Real estate stocks have been under pressure for a couple of years. The pressure rose two weeks ago for
Blackstone Mortgage Trust,
with the 50-page critique of a well-known short seller.
The Dec. 6 short report by Muddy Waters Research argued that the trust’s dividend is endangered because its real estate borrowers will be unable to refinance and repay loans in 2024. Muddy Waters founder Carson Block made his case at the Sohn investment conference in London and knocked the real estate investment trust’s stock by as much as 8% that day, to $20. 52.
Since then, however, the REIT stock has recovered its losses—bouncing to a recent $23. The REIT and its defenders issued rebuttals. As important, the retreat of 10-year Treasury yields to below 4% sent a wave of relief through real estate, persuading many that they have seen the bottom of prices for properties and property-linked securities.
Real estate has certainly been pummeled, but Block’s sell rating may have just come too late.
Block helped pioneer activist short selling. For a decade, his Muddy Waters firm has placed bets against stocks and then posted its research online. His skeptical views could trigger big drops in the day they appeared.
The Muddy Waters report on Blackstone Mortgage Trust looked at the commercial real estate scene, with its office vacancies and interest rate strains, then zeroed in on what Block sees as a particular risk at the loan REIT—which lends to property owners, instead of taking equity interests itself.
The mortgage REIT makes loans with floating rates, so its borrowers typically arrange rate-cap deals with third parties to protect themselves when rates rise. The caps have kept interest expenses manageable for Blackstone’s borrowers amid the rising rates of the past two years.
But the Muddy Waters piece estimated that rate caps on $16 billion of those loans will expire in 2024, making refinancing of the loans more costly for cash-strapped property owners. Blackstone faces a cliff, claimed the shorts. If benchmark Treasury rates don’t fall next year, the REIT’s interest income will shrink. The trust might have to cut its dividend by more than 50%.
Blackstone rushed out a fact sheet to counter the short thesis. Some 95% of the loans in its $22 billion portfolio are performing as required, said the REIT. In the September quarter, 99.7% of interest income was paid in cash and on time.
The mortgage REIT said its borrowers have been managing with rate caps that averaged 3.2%. So the current reset, to an average 4%, has been manageable.
As for the rate caps, no cliff looms, said Blackstone. Loans and rate caps mature every year. In the past 12 months, over $12 billion in rate caps expired, said the firm, with 93% replaced by new arrangements.
Blackstone said its dividends are securely covered. With the stock’s drop from about $33 last year, its yield is now almost 11%.
“The facts are that with a 95% performing portfolio, record liquidity of $1.8 billion, and repayments of $3.8 billion in the last year, BXMT continues to show resilience amidst a challenging backdrop,” the REIT told Barron’s in a statement.
Among Blackstone’s fans, analyst Sarah Barcomb at BTIG answered the short report with a note saying that the Muddy Waters view was too dire. The REIT may well have to boost loss reserves for its loans on some office properties, but she doubts the short forecast that property values will fall 50% across the lender’s portfolio. Barcomb maintained her Buy rating.
Meanwhile, the Blackstone trust has been socking away its rising receipts from floating rates. Its reserves are around half a billion dollars, some three-times those of a year ago.
Muddy Waters declined to comment on the debate it stirred. With its Blackstone idea, it may be swimming against a turning tide.
Write to Bill Alpert at [email protected]
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