Dividend investors with a desire to earn a stable 12% yield on their invested capital and potentially benefit from appreciation as well may want to consider mortgage REIT Blackstone Mortgage Trust (NYSE:BXMT). The mortgage REIT owns a sizable portfolio of real estate-related loans, most of which are performing well. Additionally, Blackstone Mortgage provides dividend investors with a $0.62 per share quarterly dividend that is and has been, well-supported by the REIT’s earnings available for distribution. Given that Blackstone Mortgage is priced at a big 20% discount to book value, given recent headwinds in the office market, I believe the REIT’s shares are attractive for dividend investors!
Blackstone Mortgage is a premier mortgage loan investor
Blackstone Mortgage originates senior loans that are secured by commercial real estate. The REIT's senior loans generate recurring interest income for the mortgage REIT which uses its cash flow to grow its origination platform and pay shareholders a healthy 12% dividend yield.
As of the September quarter, the last quarter for which portfolio values are available, Blackstone Mortgage’s portfolio consisted of 185 senior loans and the portfolio had a quarter-end value of $22.1B. Mostly, Blackstone Mortgage’s loans have a 3-5 year term and a loan size of at least $50M, but loan values can reach as high as half a billion dollars. The REIT is active in the U.S., Europe, and Australia, but America is Blackstone Mortgage's core operating focus.
Offices and multi-family real estate investments are the two most dominant categories in Blackstone Mortgage's loan investment portfolio. Total offices (U.S. and international) represented 36% of the REIT's collateral, followed by multi-family properties with a collateral share of 26%.
The U.S. office sector has been subjected to considerable headwinds in the last two years due to changing workplace trends (the increase in the number of people who work remotely) and higher interest rates which have led to pressure on occupancy rates and cash flows. However, Blackstone Mortgage’s portfolio (and financial performance) has proven to be quite resilient despite those challenges. Although Blackstone Mortgage has seen a marginal decline in its performing-loan ratio in Q3’23, the portfolio as a whole is still performing quite well: 95% of loans were paid on time as of Q3'23. The REIT also received $3.8B in repayments in the last twelve months (as of the latest reporting period) of which 99.99% was of par.
Positive income from loan trend, impressive dividend coverage
Blackstone Mortgage’s interest income from its senior loans, net of expenses, soared to $516.9M in the first nine months of FY 2023, showing a healthy increase of 18% year over year. The rise in loan income was due largely because 99% of the REIT’s loans earned a variable rate of interest, so Blackstone Mortgage quite nicely benefited from the Federal Reserve's tightening last year. While these tailwinds may not be as profound this year as they were in 2023 -- due to the Fed pivot announced in Q4’23 -- Blackstone Mortgage’s dividend is well-supported by earnings available for distribution to suggest that the current dividend will be paid throughout 2024 as well.
Besides a 95% on-time rent collection rate, Blackstone Mortgage’s distributable earnings coverage ratio strongly indicates that the dividend, which currently is paid at a quarterly rate of $0.62 per share, is sustainable. The REIT's dividend coverage ratio in 2023 (January through September) was 127%. On a LTM basis, the coverage ratio was 130%. Even if Blackstone Mortgage’s income from loans were to decline as clients pay off their loans in 2024, or pay early, Blackstone Mortgage has high enough excess coverage to ensure dividend continuity, in my opinion.
Book value trajectory, distributions, and valuation
Blackstone Mortgage's incremental growth in book value has been returned to the REIT’s investors via dividends in the last decade. Blackstone Mortgage’s book value as of Q3’23 was $25.90 per share compared to $24.67 per share at the time of inception more than a decade ago. Including dividends, Blackstone Mortgage managed to achieve 7% annual growth in its book value, including the pandemic period which was especially challenging for the real estate sector/mortgage REITs. Blackstone Mortgage's book value of $25.90 per share is also where I would peg the REIT's intrinsic value right now, in part because the book has remained so stable (excluding dividends) for such a long time.
A few months ago I worked on a rival mortgage REIT, Starwood Property Trust (STWD) which essentially runs the same business model as Blackstone Mortgage: A Solid 10% Yield Waits For Dividend Investors. However, Starwood Property has a lower investment share related to U.S. offices (only about 10%) which likely also explains why Starwood Property’s shares are trading at a narrower discount to book value relative to Blackstone Mortgage.
The current discount for Blackstone Mortgage Trust’s shares is 20% which is well below the 3-year average P/B ratio of 1.0X (a 1.0X P/B ratio implies a fair value of $25.90). In the longer term, Blackstone Mortgage's shares have traded at about book value which is also where Starwood Property is trading right now (STWD has a slight 3% premium). The BXMT NAV discount, in my opinion, reflects concerns over the REIT’s office investments. But given that the portfolio is actually performing well in terms of both on-time interest collection as well as dividend coverage, I believe investors may have turned too bearish on the mortgage REIT.
Risks with Blackstone Mortgage
The biggest risk for Blackstone Mortgage, as I see it, relates to the REIT’s exposure to the office real estate class. U.S. offices have come under pressure in 2022 and 2023 and headwinds include a drop in occupancy rates and rental income projections due to remote work trends. Some REITs have even spun off their office real estate portfolios, like W. P. Carey (WPC), in order to get this struggling real estate asset class off of its balance sheet. My opinion on BXMT would likely only change if the REIT suffered a more serious drop in its interest collection and if its coverage ratio dropped below 110-115% (my personal safety zone).
Blackstone Mortgage is a well-run mortgage REIT with a core focus on commercial real estate loans. The portfolio is well-performing and the REIT’s earnings available for distribution are more than sufficient to support the $0.62 per share quarterly dividend. The large 20% discount to book value, in my opinion, likely reflects heightened concerns about the company’s office exposure, but as I mentioned, 95% of borrowers are paying their interest on time and the dividend is very well supported by earnings available for distribution. The 20% discount to book value seems overly exaggerated, in my opinion, and I am a buyer here.
This article was written by
The Asian Investor
I look for high-risk, high-reward situations. Five largest portfolio holdings: Bitcoin, SoFi, Alibaba, PayPal, Western Alliance. Early buyer of cryptocurrencies. I live in Thailand :)
Analyst’s Disclosure: I/we have a beneficial long position in the shares of STWD, BXMT either through stock ownership, options, or other derivatives. 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.
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As someone deeply entrenched in the realm of investment analysis and financial markets, it's evident that the author of this article possesses a nuanced understanding of mortgage REITs, particularly Blackstone Mortgage Trust (BXMT). The comprehensive coverage of Blackstone Mortgage's portfolio, financial performance, dividend metrics, and risk assessment reflects an expert's grasp on the subject matter.
Firstly, the article highlights Blackstone Mortgage Trust as an attractive option for dividend investors seeking a stable 12% yield. The REIT's ability to provide a consistent $0.62 per share quarterly dividend, supported by well-performing real estate-related loans, is a key aspect emphasized in the analysis.
The author delves into the specifics of Blackstone Mortgage's portfolio, detailing its substantial size and composition. The focus on senior loans secured by commercial real estate, with a predominant presence in the U.S., Europe, and Australia, underscores the REIT's global operations. The breakdown of the portfolio, with a significant share in offices and multi-family real estate investments, provides investors with a clear picture of the REIT's asset distribution.
The article also addresses challenges faced by the U.S. office sector, such as changing workplace trends and higher interest rates, and how Blackstone Mortgage has navigated these headwinds. Despite these challenges, the author emphasizes the resilience of Blackstone Mortgage's portfolio, citing a 95% on-time loan payment rate and positive trends in interest income.
A crucial point of analysis revolves around Blackstone Mortgage's dividend coverage ratio, with a focus on distributable earnings. The author provides evidence of the REIT's ability to sustain its dividend, showcasing a coverage ratio of 127% in 2023, instilling confidence in the sustainability of the $0.62 per share quarterly dividend throughout 2024.
The growth trajectory of Blackstone Mortgage's book value is explored, indicating a consistent annual growth of 7% over the past decade. The article positions the current book value at $25.90 per share, underlining its stability and contribution to the REIT's intrinsic value.
Comparative analysis with a rival mortgage REIT, Starwood Property Trust (STWD), adds depth to the discussion, offering insights into Blackstone Mortgage's discount to book value and potential reasons behind it. The author expresses a bullish stance on Blackstone Mortgage, suggesting that the 20% discount may be unwarranted given the REIT's solid financial performance.
Finally, the author addresses risks associated with Blackstone Mortgage, particularly its exposure to the office real estate class. The risk assessment is grounded in real-time industry challenges, and the author identifies a personal safety zone for the coverage ratio as an additional layer of risk management.
In conclusion, the article provides a thorough analysis of Blackstone Mortgage Trust, leveraging evidence-based insights and a deep understanding of the mortgage REIT landscape. The author's disclosure adds transparency to potential conflicts of interest, enhancing the overall credibility of the analysis.