Blackstone Mortgage Trust (BXMT) is a prominent Mortgage Real Estate Investment Trust (REIT) managed externally by a subsidiary of Blackstone. While BXMT has previously reported steady financial results, it's essential to take a deeper look into the current commercial real estate landscape and evaluate the potential risks.
On December 6th, 2023, Muddy Waters released a report titled "Here Comes the Cliff," shedding light on BXMT's borrower's use of interest rate swaps and caps. Muddy Waters argued that as these swaps/caps expired, borrowers would struggle to repay their loans, potentially triggering a liquidity crisis for BXMT. Although BXMT's stock price initially dipped after the report, it recovered due to Jerome Powell's indication of rate cuts and the management's response.
However, a thorough analysis of BXMT's accounting, loan portfolio, debt covenants, and incentive structure reveals potential risks and challenges for the company's earnings and dividends in 2024.
Background
BXMT's scale as a REIT with over $24 billion in assets and its access to information and opportunities through its association with Blackstone gives it an advantage. The company primarily focuses on floating-rate senior loans, providing borrowers with short-term transitional loans for renovation, construction, or properties with known vacancies. BXMT positions itself as a high-yield, low-risk opportunity due to its senior claim on properties.
Office and Real Estate Market Challenges
Despite BXMT's claims, the commercial real estate environment faces numerous challenges such as rising interest rates, the work-from-home trend, and increasing crime rates. BXMT's loans, especially in the office sector, may face difficulties due to these conditions, potentially leading to impairments and increased reserves.
BXMT's loan portfolio includes assets with significant risk potential, mainly in the office sector. Many loans show a high risk of impairment, as indicated by watch-listed and impaired assets. Additionally, office properties in major markets like San Francisco and Washington DC experience high vacancy rates and declining rents, which may impact loan performance.
BXMT's loan on the Park Central Hotel in San Francisco has already faced challenges, with the property's inability to make interest and principal payments. The auditors are likely to require larger reserves and may even force a charge-off.
Potential Impairments and Auditing
The auditors, Deloitte & Touche, will likely take a more conservative approach in assessing BXMT's loan portfolio during the year-end audit. Several properties, including the Woolworth Building in NYC, an office property in Washington DC, and the Park Central Hotel, may face impairments due to market conditions and recent transactions. These impairments will impact BXMT's income and erode its book value.
Moreover, sponsor contributions and extensions on troubled projects may lead to concerns about the recovery of equity and potential higher fees, all of which may increase the risk for BXMT.
Conclusion and Risks for Investors
While BXMT's financial results have appeared stable, the challenges in the commercial real estate market and potential risks in its loan portfolio require caution. Impairments, changes in reserves, and potential charge-offs may impact BXMT's earnings and dividend coverage, leading to a reduction in its dividend. Investors should evaluate the risks associated with BXMT and consider the volatility of its stock. Short sellers need to have the patience and capital to weather potential temporary stock spikes and wait for a clear assessment of BXMT's loan book.