After the re-IPO, the second quarter earnings call, which was also the first earnings call for Blackstone Mortgage Trust (BXMT), represented a good start. Let's look at some of the pros and cons of investing in the company.
Strength in business model
Blackstone Mortgage Trust is a commercial mortgage REIT. It focuses on purchasing floating-rate, senior commercial real estate loans. Blackstone (BX) became the external manager of the legacy company Capital Trust through acquisition of parts of the firm, and renamed it to Blackstone Mortgage Trust. The company completed a large secondary offering in May this year, selling 26 million shares at $25.50, raising net proceeds of $634 million.
Blackstone Mortgage's strategy is to make senior, floating-rate CRE loans on "transitional" properties in the US and Europe, unlike many peers that target more mezzanine loans. This way Blackstone assumes lesser risk compared to its peers. The typical property being financed has a transitional element, such as lower occupancy, and the owner seeks 1-3 year financing from BXMT prior to obtaining permanent financing. Blackstone Mortgage would provide the borrower one loan up to 65-75% LTV, and offer flexibility that is not available in the commercial mortgage backed security market.
Strong recent performance
Blackstone Mortgage Trust reported second quarter GAAP EPS of $0.22, beating the consensus expectation. The earnings beat was largely driven by the company's legacy loan portfolio, partially offset by higher G&A. Blackstone originated $765 million of senior loans in the quarter, plus another $289 million in July, putting the portfolio over $1 billion. The company expects to have its capital fully deployed by the end of the current year, with around $2.2 billion of loans. All-in loan yields averaged 5.26%, ahead of Citigroup's 5% estimate.
The management at Blackstone Mortgage expects to hit its targeted 8% ROE and dividend yield level. With respect to the dividend, management plans to pay a 50% ramped up dividend shortly after Q3 (implying a 4% annualized yield), and roll out a full dividend after Q4 (nearly 8% yield). The management also noted that despite the volatility due to Fed's tapering, their business environment remained attractive, with spreads and deal flow steady.
Opportunity in the float-rate market
I believe that BXMT's pipeline for new investments remains strong, particularly as many banks have pulled back on CRE lending post credit crisis (notably transitional loans), and while the fixed-rate CMBS market is fully functioning the floating-rate CMBS market has yet to recover. Its recovery will create additional opportunity for Blackstone. While mortgage REIT models have high financing risk given the lack of deposits, lenders have provided BXMT more favorable mark-to-market terms than pre-crisis.
Opportunity in maturing debt
According to a Citigroup report, over the next several years, a significant dollar amount of commercial real estate debt is maturing in the United States and abroad. In the US alone, roughly $1.7 trillion of CRE debt will mature over the next four years, with roughly $374 billion maturing in 2013 and $350 billion in 2014. In addition, Europe has roughly €240 billion of CRE debt maturing in 2013, €261 billion maturing in 2014 and €285 billion maturing in 2015. The figures are taken from the Citigroup research report, which was published on June 24, 2012.
Given the regulatory requirements and lower risk appetite, banks in the US and Europe have scaled back their transitional debt lending activities. This should provide ample lending opportunities for Blackstone Mortgage.
Slower-than-expected new investment ramp-up remains one of the key risks for Blackstone. Blackstone Mortgage raised $634 million of net equity capital, on top of an existing equity base of $76 million, so their future earnings will be largely dependent on how quickly they are able to put their new capital to work and originate new loans. Further, in order for Blackstone to achieve their target ROE of 8%, they will need to leverage to 3x debt/ equity, which implies significant portfolio growth and origination volume. Any failure to find new, attractive investments would negatively impact earnings and dividends.
Attractive relative valuations
BXMT reported a book value of $24.67 at the end of the second quarter. So with regards to its book value, the stock is trading at a modest 3% premium. Blackstone's closest competitor, Starwood Property Trust (STWD), is trading at a 17% premium to its second quarter-end book value.
I am bullish on the future of Blackstone Mortgage. I have confidence in the company's ability to ramp up and hit the targeted ROE, plus the sector should see multiple expansion as more capital comes in the CRE markets. This should drive credit spreads tighter and support prices creating more velocity of property acquisitions in the market place. The stock trades at 1.03x book value of $24.67. I estimate 8% dividend yield at full investment ramp up.