Real estate stocks have been facing significant challenges in recent years, and this pressure intensified for Blackstone Mortgage Trust when it became the target of a 50-page critique from a well-known short seller.
The critical report was published on December 6 by Muddy Waters Research, a renowned research firm that specializes in short selling. They argued that Blackstone Mortgage Trust's dividend may be at risk due to the inability of its real estate borrowers to refinance and repay their loans by 2024. The founder of Muddy Waters, Carson Block, presented his case at the Sohn investment conference in London, causing the stock of the real estate investment trust to plummet by as much as 8% on that day, reaching $20.52 per share.
However, the stock has since recovered from its losses and is currently trading at $23. Both the REIT and its supporters have issued rebuttals to the claims made in the report. Additionally, the recent decrease in 10-year Treasury yields, falling below 4%, has brought relief to the real estate market. Many now believe that this may indicate that property prices and property-linked securities have reached their lowest point.
The real estate industry has undeniably faced significant challenges, but it seems that Block's sell rating may have come too late in this case.
Carson Block is widely recognized for his role in pioneering activist short selling. For the past decade, his firm, Muddy Waters, has taken positions against various stocks and published its research online. His skeptical views often lead to substantial drops in stock prices on the day they are released.
The Muddy Waters report on Blackstone Mortgage Trust investigated the commercial real estate sector, paying close attention to office vacancies and interest rate pressures. They identified a specific risk related to the loan REIT model employed by Blackstone Mortgage Trust - which focuses on lending to property owners rather than taking direct equity interests.
Blackstone Mortgage Trust provides loans with floating interest rates, and as a result, its borrowers typically enter into rate-cap agreements with third parties to safeguard themselves against rising rates. These caps have helped manage interest expenses for Blackstone's borrowers during the past two years of rising rates.
Blackstone Faces Potential Challenges in Loan Refinancing
According to a recent analysis by Muddy Waters, rate caps on $16 billion of Blackstone's loans are set to expire in 2024. As a result, refinancing these loans could become more expensive for property owners who are already struggling with cash flow issues. This has raised concerns among short sellers, who claim that Blackstone is facing a steep decline in its financial outlook.
To counter these claims, Blackstone quickly released a fact sheet providing its perspective on the matter. According to the real estate investment trust (REIT), 95% of the loans in its $22 billion portfolio are performing as required. Additionally, 99.7% of interest income was paid in cash and on time during the September quarter.
Blackstone also noted that its borrowers have been able to cope with rate caps averaging 3.2%. Therefore, the current reset to an average of 4% has been manageable so far.
Addressing concerns about rate caps expiring, Blackstone stated that loans and rate caps mature every year. In the past 12 months alone, over $12 billion in rate caps have expired. The firm has successfully replaced 93% of these caps with new arrangements.
Furthermore, Blackstone reassured investors that its dividends are secure. The recent drop in the stock price has resulted in a yield of nearly 11%.
In a statement to analysts, Blackstone emphasized the resilience it has shown amidst challenging market conditions. With a portfolio that has a 95% performance rate, record liquidity of $1.8 billion, and repayments totaling $3.8 billion in the last year, the REIT remains confident in its ability to weather difficulties.
Sarah Barcomb, an analyst at BTIG, responded to the short report by stating that Muddy Waters' outlook may be too pessimistic. While it's possible that Blackstone may need to increase its loss reserves for loans tied to some office properties, Barcomb doubts the short seller's forecast of a 50% decline in property values across Blackstone's entire portfolio. Barcomb maintained her Buy rating on the stock.
Meanwhile, Blackstone has been steadily increasing its reserve funds, thanks to rising receipts from floating rates. Currently, the REIT's reserves amount to approximately half a billion dollars, three times more than a year ago.
Muddy Waters, the research firm behind the short report, declined to comment on the ensuing debate. However, it remains to be seen how their analysis will fare against the prevailing sentiment towards Blackstone.