BXMT - Blackstone Mortgage Trust

[thepupil]

Blackstone Mortgage Trust is (was?) a popular yield vehicle, managed by you guessed it, Blackstone. There are a number of articles and commentaries on the business model and the REIT specifically: seeking alpha, VIC, etc. I gave it a few passing glances over the years, only to conclude it wasn't for me. I watched it fall from $40 to $13 and now rise to $23.5.

 

http://ir.blackstonemortgagetrust.com/shareholders/default.aspx

http://s21.q4cdn.com/266160035/files/doc_financials/2020/q1/BXMT-1Q-2020-Earnings-Release.pdf

 

4Q 2019 book value was $27.82, after taking a CECL reserve it's $26.92, so it trades for about 86% of book value. While it is at 65% of it's peak stock price, it is only at 86% of book because it previously traded quite rich to book.

 

BXMT has lent $18 billion to transitional/value-add properties. BXMT makes floating rate loans with relatively short duration and also borrows on a floating rate basis ("match-funded"). The BXMT borrower is typically an "opportunity fund" or "core-plus" or "value-add". These are guys [like Blackstone itself] trying to make high IRR's through buying less than optimal properties and then selling them when they're all fattened up and ready for the market to institutions/REITs etc. Followers of BPY are familiar with the model (or should be since BPY invests in BAM's funds of this nature). What this means is they typically don't buy "the best" assets, but things that maybe have a bit of hair, some vacancy or maybe a little bit less good of a market, what have you. Value plays. cheaper than market, but most often for a reason. you buy a building for $100 borrow $70, make the lobby prettier, give out some iPads to the local leasing brokers, get the building full, blah blah blah.

 

They recently reported good results and put their best foot forward.

 

I don't think everything is fine and think that BXMT is potentially a short [wait pupil actually dislikes some RE securities?], at the right price, and I think it's getting there. It is particularly appealing to me as a short for obvious reasons (I own a lot of real estate).

 

Let's go through the consolidated capital structure.

 

$18 billion of Loans (the assets) ($1 billion of which were just originated last q)

$3 billion asset specific financings

$0.7 billion senior syndications

$10.8 billion corporate obligations

 

$3.6 billion equity

 

So BXMT makes a 65% LTV loan, which sounds quite safe. If you lent $65 to your neighbor's $100 house and the housing market fell by 30%, you'd be okay. If it fell by 50%, you'd lose a little $15 ($15/$65 = 23%).

 

But what if you structured this a little differently and borrowed $52 from your dad, put in $13 of your own money, and lent $65. Well then the math gets a little more...levered. A 50% decline wipes your $13 out completely instead of losing 23% on your $50. 

 

This is the simple concept of leverage or in securitization speak "tranche thickness". BXMT makes senior loans, but then uses back leverage to turn those senior loans into mezzanine risk. This is probably the right thing to do in most environments. It allows BXMT equity holders to put up less capital and make a higher ROE. I'm not saying it's nefarious or anything.

 

Relative to other mortgage REIT that take/took credit risks, BXMT just sailed through the March 2020 implosion. They don't own securities and thus don't have mark to market repo facilities which is what caused Invesco and all those folks to blow up. There are benefits to illiquidity/not being able to look something up on a bloomberg.

 

pupil, you own REITs, so you are the equity, why are you acting like being a mezz lender is so scary?

 

it's a matter of valuation, upside capture, and property type.

 

Valuation

 

BXMT lends in the private market. the private market for real estate is MUCH higher than the public REIT market. If the private market is right about RE prices, then your truly will be like Forrest Gump after Lieutenant Dan got him into that fruit company.

https://memegenerator.net/instance/13687070/forrest-gump-lt-dan-got-me-invested-in-some-kind-of-fruit-company-dont-have-to-worry-about-money-no-

 

To add a little data in here, see page 12 of the most recent investor presentation,

 

- here's are two NYC office loans at over $800 / foot loan per foot. I just bought/own trophy NYC office property at below that price and it's higher quality and owned by well capitalized REITs with lots of cash and liquidity.

 

- There are various hospitality assets at very high valuation relative to public comps. See the hospitality loans at $300-$400K / key. Is it riskier to lend to a BXMT borrower at $400K / key or to own HST's high quality low levered equity at $200-$250K / key or wherever it trades

 

- The biggest loan is an irish office portfolio at $450/foot, originated last year at 74%. that just sounds kind of scary. Ireland is great and all, but Dublin office wouldn't be the first thing i want to lend to going into a global recession.

 

Upside Capture

 

If things go well on its loans, then BXMT gets paid off at par and needs to make another loan to keep feeding the machine. there could be lots of upside if BXMT starts trading at 1.5x book again, but is that really going to happen? is the yield pig that bought BXMT at $40 and saw it go to $13 going to line up for some more? maybe. But I like owning REITs at 30,40,50% of NAV than lending to PE guys at 87% of levered book.

 

I think the volatility in REITs , mREITs, pref's etc. should put some limit on a return to the old "accretive issuance"/premium to book dance that BXMT did so well (they grew their loan book from $9 billion to $18 billion over the past 5 years which should tel you something).

 

I think book value or a slight premium is your upside. I could be wrong. As BXMT rockets toward book value, then I think this gets to be a good risk / reward as a short. Good assets pay off the loans, the bad assets cause trouble (and there will be some, this is a big $18 billion diversified book that is 13% hospitality).

 

property type

as I said, I think these are weaker properties; they're not bad properties, just not superb. If you own a fully leased up trophy asset, like say 1633 Broadway $PGRE, you borrowed at 2.99% interest only for 10 years from the CMBS market. If you own a weaker asset, you go to BXMT at L+350 on 4 year term.

 

Or they could be super high quality, but just developed and not fully leased: like this:

https://www.globest.com/2019/11/27/blackstone-lends-724m-for-hudson-commons-refi/?slreturn=20200329155512

 

that's the high level. I intend to do more work and would like a stock price higher to enter.

 

it will be a small position. the biggest risk is that Blackstone is just so freaking good you don't want to bet against them, maybe loan failure is a positive as BXMT takes over properties and does well. I personally think BX's institutional funds would get first dibs (there are potential conflicts here) but you got to be careful and analyze the incentives.

 

 

 

 

 

 

 

[thepupil]

now > 4Q2019 BVPS pre CECL

 

I invite the office bears to short this huge loan book @ > par.

[thepupil]

Company hitting the bid...not good from shorts perspective as this increases intrinsic value per share, but also in my view indicative that the savvy operators of this bad boy think it’s a bit stretched.

 

 

 

 

 

Blackstone Mortgage Trust, Inc. (NYSE:BXMT) announced it has commenced an underwritten public offering of 10,000,000 shares of its class A common stock. The underwriters will be granted a 30-day option by the Company to purchase up to an additional 1,500,000 shares.

 

The Company intends to use the net proceeds from the offering for working capital and other general corporate purposes, including further increasing its liquidity and supporting the origination of additional commercial mortgage loans and other target assets and investments.

 

Citigroup, BofA Securities, Barclays, Morgan Stanley and Wells Fargo Securities are acting as joint book-running managers for the offering.

[thepupil]

100% performing. slight increase in reserves.

 

http://s21.q4cdn.com/266160035/files/doc_financials/2020/q2/BXMT-2Q-2020-Earnings-Press-Release-and-Presentation.pdf

 

some thoughts:

 

- interesting that a 55% office 17% hotel $18B loan portfolio hasn't missed a single payment. At odds with the Hotel CMBS DQ rate (over 20%) for sure. speaks to BX sponsor quality, i guess

 

- raised Term Loan B money at L+475, this is above the return of their loan book (L+350); helps liquidity but is dilutive to ROE. very well timed equity offering at $28 (relative to stock price now $25 and lows of $12/3. Again, the equity offering speaks to quality of management; top ticked that very nicely.

 

Despite the savvy management and lack of significant fundamental deterioration, I still like this as a tail hedge / small short. the ROE is not so crazily high in terms of negative carry and this simply doesn't have the huge upside of things with similar exposure to office/hospitality real estate.