Blackstone Mortgage Trust – Wait Until Earnings To Sell – Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

After the recent turmoil in the market this month, we don’t blame members for being a bit cautious about adding any investments to their portfolios. That said, we currently have a position within our High Income Portfolio that is included in there for two reasons. On the one hand, it is a high paying dividend stock with a current yield of over 7% and with arguably a stronger balance sheet than many of the companies currently paying less than that – with balance sheets that don’t qualify for investment grade. The second reason is because – until recently – the possibility of rising rates. That possibility is no longer on the table now that the Fed has cut rates and President Trump and China’s trade war will likely lead to a global economic slowdown – and more rate cuts.

Despite the potential for a negative impact, we still believe that the dividend is solid, the company is backed by Blackstone (BX), and, the portfolio has certain stops that limit losses in the event of big declines to LIBOR. We are maintaining it in our High Income Portfolio.

Blackstone Mortgage Trust – Commercial Mortgage Lender With Quality Real Estate Assets And A 7% Dividend

Blackstone Mortgage Trust (BXMT) is a commercial mortgage lender focused on originating or acquiring senior mortgage loans secured by institutional quality commercial real estate. One distinctive competitive advantage for BXMT vis-à-vis other non-banking CRE lenders is its relationship with Blackstone, which provides superior access to deals and funding through its extensive real estate debt investment platform comprising sourcing, underwriting, and structuring capabilities.

Over the past few years, BXMT has successfully grown its portfolio through new originations. 2018 was particularly spectacular, with loan originations more than doubling to $10.7 billion (key among them €1 billion in Spanish residential assets in 1Q18 and $1.8 billion on the Spiral property in Hudson Yards, Manhattan in 2Q18) and the portfolio reaching $15.7 billion. In 2Q19, BXMT originated $1.3 billion in new loans, 100% of which were senior floating rate notes. At the quarter end, BXMT had a portfolio of $15.8 billion, comprised of 124 institutional quality commercial real estate assets. The portfolio is also well diversified in terms of geographic presence as well as collateral. Within the U.S., BXMT has a presence across ~20 states with New York and California accounting for 24% and 16% of the portfolio, respectively. Internationally, UK contributes 10%, followed by Spain at 7%, and Germany and Australia at 2% each. In terms of collateral breakup, 47% of the portfolio is held in Office, followed by Hotels at 22% and Multi-family at 14%.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: BXMT 2Q19 Earnings Supplement

The majority of BXMT’s portfolio (98%) is floating rate secured with floors to protect downside, while the remaining 2% is fixed rate loans and subordinate loans. This model will result in increased net income as interest rates rise and reduced net income as interest rate fall. Because the company has floors, any sharp fall in interest rates will have limited impact on earnings, however. For example, a 50 bps decline in USD LIBOR would result in a $0.02 drop in quarterly EPS while a 200 bps decline will only result in $0.01 drop in quarterly EPS. On the upside, a 50 bps increase in USD LIBOR would add $0.03 to quarterly EPS and a 200 bps increase will add $0.10 to the EPS.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: BXMT 2Q19 Earnings Supplement

Loan to value (LTV) of the company’s portfolio is at a decent 63%, depicting low risk with sufficient haircut.

Sufficient funding to support loan originations

To fund loan originations, BXMT utilizes both debt and equity to raise capital. Recent equity offerings included a $476 million stock offering of 14.6 million equity shares (2018) and $311 million offering ($0.52 per share of book value accretion) of 8.6 million shares in H1’19. In June 2019, BXMT announced another stock offering of $275 million and with plans to issue 7.5 million shares. Debt facilities outstanding at 2Q19 stood at $9.4 billion, comprising $8.3 billion from 11 credit providers and $1.1 billion in corporate debt.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: BXMT 2Q19 Earnings Supplement

Stable dividend payout with high coverage

Over the past three years, BXMT has paid a stable dividend of $0.62 per share, primarily from its core earnings that have averaged $0.68 per share. Coverage has been high but stable over the past seven quarters on continued growth in core earnings driven by higher net interest income on a consistently growing CRE portfolio. High coverage and stable dividend payouts have enabled BXMT to retain core earnings, which along with accretive equity issuances have been driving book value per share.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: Company Filings

At the current price of $35.78 on the NYSE, BXMT offers a decent dividend yield of 7%. Although lower than the peer group average yield of 8.7%, BXMT’s yield is relatively safer than peers due to its investments in institutional quality CRE investments supported by its relationship with Blackstone.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)Source: Yahoo Finance

Although a decline in interest rates poses a near-term risk for core earnings, sufficient floors on floating rate loans and continued growth in originations should enable the company to pay out its regular $0.62 quarterly dividend per share over the coming years.

Industry Overview

Commercial real estate lending remains buoyant

Notwithstanding growing fears of economic recession and trade tensions, the U.S. commercial real estate (CRE) lending market remains buoyant, driven by favorable demand-supply dynamics in the underlying CRE market.

A large and growing CRE market with favorable demand-supply dynamics

As per the latest data from Nareit, the U.S. CRE market was worth a whopping $16.0 trillion in 2018, with four key sectors – Multifamily, Office, Retail, and Healthcare – representing more than 50% of the value. In terms of locations, gateway markets contributed one-third while the next 47 largest markets held ~50%.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: Nareit, CoStar

REITs account for 20%: Of the total CRE market, REITs account for 10%. However in institutional grade investments or similar investment grade CRE, REITs hold about twice that amount, or roughly 20%.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: Nareit, S&P Global Market Intelligence, CoStar

Favorable demand-supply dynamics driving property prices: Aided by strong demand and limited supply across CRE sectors, commercial property prices recorded decent growth of 1.8% in 2018, following a robust 7.2% in 2017. Although growth across sectors has varied, the growth trend for all sectors over the past ten years has trended up as shown in the figure below. Among the key four sectors, retail is the only sector that witnessed price declines in 2018 while the rest (industrial, multi-family, and office) witnessed strong price increases.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: Nareit, CoStar

Industrial property prices rose the most (8.5%) in 2018 on strong demand for logistic facilities to ship goods purchased online, followed by multifamily property prices that grew 6% on strong demand for apartments. Office property prices grew a modest 1.3% while the retail market witnessed a decline of 1.4% on store closures.

Office CRE driven by buoyant tech jobs

Office CRE, which forms a major part of BXMT’s portfolio, continues to enjoy strong tenant demand from booming technology and media sectors, driving rent increases. This is particularly true in California and the west coast where expanding tech and media industries are keeping occupancy levels high, boosting rents. As per research firm Reis, rent increases in 2018 across the major west coast cities of Los Angeles, Orange County, San Francisco, San Jose and Seattle were in the range of 3% to 3.5% versus the U.S. average of 2.5%. On the contrary, in New York, demand is being offset by new supply – resulting in slowing rent growth.

Outlook remains positive for 2019: Continued demand across sectors amid moderating supply has resulted in low vacancy rates and continued rent increases. Vacancy rates have been largely flat to down over the past two years across the four key sectors, though apartments witnessed an uptick in 2018, office and retail markets declined while industrial remains little changed.

CRE lending market remains strong in 2019

A robust CRE market as discussed above continues to drive the CRE lending market. After a strong 2018, the CRE lending momentum continued into 1Q19, with CBRE Lending Momentum Index gaining 18.0% YoY to 239.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: CBRE Capital Markets and CBRE Research

Banks dominate loan closings: As per CBRE, banks accounted for 40% of non-agency loan closings in 1Q19 (up from 25% a year ago), followed by CMBS conduit lenders at 31%, and life companies at 16%. Share of REITs, finance companies and debt funds declined to 14% from 20% a year ago.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Source: CBRE Capital Markets and CBRE Research

Underwriting measures including Debt service coverage ratio, LTV, Cap rates, and debt yields remain unchanged in Q1, but lenders are underwriting more aggressively than three years ago on competitive pressures. At quarter end, DSCR stood at 1.4x while LTV, Cap rate, and Debt yield were 65.1%, 5.9% and 9.34% respectively.

Interest rate decreases amid slowing global economy remain headwinds

On July 31, the U.S. Fed cut interest rates by 25 bps for the first time in a decade, citing a global slowdown and low domestic inflation. However, the Fed chair indicated that this is not the start of a longer rate-cutting cycle but just a mid-cycle adjustment as U.S. economic growth remains moderate along with a strong labor market. That said, this cut could be negative for commercial mortgage lenders, particularly those with floating rate books.

Our Take

Blackstone Mortgage Trust is a key player in the U.S. non-bank CRE lending market. Leveraging its relationship with Blackstone, the company has access to quality deals and funding along with significant negotiating power. BXMT has consistently paid its stable quarterly dividend of $0.62 through its core earnings and would be able to sustain this over the coming few years through new originations supported by healthy funding. Although interest rate decreases remain a key concern in the near term with Fed cutting rates, floors on its floating rate portfolio offer adequate downside protection.

BXMT did not escape the recent sell turmoil in the market. With rates expected to remain low or trend lower in the short-term, there may not be much upside to the stock price, but for dividend investors, the 7% dividend looks appealing. However, the price is looking a bit rich and I caution readers to at least take some money off the table. My dividend yield valuation method suggests a sell, but I’m holding off on updating that rating until after earnings. Stay tuned.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Generate Better Returns with my Five Income Strategies

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)Expand your income investing to include five unique strategies. Use them individually or combine them to generate the target returns you want.

Get access to our 5 Income Portfolios and research including

  • Stable Monthly Income Portfolio
  • Dividend Growth Portfolio
  • High Income Portfolio
  • Tax-Exempt Income Portfolio
  • Income Safety Portfolio

In addition, get investment strategies to navigate all phases of the macroeconomic cycle and advice from Arturo Neto, a Chartered Financial Analyst (CFA) and Certified Private Wealth Advisor (CPWA).

As a member, you will also get preferred pricing on Financial Planning and Portfolio Guidance services.

Blackstone Mortgage Trust - Wait Until Earnings To Sell - Blackstone Mortgage Trust, Inc. (NYSE:BXMT)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It does not provide individualized advice or recommendations for any specific reader. Also note that we may not cover all relevant risks related to the ideas presented in this article. Readers should conduct their own due diligence and carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances. Furthermore, none of the ideas presented here are necessarily related to NFG Wealth Advisors or any portfolio managed by NFG.