus remains on dividend, quality and stability and continuing to introduce investors to BXMT and the opportunity to invest in this Blackstone sponsored company with highly compelling 7.6% dividend yield. And with that, I'll turn the call over to Tony.

Thank you, Steve and good morning, everyone. This quarter, we again delivered compelling results with GAAP net income of $0.67 per share and core earnings of $0.75 per share. For the second consecutive quarter, we recognized significant prepayment fees and fee acceleration income, a benefit of our loan structures, which capture significant economics upon an early prepayment. In 3Q, we recorded $0.10 per share of such prepayment related income, while our 2Q results included $0.13 as compared to a range of $0.01 to $0.03 in a typical quarter. Adjusting for these outsized income items, as well as the GE reserve reversal we discussed in the second quarter, our run rate earnings remained stable at $0.65 per share for 3Q, up slightly from the comparable $0.64 in 2Q, notwithstanding the dilution from the incremental shares we issued during the quarter, which Steve mentioned earlier. We are proud of the strong performance, which demonstrates the consistent earnings generation of our business, with material upside potential to earnings and book value in periods with loan repayments or other events. At $0.65 and $0.64 in 3Q and 2Q respectively, our $0.62 dividend is well covered and we are able to retain the additional earnings generated from prepayment income as additional book value. One further note on earnings before I move on. One of the larger prepayment fees we recognized this quarter relates to a loan we previously syndicated, but still record gross on our balance sheet, with the whole loan included as an asset and the senior loan recorded as a participation sole liability. As a result of this gross accounting, we recorded additional interest income of $0.15 and interest expense of $0.08 for a net impact of $0.05 per share, net of incentive fees. I highlight this to provide clarity, as this accounting makes our interest expense look higher than one would expect this quarter, given our relatively low cost of capital, but is really just a gross up of the fees we earned on our net loan position. Turning to book value, this quarter, we issued 6.9 million shares of common stock through an underwritten offering in July as well as 1.3 million shares through our at-the-market program at an average price of 1.21 times our 2Q book value. These accretive stock offerings raised $270 million of fresh capital for our growing business and contributed to a $0.45 increase in book value per share. As Steve mentioned earlier, we closed $1.4 billion of new loans this quarter, bringing our total year-to-date originations to $7.2 billion, slightly more than double the same time last year. This quarter includes our first two loans in Australia, increasing our loans outside of North America to 19% of our total portfolio and further diversifying our business and pipeline of future origination opportunities. As with our existing foreign currency investments, we expect to address Australian currency exposure through a combination of Australian dollar financing, which provides a natural hedge by lending and borrowing in the same currency. And foreign currency forward contracts, which mitigate our remaining net exposure to the currency and effectively swap local currency index to USD LIBOR through the forward points embedded in the hedge contracts. These forward points are recorded in other comprehensive income for GAAP accounting and so are included as an additional component of core earnings. We closed the quarter with a total loan portfolio of $12.7 billion, which is roughly in line with 2Q, however, excludes the CorePoint investment originated last quarter. During the third quarter, we contributed our $518 million CorePoint loan to a single asset securitization alongside JP Morgan who owns the other 50% pari-passu participation in the loan. We retained $99 million subordinate risk retention investment in the securitization, which generates an attractive L plus 10% return. We do not consolidate this securitization in our GAAP financial statements and instead only reflect the net $99 million investment as a component of other assets on our balance sheet. Including the $1 billion loan that is underlying our net security position, our total investment portfolio grew to $13.8 billion as of 09/30, another record for our business. This securitization transaction as well as the common stock we issued during the quarter drove our debt to equity ratio down to only 2.3 times as of September 30 from 2.6 times last quarter. As always, we remain focused on the stability of our balance sheet and pursuing accretive capital sources to finance our low leverage, senior loan investments. We closed the quarter with available liquidity of $664 million, which we expect to deploy into the robust pipeline Steve mentioned earlier, as we move into year-end. Thank you for your support and with that, I will ask the operator to open the call.

[Operator Instructions] And the first question is from the line of Steven Delaney.

Good morning and congratulations on another strong quarter. I noticed when we were reviewing the 10-Q, specifically your risk rating section, there was an increase in the number of two rated loans by about 7 and from 36 to 43, but it appears most of the new loans were three rated. So it appears there's some upgrades. Could you comment on that and confirm if that was the case?

Sure, Steve. Yes. I think, those seven loans that you know were upgrades from 3s to 2s as part of our process. Every quarter, we revisit every loan in the portfolio in a in-depth portfolio review that includes an updated risk rating. And, in this past quarter, we had seven upgrades, no downgrades. The loans typically originated at a 3 and as they progress through the business plans, are often upgraded to a 2 and typically they're repaid at the 2 level. So it's the – you have to be careful in terms of looking at what that information means, but in this case, and I mentioned it in my script that the credit quality of the portfolio is very strong and the upgrade trend that we saw during the quarter is reflective of that.

So you would suggest I think Steve that at least with that specific project, the fundamentals, the real estate fundamentals are better in terms of absorption or projected revenue and not just some sort of fair value mark on the asset, am I hearing you right?

Well, I think, what you're really seeing is that it's progressed along the business plan, so the transitional assets that that we finance. So, we might finance a building that’s 50% or 60% leased and when it gets to 70% or 80% leased or 90% leased and we review it again, then it begins – it gets -- its credit rating could be upgraded from 3 to 2. So it's really our view of credit and credit quality in our portfolio and a lot of times, it’s the anticipated migration or improvement of assets, as they progress along the business plans.

And just a quick follow-up on the two new loans in Australia. They were about 300 million combined I believe. They were -- in terms of property type, they were both indicated as other. Could you just provide some color on that?

I would you say in general, the loans we’re making in Australia and everywhere in the world are similar in concept. I mean, there are moderate LTV transitional loans, better markets and better sponsors. The first two loans in Australia, one was a 68% LTV portfolio of office and hotel assets, 9.5% debt yield, strong performing and good local sponsor. The other was a construction loan. It was really the expansion to two existing facilities, 100% pre-leased to AAA credit. It’s a hyper-scaled data center, equity sponsored by PPG and Goldman and really an outstanding project and one that again the credit risk is completely mitigated by the pre-releasing.

The next question is from Stephen Laws.

Could you maybe talk, you've done a good job about opportunistically raising capital and deploying that. Can you maybe talk about how you look at maturities from here against your pipeline as far as keeping capital deployed, particularly your investments are prepayment protected for a period of time. You do provide the extended maturity, but can you or maximum security, talk to what you expect the payoff to be like kind of over the next two to four quarters.

Yes. Steve, it's really tough to predict the prepayments in advance. The borrowers are usually required to notice us 30 days out. A lot of the loans are outside the call protection, but we've had a lot of success in maintaining loans well beyond the call protection period through a very active asset management making sure that we're continuing to amend our loans as necessary to reflect improvements in performance of underlying real estate or changes in market conditions and the prepayments in this quarter were relatively light, certainly compared to our originations. Going forward, we do expect significant prepayments, but we have been able to originate in excess of those and grow our portfolio. So, all these loans are going to repay. It’s just a matter – obviously, it’s just a matter of when. And what doesn’t get repaid now, that we expect it will repay sometime probably in ’19. As part of that process where we go and review credit quality, we do try and think about prepayment dates, but it’s really just our estimation of when we think it might be a sponsor’s best interest to repay, but again, we don’t get a lot of visibility on it, until they’re very close to actually committing to a sale or replacement.

The one thing I would add to that Stephen, it’s Doug, is that by comparison to 2015 and 2016, when we took on a lot of very seasoned loans from GE, we've now built the balance sheet up beyond that level with, by definition, newly originated loans. And so we're on average a little bit earlier in the lifecycle of a loan, which of course is a random walk as Steve mentioned, but we're on average from a portfolio point of view, a little bit earlier in the lifecycle of the loans than we were by comparison in 2016 with a larger balance sheet. So that growth in the balance sheet contributes to a sort of youth effect in the portfolio, which will make the weighted average life seem a little bit longer than it did certainly in the 2015-16 period.

And as you're building the pipeline of new investments, can you maybe talk a little bit about competition, what you're seeing from others out there, are they competing on price, is it less covenant, less prepayment protection, maybe, what you're seeing in the industry as you continue to look for new investment opportunities.

Well, we continue to look for new investment opportunities obviously in the markets that we like. We will have a much larger focus on the bigger deals that are less competitive, because less lenders are able to do that, let me say, at very big, very big vehicles. Some of the deals that I talked about that have -- that require certainty or speed or maybe in jurisdictions where we're not everybody's active also helped get us out of the competitive fray. On the more commodity deals, maybe a US deal that $100 million or $150 million in loan size, there's more competition. We see it from banks, from the other mortgage REITs and from private debt funds. It depends upon the situation, the sponsors and who the relationships are with. We’re generally able to compete favorably, because given our sort of cost of capital and our history now with a lot of the borrowers in the US, especially the fund sponsors, but it is competitive and we're seeing the impact of the competition, primarily on rate. Most of the sponsors want to get their equity investments, so we haven't seen meaningful leverage creep. And in terms on the margin, our basis of competition, but no, you're responsible lending, nothing like what we saw in the 2006, 2007 timeframe. And some of the spread competition really does reflects the increase in base rates and the anticipated decreases in spreads as a result of absolute rates increasing with base rates. So it is overall competitive for us, but we're winning a fair amount and finding good opportunities to make accretive investments.

And one last question, if I may, can you talk maybe to property types that you find attractive or less attractive, curious to get your higher level view on hotels here as well as maybe luxury condos in Manhattan seem to be a softening market, but maybe any asset types you like or don't like at this point in the cycle?

We've avoided luxury condos. We don't have any in BXMT. We don't have any suburban regional malls. Our retail percentage is down to 2%, again, so reflective of our general view that with just the Internet or the near term winners and physical real estate, physical retail real estate is more challenged. We tend to avoid, in general, suburban assets, especially suburban full service hotels and office buildings, much more constructive on multifamily and in some of those markets. We like housing, almost everywhere in the world. We like the innovation cities, the cities with dynamic demand and have typically have tech tendency that have real growth in terms of a tenant demand. And those tend to be the coastal gateway cities. And so that's where you see us most active, it’s in these major cities and larger assets. On hotels, where there's barriers to competition, we think that there's some good opportunities for hotel. The performance has generally improved with increased economic activity in a lot of markets. We're a huge owner of hotels worldwide. So, we have great insight into where we want to be and where we don't. And so you've seen, hotels are still a minority percentage of our portfolio compared to office, which continues to be the largest percentage, about 45, typically between 45% and 50% of what we're seeing and doing.

And the next question is coming from the line of Ben Zucker from BTIG.

Good morning, guys and thank you for taking my questions. I wanted to go back to the international landscape. I heard you that the loans you're making abroad are pretty much the same type of loan that you would make in the US, but can you talk about the market environment and underlying fundamentals and how they differ between markets like Australia, Europe and then comparing them to the United States.

The dynamics in the major markets are all generally favorable or certainly the ones that we’re interested in investing. Again, high quality real estate, a good solid fund -- underlying fundamentals and demand for real estate. The biggest differences that the markets outside the US are much more episodic. We just don’t see the regular flow that we see in the US. There's less consistent demand. We do see across a very broad palette, opportunities that do meet our mandate and from a quality standpoint, look as good or better than what we're seeing in the US, certainly better from a spread standpoint and an ROI standpoint. We wish there was more of it. But, the major international markets are generally pretty good. In Australia, specifically, the banks have gotten a little bit more conservative. So, some of the deals that might have gone to the bank market are – look like they might be available to us now. These were our first two loans, but we have other loans we’re looking at in Australia. And UK, same thing. The banks are not as aggressive as they were in the last cycle. And so, we’re seeing more opportunity there and we tend to follow our clients. A lot of the private equity clients are more active in Australia now than they had been, same with Europe. It's a great client base for us to fall into these regions, where we have people on the ground own real estate and get the full benefit of the Blackstone franchise, like we do in the US.

That's very helpful and obviously this is a more unique capability of your broader platform’s reach. Turning to the liability structure, I think I noticed that your 2013 notes are coming due in the beginning of December of this year, in just over a month. Would you be willing to speak to what your plans are for that? Do you think you're going to just redeem those or are you looking at doing a refinancing with those?

Hey, Ben. It’s Doug. We will redeem those and we've been clear that we’ll be paying those off in cash, which is I think an important distinction for the market. We've done a good deal of convertible note issuance in the summer last year and at the beginning of this year. So in that sense, you can consider those notes already refinanced, but we've got great access to the capital markets and we will continue to evaluate our options in terms of managing leverage on the balance sheet. It's a relatively small number, given how our balance sheet has grown since 2013 when we issued those. So it's not a real needle mover in terms of our capital structure. It's the end of a five year road. With those notes, they’ve performed very well. We were very happy with the transaction, we're happy with the product type in general and it's certainly one of the arrows in our quiver going forward.

And speaking about that and while we're on the debt side, that risk retention security that you picked up, that's a nice yielding piece of paper. Can you -- I don't think that you can put bank debt on that, but you'd be able to use the convertible note as like quasi equity to help finance that and make it more accretive. Is that correct?

That's true. And you can say that about any of the investments that we make, the convertible notes lever our balance sheet as a corporate obligation and that capital is fungible. So, we invest that in all of our portfolio, which is levered separately at the asset level, but you can think of it as sort of a fair trade, relative to a specific investment, episodically. That's a perfectly good way to think about it. That securitization by the way, while we're on the financing topic, although it’s accounted for on a net basis, it represents a very large and structurally sound financing of our investment in that loan. It's a SaaS CMBS deal, and so it’s non-recourse and non-mark-to-market and very efficiently priced, resulting in that attractive yield on our retained position.

And then just real lastly, it seems like your pipeline for 4Q is pretty healthy and obviously the fourth quarter is normally the most seasonally active. I'm curious though because I -- my understanding is it takes a little bit of time for the loan process to go through. Since the rates really started to move kind of at the end of 3Q, in September -- has there been -- do you think there's been or going to be any impact on the incremental borrower going forward through the remainder of fourth quarter or even out into first quarter, maybe making next year a little soft to get started. Just what are you guys feeling and seeing on the street now that rates are a little bit higher than when we last spoke?

Hey, Ben. I think we haven't seen that, any impact from rates thus far. And again, most of our borrowers are just floating rate borrowers and aren’t looking at fixed rates and what the impact of a fixed rate cost of borrowing might be on their deal. I do think though that if rates continue to move, then you will see some deals get re-traded and maybe impacts some deals that maybe on the margin, may not close that would have closed from an acquisition standpoint. So anytime there's a sharp movement in rates, you certainly have the ability to have a little bit more deal fall out. Hopefully, we’ll be the beneficiary of that and maybe we’ll pick up some financing opportunities that might have gone fixed rate or that there will be some more opportunistic things to get some contracts of that, but we haven't seen it yet, but I wouldn't be surprised to see a little bit of that going forward.

The next question is from Rick Shane from JPMorgan.

Ben really just asked my question, but to sort of follow up on the borrower behavior related to the movement in base rates, obviously this has an impact as well on your counterparty risk if rates continue to rise. Is there any protection that you get or require the borrowers to take in terms of swaps or any sort of protection in that like.

We completely require in almost all cases that a borrower’s purchase interest rate caps. That’s really an insurance policy on rates rising above a pre-determined level and those interest rate caps are provided by credit worthy banks and posted to us additional collateral for the loans and we have those in almost all instances. So, it does provide us with a little bit of insurance in the event that LIBOR moves -- continues to move at a rapid pace and potentially for us with those caps, which are typically somewhere in the 3s over LIBOR. 3% LIBOR or higher.

Got it. Okay. And then just to continue that, you talked about the potential for some fallout in the fixed rate market and the opportunity there. Is the other implication that the duration on your loans could expand, not only will it impact originations, but it actually could delay refinancing from the transitions.

I think it's possible. Any sort of market volatility or market dislocation typically [indiscernible] some period of transaction parties going to the sidelines and deals being delayed or less likely to occur and so yeah, that could -- we could definitely benefit from getting a little bit more duration on our loans. We saw a little bit of that in the first quarter of 2016 where we saw a lot of CMBS deals repriced and a lot of borrowers walking away from those and some in a lot of sale transactions put on hold or cancelled. We move forward with our funding commitments during that time with some great loans. So, we do think that we benefit from these kinds of periods of volatility and we'll see how it plays out.

The next question is coming from the line of Jade Rahmani from KBW.

What drove the moderation in the quarter’s loan repayment? Seems at odds with what the banks are seeing in terms of loan growth, their portfolios are actually declining modestly.

This is really again difficult to explain Jade, our repayments in any one quarter. I think over the extended period of time, we’re going to see all of our loans repay and it was nice to see that there -- the average duration of the loans extend out a little bit longer than maybe what we had anticipated. It’s definitely beneficial for us. And so I think we'll see the other prepayment that maybe could have occurred in the second half of this year, maybe some of those will get pushed into 2019, but I don't see anything that is anything other than adjustment of the timetable. There's no loans that we've seen that for some reason now are less likely to get repaid or aren’t going to get repaid for anything other than strategic decision making made by a borrower. We've talked a lot about our asset management initiatives in terms of trying to hold on the loans and so we do amend loans when their terms are no longer reflective of where an asset is in its evolution. So if we made a long winded asset, it was not very significantly leased as it becomes very least. If we want to hold on to that asset, we need to make an adjustment to the loan that we do that on a proactive basis and that definitely defers some of the prepayment activity and that's part of the reason why you saw repayments in our portfolio a little bit lighter in the third quarter. And so, hopefully, they’ll stay light. I mean, we like that, but we'll see how it goes going forward.

And just on that note, just one thing we noticed in the 10-Q, the Hawaii hotel loan in Maui, it looks like that loan was upsized and the term extended with some adjustment in spread. Is that one of the loans you’re referring to in this quarter that could have otherwise prepaid.

Yes. That loan had dramatic improvement in performance from when it went to the contract by a borrower to date, probably 18 months or two years later. 30% plus NOI improvement in the hotel and so they were essentially looking for a new five-year loan on the hotel and we were able to sort of hedge that off at the pass and maintained a loan to provide. So, the equivalent of a new five year loan, but structured as an amendment of the existing loan and we’re able to, because of our call protection, to get a rate on that loan that was not, that was sort of the midpoint maybe between where a loan rate was and where a new loan would be on that asset. So we still were able to win on a rate, because of the ability of -- because of our incumbency on the existing loan and provide the sponsor with a nice solution.

And were there any modification fees or unusual fees associated with that in the quarter?

I don't remember the exact fee dynamics, but we were very pleased with the overall economic package that we got. I would just say and again, I would repeat sort of in general or sort of somewhere in between where we were previously and where a new loan would get would be reflected.

Just switching to the initial commentary about the impact of early prepayment fees on the quarter at about $0.10. Is that $0.10 all inclusive of any outsized not unusual items, because it's part of the business, but sort of above normal fees, for example, acceleration of amortization of origination fees, was there any -- was that $0.10 inclusive of accelerated amortization.

Jade, hey, it’s Doug. Yes. It was. So the $0.10 is the total number. It's hard to characterize them as recurring, non-recurring or extraordinary or not. I think prepayment penalties as distinct from the amortization of deferred fees, origination fees tend to be a little bit more lumpy by definition. So, you need to normalize for those at some level, but we always experience some degree of prepayment income, because there are loans as a general matter don't go to full term. So, it's a great area as to how much of that you consider recurring or non-recurring. We've broken out the total amount. If you look back historically, you’ll see that obviously in the last two quarters, we've had some real lumpy numbers. But if you look back historically, you'll see a few pennies every quarter coming from that on a fairly regular basis.

I was wondering if you could just discuss your approach to asset management more broadly. I'm sure you saw Bank of the Ozarks took two large impairments in the quarter and I think it surprised investors, because the loans have been on the books for so long. I think these were originated in ’07, ’08. So, just wondering what you can say about the level of proactiveness with respect to discussions with borrowers. And also if you can give an update on, for example, the Spanish NPL deal, how performance is going there.

Sure. I mean I would just say in general, we’re extremely proactive in our asset management. It's critical, both on an offensive and defensive way. Given that we have few credit issues or no credit issues on our portfolio, most of our asset management energy has been around, rightsizing our loans and trying to keep them for longer duration, but we're extremely mindful of anything that might be going the wrong way in our loans and early identification of issues is absolutely critical in terms of achieving success in asset management. And so I think, and if there are issues in our portfolio, we're going to identify them, we're not going to wait, so you will see them. And again, we have our quarterly risk rating process. We have historically had two loans that we rated for. They've both been repaid, they were both GE loans. So you’ve seen us identify loans in the past and resolve them and that will continue to be our practice going forward. As it relates to the Spanish deal, it's really gone well so far. We are expecting a total of $950 million of sales in the underlying – in the portfolio that underlies our loans, for those who aren’t familiar, it's a very large portfolio, secured by mostly REO and NPLs in Spain. A lot of it’s housing related. And the underlying performance of the portfolio has been right on our underwriting. We're seeing a lot of activity in the portfolio, the sales performance is in line with our spot values, our underwriting. There has been good progress in the MPL book, which is about a third of the collateral. We’ve seen 30% of those NPLs already results in closing. So we're very pleased with the progress so far and we’ll continue to report about it as we get more updates in the future.

Just lastly, in terms of the dividend to date, core earnings clearly running in excess of that. Assuming you maintain the dividend, would there be a need for a special dividend based on taxable income?

It’s Doug. There wouldn't be a need for a special dividend in terms of our distribution requirement as a REIT. I think what we're very focused on there is the benefit of those retained earnings in terms of accretion to book value. But our distribution requirement as a REIT doesn't put any pressure on us, relative to these -- the different string core earnings and the dividend.

And the next question is coming from the line of Don Fandetti from Wells Fargo.

Hi, Steve. Question, if you look at valuations for natural and another companies in the equity markets, it seems like the market suggesting an economic slowdown, a recession and I was just curious what you guys would do, if you became convinced that we are moving more in that direction, any portfolio moves, leverage. And then secondly around that, Blackstone obviously has a very good insight and window into commercial real estate. Is the message a little more cautious internally over the last three to six months in terms of risk or has it been more steady?

I think, it was sort of always -- in the lending business, especially, we're always a little bit more cautious. We're making -- typically making loans that have a fully extended term of five years. The possibility of there being a recession during that five year term seems quite possible. We've been looking at, we presume that rates and cap rates will trend higher during our long term or at least, if we have to underwrite the possibility that might. And so -- and we've been -- we sort of have been looking at the world this way for a while now. So whether, I don't think we see a near term recession, the fundamentals and the economy feel strong to us and we're not seeing anything on the ground that will lead us to near term issue, but our loans are -- in our company, definitely built to endure a slowdown and we're conservatively capitalized with term match debt to make sure that we get through any kind of credit events that may occur, whether it be on any individual loan or across the portfolio as a result of recession. So it just has to be in your calculus all the time, but we're not seeing any real near term indicators based upon our lending or ownership footprint.

And is there sort of the internal view as you sit around the committees and talk about the market, is there sort of a growing sense of caution or is it -- maybe your point is you've got to operate that anyway, so hasn’t been incrementally good thing?

I think that – again, I don't know if there's a growing sense of caution. I think that we feel it’s -- we have definitely – it’s been a little bit harder to make acquisitions and investments on the equity side in North America than it has been in prior years and I think it is really with the market being a little bit more fully valued than it has in the past, maybe more so than the fear of any near term economic event, but we're certainly – again, we’re certainly really mindful, but I don't know that we're really looking at where we think value is and where value will go over time, because again, we're not seeing anything that will lead us to believe that there's a near term recession.

And our final question is coming from the line of George Bahamondes from Deutsche Bank.

Hi, good morning. Just wanted to ask a follow up question on your last point, really around the US market and potentially being at or near peak levels. You referenced earlier in the call that your international exposure is now 19%. Do you have a sense for how large your international exposure can get, as you see opportunities abroad and can you provide any color around what spreads may look like for loans abroad versus what you might typically be seeing in the primary markets if you focus on the United States?

I think from an international standpoint, again the flow internationally is harder to predict than it is in the US. It definitely has been more episodic. We're fortunate in that we have such a strong presence in so many of the international markets when interesting deals come or when our sponsors go to these markets that we get an early call and have ability to transact. Doug and the capital markets team have done a nice job again of exporting our cost of capital to these markets, creating a multi-currency capability in our borrowings and gives us a big advantage and beyond that to transact because spreads are a little wider in the deals that we're seeing in these markets. It’s really, I think, a function of there not being as much spread compression in the last 18 months there as we've seen here in the US, because this is less competition. So spreads are probably 25 to 75 basis points lighter on the opportunities that we're seeing outside of the US. Hopefully, we will see more of them. I don't know that our portfolio will grow a lot beyond sort of the 20% international exposure that we have today. If we see more opportunity, then perhaps we will, but we don't allocate, so we're just looking for the best opportunities to capitalize on whether it be in the US or in the international markets that we cover.

Thank you very much. And let me hand back over to Weston Tucker.

Great. Thanks everyone for joining us this morning. If you have any questions, please follow up with me after the call.

Thank you very much ladies and gentleman. That concludes your conference call for today. Thank you for joining. You may now disconnect.