ryasick
Mortgage REIT Blackstone Mortgage Trust (NYSE:BXMT) delivered a solid earnings beat of $0.07 per-share last week, causing shares to increase by 4%. However, the mortgage REIT’s portfolio is showing weakness as the percentage of performing loans declined for the third time in Q4’23. Additionally, Blackstone Mortgage Trust has a smaller dividend safety margin (weaker distribution coverage) and the REIT’s book value dropped to the lowest level since FY 2014. These factors cause me to reevaluate Blackstone Mortgage Trust’s dividend risks and I am, for reasons of caution, lowering my stock rating to hold.
Previous rating
I previously rated Blackstone Mortgage Trust a buy — 0.8X Book Value, 12% Yield, 130% Dividend Coverage — because of its relatively large (20%) discount to its book value and decent coverage based off of its earnings available for distribution metric. However, in the fourth-quarter, Blackstone Mortgage Trust saw deteriorating distribution coverage as well as a large book value drop which was related to headwinds to portfolio performance. My new rating on BXMT is hold.
Portfolio faces some issues
Blackstone Mortgage Trust owns a large, senior, floating-rate portfolio that was valued at $22.0B as of the end of FY 2023. The portfolio included chiefly CRE loans protected by collateral in North America, Western Europe and Australia. The term of these senior loans is typically 3-5 years and chiefly includes variable loan rate payments.
Blackstone Mortgage Trust does have a lot of exposure to the U.S. office market which has been pressured by shifting work trends (remote working) and high interest rates. The REIT had 27% of its collateral exposed to the U.S. office market as of the end of FY 2023 which was unchanged from the previous quarter.
BXMT
Of $7.9B of loans to the office sector about $0.8B (representing about 4% of portfolio assets) carried the highest internal risk rating of 5 at the end of the fourth-quarter, meaning the repayment of such loans is in serious doubt.
Blackstone Mortgage Trust, as a result, has seen a significant increase in its CECL reserve in 2023 and in Q4’23 especially. The CECL reserve measures future expected credit losses which has caused a deterioration in the REIT’s book value in 2023. As a result, 93% of loans were performing as expected in the fourth-quarter, compared to 95% in Q3’23.
BXMT
Due to a decrease in loan quality, Blackstone Mortgage Trust’s CECL reserve — which stands for current expected credit losses — had to be raised to $592M in the fourth-quarter. Blackstone Mortgage Trust added $115.3M to its CECL reserve in Q4’23 compared to a $96.9M increase in the third-quarter. In total, the commercial REIT added $249.8M to its CECL in FY 2023, showing an 18% increase compared to FY 2022. The decline in loan quality is a key concern for dividend investors and likely the main driver behind Blackstone Mortgage Trust’s large discount to book value.
BXMT
BXMT’s distribution coverage looks good, for now…
Blackstone Mortgage Trust supports its dividend with earnings available for distribution, which rose to $3.05 per-share in FY 2023, chiefly because of tailwinds from higher rates. In Q4’23, however, Blackstone Mortgage Trust’s distribution coverage ratio declined to 111% compared to 126% in Q3’23 as interest rate tailwinds leveled off. With the Federal Reserve set to lower rates in 2024, I expect headwinds to the REIT’s distribution coverage ratio as well and a lower dividend safety margin. While the dividend is currently well-supported by distributable earnings I believe the trend in the CECL reserve as well as the drop in book value are reasons to be more careful going forward.
BXMT
Book value drops back to 2014 level
Blackstone Mortgage Trust’s book value dropped to $25.16 as of the end of FY 2023 due to headwinds to portfolio quality (I use the REIT’s book value as my fair value estimate). Blackstone Mortgage Trust’s book value, due to the portfolio issues discussed above, declined 4.2% in FY 2023. Since the REIT remains overweight U.S. offices, further increases in the CECL reserve must be expected.
The REIT’s book value has not been this low since FY 2014 which is when Blackstone Mortgage Trust disclosed a book value of $25.10 per-share. Because of the REIT’s high office exposure, Blackstone Mortgage Trust’s shares trade for a 21% discount to book value while Starwood Property Trust (STWD) trades at a P/BV ratio of 0.98X, largely because the REIT only has about 10% U.S. office exposure.
Because of the risks inherent in the office portfolio and the drastic increase in the CECL reserve, I am down-grading BXMT to hold, despite a 21% discount to book value.
Risks with Blackstone Mortgage Trust
The mortgage REIT’s loan portfolio has suffered some performance issues, as 4% of its loans are classified as impaired or not generating income. This resulted in a significant increase in the company’s CECL reserve, which lowered the company’s book value. The percentage of the portfolio that is well-performing (currently 93%) and the trajectory of the CECL reserve are two metrics/trends that I believe are worth tracking going forward, as they indicate the quality of the REIT’s portfolio and sustainability of the distribution. What would change my mind on Blackstone Mortgage Trust completely is if the mortgage REIT were to fail to support its dividend with earnings available for distribution.
Closing thoughts
Blackstone Mortgage Trust’s distribution coverage ratio dropped from 1.26X in Q3’23 to 1.11X in Q4’23 and given that the portfolio has relatively high exposure to the struggling office real estate sector, there is a chance that the mortgage REIT could see weaker distribution coverage going forward. The dividend, as of right now, is not at risk since the coverage ratio of 1.11X implies a moderate dividend safety margin. The lower dividend safety margin (relative to Q3’23), the increase in the CECL reserve and the drop in book value due to a lower percentage of performing loans in the portfolio are 3 reasons why I am down-grading shares of Blackstone Mortgage Trust to hold!
