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AmextaFinance > News > Blackstone Mortgage: Run Away Or More Room To Run? (NYSE:BXMT)
News

Blackstone Mortgage: Run Away Or More Room To Run? (NYSE:BXMT)

News Room
Last updated: 2023/07/20 at 7:02 AM
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This article was coproduced with Williams Equity Research (‘WER’).

Contents
Strategy and PortfolioCash Flow and DividendBalance SheetValuationTop REIT CEOs

Blackstone Mortgage Trust (NYSE:BXMT) is an externally managed mortgage REIT with a $3.8 billion market capitalization. That’s second behind only Starwood Property Trust (STWD) in size among commercial mortgage REITs.

iREIT®

iREIT® (in $US millions)

As a reminder, commercial mortgage REITs make loans against all types of commercial properties like industrial, hotel, and office. Agency, or residential mortgage REITs, specialize in multifamily properties.

Why the distinction?

Via Fannie Mae and Freddie Mac (these are the government agencies), the government is deeply involved in the financing of residential property. Like the single-family residential sector, these parts of real estate, for all intents and purpose, are socialized from the lending side.

Since the government offers better rates, they dominate the market and set the terms and conditions.

In addition, the government allows higher levels of leverage than the private markets can stomach. Add it all up, and the commercial REITs are much more diversified and have much lower leverage than the agency/residential REITs.

As one example, the best-known residential mortgage REIT is likely Annaly Capital Management (NLY). It’s the only mortgage REIT with a greater market capitalization than Starwood at $9.8 billion. Annaly’s economic leverage ratio is 6.6x, which is actually down from Q3 2022’s 7.2x.

That’s over 50% higher leverage than Blackstone Mortgage Trust. This is one concrete example of why we prefer commercial mortgage REITs.

That said, there are reasons why Blackstone Mortgage Trust trading nearly 30% off its 52-week highs and at only 8 times forward earnings could be justified.

Blackstone Mortgage Trust owns trophy assets all around the country.

Like this one below:

BXMT

BXMT: New Multifamily Development Brooklyn, NY

And not all those cities are doing well.

Though the mREIT has reduced its exposure to office properties substantially from over 40% a few years ago to 34% in Q1 2023, it’s still more exposure than many peers.

And some of those buildings are in cities that are not doing well. Blackstone Mortgage Trust’s percentage of impaired loans rose from 1.3% at the end of 2021 to 4.0% in Q1 2023. If that pattern continues, Blackstone Mortgage Trust is in trouble.

Let’s evaluate the company’s strategy, portfolio, and balance sheet. That’ll lead us to a discussion on risk and then we’ll solve the valuation puzzle.

Strategy and Portfolio

We’ve known that commercial mortgage REITs primarily make loans against commercial real estate. Next, we need to understand the loan portfolio’s strengths and weaknesses.

A map of the united states with different states Description automatically generated

Q1 2023 Investor Presentation

Thanks to the mREIT’s sizable scale, it has exposure to over a dozen U.S. states and even six foreign countries.

As mentioned in the introduction, Blackstone Mortgage Trust had ~50% of its portfolio tied to office properties not that long ago. To management’s credit, it saw the office storm clouds on the horizon several years ago and has been diligently reducing exposure to the troubled sector ever since.

U.S. office exposure is down to 25% of U.S. assets with another 9% in overseas office properties. The troubles of U.S. office aren’t too similar to what’s happening in major cities overseas. In other countries it’s not as easy to move as it is in the U.S., so the problem isn’t necessarily as profound.

Multifamily properties are 27% of the portfolio with hospitality next largest at 19%. The latter is what had the market running scared during the pandemic. To Blackstone’s credit, it managed that seriously challenging environment well and didn’t have too many issues.

BXMT

BXMT: Beachfront Hotel Huntington Beach, CA

Industrial, retail, and life sciences are next in line at 9%, 4%, and 2%, of the portfolio, respectively.

Let’s talk about collections. Blackstone Mortgage Trust had 97% performing loans and 100% interest collection in Q1 2023. That’s technically true but can be misleading.

A graph with numbers and a line Description automatically generated

BXMT Q1 Investor Presentation

3-4% of the portfolio is impaired, but those loans don’t count against loan collections for reporting purposes. That’s why you’ll see “100% interest collection” plastered all over Blackstone Mortgage Trust’s investor presentations.

At the same time, the mREIT can easily handle problems with 2%-3% of its loan book. If that slowly improves back toward 99% in the next couple years, BXMT is indeed a huge bargain at today’s levels.

A pie chart showing different types of numbers Description automatically generated

BXMT Q1 Investor Presentation

Part of Blackstone Mortgage Trust’s problems are its exposure to office properties in major cities in Illinois, New York, and California. Most major cities have struggled with the “return to office” mandates many companies are pushing, but these cities are really struggling.

Unlike Texas or Florida, where Blackstone Mortgage Trust also has exposure, a decent percent of the workers that are supposed to return to work don’t even live in these states anymore. Albeit anecdotally, 10%-20% of friends in Austin (where WER lives most of the year) are in this exact situation.

They previously lived in L.A or New York City and moved to Texas during the pandemic. That’s also true in West Palm Beach where I maintain a residence.

Their companies are now requiring them to return to the office, and they aren’t budging. Given how tight labor markets are in many industries in the U.S., I think office utilization in these cities may take a long, long time to recover.

This aligns with the data we’ve seen on migration patterns, people’s sensitivity to taxes, etc. If a city is losing jobs, it’s effectively impossible to have a healthy office market.

Cash Flow and Dividend

No mortgage REIT has an exceptionally long dividend track record.

That’s for two reasons.

First, there was the Great Recession. Every part of the real estate market was impacted, and that includes mortgage REITs.

The second is the sector’s age.

The largest players among commercial mREITs, which are Starwood Property Trust and Blackstone Mortgage Trust, had their IPOs in 2009 and 2013, respectively.

Although an established sector is already preferred, it’s not what’s most important. We aren’t buying a sector, we are buying stock in an individual company.

As a result, we are more interested in the individual mortgage REIT’s dividend track record. Blackstone Mortgage Trust has paid a $0.62 dividend for 31 consecutive quarters. That includes the pandemic.

What about before that?

The company never decreased its dividend. It started at $0.27 per share quarterly in 2013, so that’s a 130% increase since its IPO.

Note: Remember that Blackstone Mortgage is somewhat of a reincarnation story – the company changed its name from Capital Trust after Blackstone Group LP acquired the business in December 2012 to focus on originating first lien mortgages unlike many peers that focus more narrowly on mezzanine lending. That’s why you may see something like this:

Seeking Alpha

Seeking Alpha

Is Blackstone Mortgage Trust in the fight to become a dividend king or aristocrat?

Far from it.

But that’s not really its business model. Given its near double-digit yield, simply maintaining the dividend is what most investors should expect with any increase considered a bonus.

What about dividend coverage? We know a track record is only as strong as the current payout patio.

A screenshot of a graph Description automatically generated

Q1 2023 Investor Presentation

In Q1 2023, Blackstone Mortgage Trust increased earnings 27% year-over-year from $0.62 to $0.79 per share. There are very few companies with that kind of earnings growth.

The percentage of that group that pays an 11%+ yield is even less. To be balanced, the company’s earnings can be volatile. It had several quarters of ~100% payout ratios during the pandemic.

This recent improvement allowed Blackstone Mortgage Trust’s dividend payout ratio to improve from 100% to 127%. A 100% payout ratio always makes us nervous, but Blackstone Mortgage Trust’s willingness to hold the line on the dividend does inspire confidence.

The trend is related to a key fundamental about Blackstone Mortgage Trust and most non-bank lenders (e.g. mREITs and Business Development Companies): Floating rate loans.

A screenshot of a computer Description automatically generated

Q1 2023 Investor Presentation

See how the box I made in green has “+” in front of all the cash coupon rates? That’s a floating rate benchmark rate plus an agreed upon premium.

A graph with arrows and numbers Description automatically generated

Q1 2023 Investor Presentation

SOFR, the recent replacement for LIBOR, has increased from effectively zero in early 2022 to 4.62% as of the end of Q1 2023. That translates into much higher loan income for Blackstone Mortgage Trust. Now you see why mREITs are uniquely positioned to profit in this environment. The key is if they can manage their portfolio risk and balance sheet along the way.

Balance Sheet

Understanding a company’s balance sheet is always important, but it’s especially critical for mortgage REITs.

Let’s start with liquidity. That’s how any company rides out bad times, and if they have enough liquidity, they can even make accretive purchases from distressed sellers. That’s one of Blackstone’s (BX) key tenets and drivers of its success.

Blackstone Mortgage Trust ended Q1 with $1.6 billion in liquidity. That’s more than enough to run the mREIT. It’s maintaining that high level of liquidity to take advantage of the panic selling many expect is on the horizon, at least within the office sector.

A chart of a company's financial statement Description automatically generated

Q1 2023 Investor Presentation

Next is the timing of its debt repayments.

All well-managed companies do their best to avoid short-term maturity risk because you never know what’s on the horizon (like a nationwide lockdown). Best practice is to refinance or pay off debt at least a couple years before it’s actually due.

That’s precisely what we see with Blackstone Mortgage Trust’s debt maturity schedule shown above.

It has no debt maturities in 2023, 2024, or 2025.

It does have a sizable $1.3 billion due in 2026, but there’s a reasonable probability that credit markets are more favorable by that point in time.

We consider it a near-zero (<5%) probability that the economy can hold up with where interest rates are today. Either the Federal Reserve will run the economy into the ground and be forced to lower rates, or they’ll lower rates naturally as inflation cools off.

Either way, we believe rates will be lower by 2026. We leave the ~5% uncertainty because we do not have near-zero confidence in the federal government’s money management discipline.

Blackstone Mortgage Trust has a 64% loan-to-value (“LTV”) at origination. The other way to state that is the borrower has to put up a 36% down payment on average (one way or another).

Stated yet another way, the average property in the portfolio has to decline by nearly 40% before Blackstone Mortgage Trust loses a penny in principal.

This is in line with its peer group, almost all of which have 60-65% LTV at the portfolio level.

Let’s take a closer look at the previous chart to better understand Blackstone Mortgage Trust’s exposures.

A screenshot of a computer Description automatically generated

Q1 2023 Investor Presentation

We highlighted the loans that are either in under-performing markets (e.g. L.A. and NYC) or in under-performing sectors (office).

The LTV on the first New York and L.A. properties are 48% and 59%.

That means these properties require a 52% and 41% decline in value, respectively, before Blackstone Mortgage Trust suffers any material losses. This is very favorable and highly unlikely to ultimately end in losses, but let’s keep going.

The next L.A. office property has a higher than average LTV of 69%. That’s not good, but it’s a tiny (at least for this mREIT) $72 million loan. For context, that’s the smallest in the entire portfolio.

Up next is a 71% LTV loan in New York worth $344 million. This is a problem.

A table with numbers and a red line Description automatically generated

Q1 2023 10-Q

This is the same loan but in the Q1 2021 10-Q SEC filing. The risk rating went from 2 back then to 4 today.

A document with text on it Description automatically generated

Q1 2023 10-Q

It looks like Blackstone Mortgage Trust agrees with our concerns. The loan has gone from “Low Risk” to “High Risk/Potential for Loss” in the two-year period. Let’s look at the bigger picture.

A table with numbers and numbers Description automatically generated

Q1 2023 10-Q

Since the end of last year, the risk ratings haven’t changed much. Neither has the CECL reserve of $336.6 million versus end of 2022’s $326.1 million. As of right now, the portfolio is bleeding a little but stable.

Our view is that we’ll know what the trajectory will be within the next 1-2 quarters. That New York loan, for example, has a stated maturity date of May of this year. If they were able to handle that without taking much damage, we think the stock will react very positively.

A comparison of a graph Description automatically generated

Q1 2023 Investor Presentation

CECL stands for Current Expected Credit Losses. It’s used by regulators to hold management accountable for how its loan portfolio is performing.

The mortgage REIT’s senior loan portfolio stands at $26.7 billion. The CECL reserve is 1.3% of that. At the same time, that $352 million is 2.7x higher than a year ago. That’s mostly because Blackstone chose to include 20% of its top-rated office loans in its CECL reserve.

Some will argue that’s too conservative.

Others will say it’s not enough.

Q2 and Q3 will determine who was right. Based on the LTV of each individual loan and our personal assessment of their risk, we think management’s actions tilted toward conservative.

Let’s compare to this a mega-bank everyone knows: JPMorgan (JPM).

JPMorgan had $22.8 billion in expected credit losses at the end of Q1. Let’s put that into context. It’s 1.85% of JPM’s assets, or 42.3% more than Blackstone Mortgage Trust.

That’s not a perfect comparison because their businesses are different, but both are ultimately lenders at the end of the day. We think it’s worth keeping this perspective in mind when thinking about Blackstone Mortgage Trust’s numbers and whether “panic” is warranted.

A graph of a number of bars Description automatically generated

Q1 2023 Investor Presentation

Here’s a visual of how the risk ratings have evolved since the start of 2022.

Note that the mREIT’s weighted average risk rating has been +/- 0.2 from 3 since we started following the company many years ago.

The risk ratings aren’t signaling a pending disaster.

They’re determined by management, and we shouldn’t forget that, but they have been reasonably accurate estimates for many years.

Lastly, Blackstone Mortgage Trust’s credit rating of BB is two notches (BB to BB+ to BBB-) from investment grade.

Does that mean the company isn’t credit worthy?

I don’t think it’s that clear, and we’ll explain why.

The credit rating agencies, which include Fitch, S&P, and Moody’s, use a system that favors companies with low levels of debt. The mortgage REIT business model uses a good amount of debt like all lenders do, but it doesn’t receive any of the “points” that banks do because they don’t have deposits on lucrative consumer loans.

As a result, no mortgage REIT has an investment grade credit rating, but Blackstone Mortgage Trust has among the best scores in the industry (only Ladder Capital (LADR) has higher at BB+). Starwood Properties also is BB.

Credit ratings are useful, but we prefer facts over ratings every time. Blackstone Mortgage Trust made it from 2011 through today, which includes the pandemic, without cutting its dividend.

That’s a better track record than many investment grade rated dividend stocks.

Valuation

We have several things to consider.

On one hand, Blackstone Mortgage Trust is on track to generate record earnings. At the same time, it has a higher percentage of impaired loans and a lot more portfolio risk than perhaps any other time in the company’s history.

It’s hard to run an analysis where the book value of Blackstone Mortgage Trust should decline significantly from here. It only has so much office exposure, and much of that has already been written down (taken as a loss from an accounting perspective even though it hasn’t occurred).

Blackstone Mortgage Trust currently trades at 8x forward earnings. That’s ~40% cheaper than its historical average. Compared to its closest rival, Starwood Property Trust, Blackstone Mortgage Trust is ~25% cheaper. To be clear, Starwood’s portfolio is different, and some discount is warranted in my opinion.

iREIT®

iREIT®

Now, we know BXMT traded above $40 per share momentarily before the pandemic/lockdowns arrived. If book value per share was way down compared to then, maybe it makes perfect sense why the stock trades around $22.

A close-up of a white background Description automatically generated

BXMT 2019 10-K

Not the case.

The company’s book value was $27.82. Let’s see about the current figure.

A graph of a book value Description automatically generated

Q1 2023 Investor Presentation

It’s lower then back then, but by less than 6%.

The stock, on the other hand, is down nearly 50% over the same time.

Maybe it’s earnings?

2019 saw Core earnings of $2.70 per share. Q1 2023’s run rate equates to $3.16 in Distributable Earnings Per Share (“EPS”), which while slightly different, is very similar.

So, it’s not that either.

The only way BXMT’s share price and valuation make any sense is if you expect several of the mREIT’s loans to be worth zero.

To illustrate how this works in practice, let’s use one of the highest levered loans in the portfolio at 70% LTV at origination.

The company can recoup 50% of its principal by selling the building for 35% of the original value at the time the loan was made.

If we move to a 60% LTV, Blackstone Mortgage Trust can recoup two thirds (66.6%) of its principal value by selling the building for 40% of its original value.

Hopefully, this shows you what kind of distress is needed for a total loss.

We believe this mREIT is severely undervalued. And that’s coming from analysts who are very bearish on the L.A. and New York office market. Bearish, but not irrational.

iREIT®

iREIT®

When BXMT eventually returns to a half-way normal 10-11x earnings multiple (where Starwood trades today), the stock will gain 30%-40% with a 11.2% yield-on-cash paid along the way. We believe there is a high probability that will outperform the S&P 500 over the expected hold period of 1-2 years.

FAST Graphs

FAST Graphs

Top REIT CEOs

As I posted on Twitter this morning, I will be working on our Top REIT CEO rankings this week and Katie Keenan is on our short list. She leads all aspects of Blackstone Mortgage Trust.

Before joining Blackstone in 2012, she held positions at G2 Investment Group, Lubert-Adler Real Estate Funds and in the Real Estate Investment Banking Group at Lehman Brothers.

She graduated cum laude with an A.B. in History from Harvard College and sits on the Board of Directors of Getting Out and Staying Out and the Advisory Board of Governors of NAREIT, and is a member of WX New York Women Executives in Real Estate.

blackstonemortgagetrust.com

blackstonemortgagetrust.com

Note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.



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News Room July 20, 2023 July 20, 2023
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