Description

Important Disclosures: Certain funds and accounts managed by us are currently long Blackstone Mortgage Trust.  We may buy and/or sell shares of Blackstone Mortgage Trust in the future for the funds and accounts managed by us without notice, and we are under no obligation or agreement to take, or not take, any action or restrict our actions in any manner.  This is not a recommendation to buy or sell shares.  Our views are subject to change without notice and we may trade in any manner, whether consistent or inconsistent with this recommendation.  The information below is from public sources.  We have not independently verified this information and we make no representations as to the accuracy or correctness of any such information.  We undertake no obligation to update any information below.

Investment Thesis

Blackstone Mortgage Trust (BXMT) is a REIT that originates senior loans collateralized by commercial properties in North America and Europe. The company is externally managed by a subsidiary of Blackstone Group (BX) and is headquartered in New York. We believe that favorable industry dynamics driving strong demand for commercial mortgage originations and limited competition from traditional banks, coupled with BXMT’s best-in-class asset portfolio, strong management team, recent transformative deal with GE Capital, and unique competitive advantages stemming from its affiliation with BX will drive meaningful cash flow and dividend growth, warranting a premium valuation vs peers.

Market Opportunity

More than $1 trillion of commercial real estate debt is expected to mature over the following 3 years, resulting in a very favorable loan origination environment for commercial mortgage lenders. Additionally, increased banking regulation since the 2008 financial crisis has negatively impacted real estate lending activity among traditional banks. This supply / demand imbalance for debt capital presents a significant opportunity for non-bank commercial real estate lenders to garner attractive yields in less competitive markets while maintaining high selectivity in crafting asset portfolios.

Competitive Advantage

BXMT is best positioned to benefit from these favorable industry trends as a result of the company’s affiliation with BX, a global leader in real estate investing with approximately $81 billion of real estate debt and equity AUM and over $141 billion of owned real estate. The ability to leverage the expertise of BX management, as well as the scale and market reach of the BX platform provides BXMT with unrivaled deal sourcing capabilities, superior access to financing, and significant advantages over competitors in terms of execution speed and flexibility. The recently announced acquisition of GE Capital’s $4.6 billion loan portfolio highlights the unique opportunities for value accretion resulting directly from the BX relationship. This exclusive off-market transaction will double both BXMT’s existing asset base and number of borrower relationships, and simultaneously eliminate the company’s biggest competitor.

Loan Origination Portfolio

Pro forma for the GE Capital acquisition, BXMT’s loan portfolio will increase to $9.4 billion, with an average loan-to-value of 66%, weighted average loan maturity of 3.5 years, and stabilized debt/equity ratio of 3.0x. Notably, 99% of BXMT’s portfolio is comprised of senior first-lien mortgages, representing the highest quality asset base within the commercial mortgage REIT sector. 

Pro Forma Regional Mix:

76% US

8% Canada

11% UK

4% Germany

1% Rest of Europe 

Pro Forma Property Type Mix:

39% Office

21% Hotel

15% Manufactured Housing

9% Multifamily

8% Retail

8% Other

Valuation

We believe BXMT’s 2016 dividend could increase to as much as $2.35/share from $2.08/share currently, driven by the GE Capital acquisition, which is expected to close in phases through Q215 & Q315, as well as continued stable loan originations, which have averaged in excess of $500 million per quarter since BXMT’s IPO in 2013. We believe the high quality of BXMT’s underlying asset base and superior competitive positioning warrants a dividend yield of 6.5% vs the peer average 8.1%, implying a potential share price of $36 or a total return of $41/share including dividend payments over the following two years. This price target implies a 1.3x P/B multiple on BXMT’s estimated pro forma year end book value of $27/share, which we believe represents a reasonable potential premium to BXMT’s peer group average of 1.1x P/B.

Notably, BXMT earnings are positively exposed to rising interest rates. The company’s primarily LIBOR-based lending and funding business model generates increasing returns with rising short-term interest rates. All else equal, our model suggests that a 100bp increase in LIBOR would drive an incremental annual earnings tailwind of $0.08/share, which we have not factored into our forecast and which represents additional upside opportunity.

Certain Risks

The risks we have identified in connection with an investment in BXMT include, among others:

• Credit/Capital Markets Risk: Underlying asset performance, financing costs, as well as overall portfolio growth are highly reliant on a sustained healthy credit environment and continued access to capital markets

• Commercial Real Estate Cycle: Management believes we are in the middle innings of a U.S. commercial real estate recovery and early innings of a European commercial real estate recovery. However, any macroeconomic weakness or deterioration in commercial real estate fundamentals or valuations would negatively impact BXMT’s growth and cash flow outlook. We believe that BXMT’s conservative portfolio average loan-to-value ratio and focus on transitional properties (with no exposure to new commercial construction) provides partial downside protection in the event of a macro or commercial real estate downturn 

• Competition / Spread Compression: Increasing competition may lead to spread compression and deteriorating portfolio loan quality. We believe BXMT continues to strengthen its competitive positioning by leveraging the BX platform to target larger and more complex deals where competition is more limited

• Regional Risk: BXMT’s portfolio has exposure to New York City, where foreign currency weakness may negatively impact international tourism. BXMT also has exposure to Houston, where severe oil price declines may negatively impact the local economy. While management has indicated no material impact to underlying properties in these markets to date, we continue to track regional trends closely

• FX Risk: BXMT match funds all collateral loans, resulting in effectively no direct transactional currency exposure. However, earnings are negatively impacted by translational currency exposure driven by portfolio exposure to Canada and Europe

Catalyst

• Continued earnings & dividend growth driven by completion of GE Capital acquisition, loan origination growth, and accretive deployment of capital
• Rising interest rates