Description

Blackstone Mortgage Trust is a REIT that invests in senior commercial mortgages.  In exactly one month, the stock has declined more than 50%. Currently it trades at 65% of book value and yields 13.8%. Virtually all (97%) of the loans are floating rate and the vast majority have LIBOR floor protection, some of which is in the money at present.  (See page 7 of the appended Q4:19 presentation for an interesting chart on earnings sensitivity to LIBOR changes in either direction).

So why the opportunity?  Market carnage, especially dire in the Mortgage REIT sector, and legitimate concerns about credit quality.  Here, I point to BXMT’s exemplary track record. CEO Stephen Plavin in early 2019 (and this track record has continued through the 4th quarter:  “We haven’t had a single missed interest payment on a loan in the history of the company [since 2013].  The loans that have been watch listed have been resolved and repaid. And if you’re starting with an average LTV of 62% or 63%, it takes quite a show of adversity to have that loan not perform.”  

At year-end, 18% of the portfolio was in hotels.  Speaking at the Citi Property Conference in early March, Plavin said that the sponsors were capitalized to get through difficult times.  While they expect a lot of stress, he believes borrowers will get through it. More broadly, BXMT uses an internal ranking system from 1 (best) to 5 (worst) for all of its credits.  At 12/31, only 3 out of a total of 128 loans were rated 4, totaling $171MM out of a $17 billion total principal balance. None were rated 5.  

I think it would be prudent to assume that BXMT’s perfect track record will come to an end and that the dividend, to date well-covered, will be cut.  To pick an arbitrary number, $500MM in writeoffs, or roughly 3% of the loan book, would cut book value by $3.70/share to $24.10. While not a worst case scenario, that level of losses seems quite draconian.  

On the other hand, there are several positive factors that may well be overlooked.  One is the Blackstone connection. The parent company has tremendous worldwide real estate knowledge and market information which should be of great help to BXMT.  Second, because BXMT loans are often transitional and comparatively expensive, borrowers are typically eager to refinance elsewhere. This will be more difficult in the current environment.  Third, spreads should widen on new business with diminished competition.  

Fourth, interest rates should remain low indefinitely.  Even with a lowered dividend (not inevitable, by the way), BXMT should stand out as an attractive income play.  

Investor Presentation:

http://www.blackstonemortgagetrust.com/docs/librariesprovider5/presentation/bxmt-4q-2019-earnings-release.pdf?sfvrsn=953e86ad_4

I wanted to get this out quickly; happy to try to answer questions.

Catalyst

The tsumani ends.  Greater confidence in credit quality.  Signs that BXMT can capitalize on a new lending environment.