Blackstone Mortgage Trust (NYSE:BXMT) is an exceptionally large commercial mortgage REIT. They also trade at the highest valuation (price to book value) in the sector. REITs with substantial amounts of other non-mortgage assets should not be included in any comparison. As a mortgage REIT, BXMT is regularly making adjustments to the fair values of their loans to keep the book values at least roughly equal to the market value of the loan.
In this article I want to focus on the things BXMT does very well. In my last article, I discussed the two changes BXMT could make.
Great Transparency on Holdings
BXMT is a complicated mortgage REIT, in my opinion. Commercial mREITs, as opposed to residential, are naturally more complicated because they deal with specific loans rather than owning a small chunk of several extremely large pools. What makes small chunks of large pools easier to analyze? The large pools are so liquid and similar that "public" information is available (at a price).
The thing I like about BXMT as a commercial mREIT is the work they put in towards being transparent. For instance, take a look at this chart from page 54 of their quarterly filing:
They provide charts that are aggregated as well for easy reference, but this is some very specific data. It goes on for a few pages as they list out precisely what they own. I appreciate this level of transparency because I believe shareholders should know what assets they are buying into. After all, this is the shareholder's financing the positions. The equity here was raised from shareholders, so why shouldn't they know what they are buying?
So Many Adjustable Rates
This is a major reason investors like BXMT. The portfolio is heavily weighted into loans where the interest rate is adjustable and resets to LIBOR plus a specific margin. For instance, we can look at the chart and see that loan 4 was originated on 05/01/2015. The principal balance on the loan is $294.5 million. The loan accrues interest at a rate equal to LIBOR plus 3.45%. It is worth noting here that many of the loans have a floor in place for LIBOR, so when LIBOR is below the floor the loans use the floor rate plus 3.45%. In the past several quarters, I believe those floors were a more significant part of the income. With rates rising on the Trump Tantrum (bonds investors selling off Treasuries much as they did in the Taper Tantrum), the new LIBOR rates are moving higher and the floors should become less relevant.
To look further into this one loan, selected simply as an example, we even know that it is secured by an office building in New York. We can see that the loan to value ratio was 68% at inception. The value of the loan and the collateral may both change each quarter, but having the value at inception is enough to get a generalized idea.
Some of the loans have much more generic data than that one, but the level of detail there was great.
Which LIBOR Rate
When I say loans are indexed to reset at LIBOR plus a margin, investors should wonder which LIBOR rate. There are actually multiple possibilities and the LIBOR rates in different currencies will be different. For BXMT, as of Q3 2016, 86% of the loans were indexed to USD LIBOR. Since that should be one of the best proxies for the cost of financing the positions, the loan structure nicely matches the funding. That helps to protect the net interest spread from one quarter to the next.
Interest Income and Dividend Yields
The company offers a much lower dividend yield (around 8.2% to 8.3% currently) than the residential mortgage REITs, but it offers investors a pool of assets that create higher income streams when rates move higher. The way BXMT structures their portfolio results in an increase in net interest income if rates go up. That makes them a very interesting mortgage REIT because it means they can be a hedge of sorts against holding other mortgage REITs.
Management does a great job of illustrating that fact for shareholders with the following slide:
The entire presentation is available on the investor relations page.
This is part of why I believe BXMT's dividend is in exceptionally good shape. The increasing rates for LIBOR should bode well for the portfolio.
BXMT trades at an exceptionally high valuation compared directly to book value or to the price to book value ratios for the rest of the sector. Consequently, I wouldn't feel right putting a positive rating on the stock despite some great fundamentals within the company. On the other hand, I love the clarity in their presentation. The excellent detail on the individual loans combined with charts that allow investors to rapidly aggregate the data creates a better than expected transparency for an mREIT in the CRE (Commercial Real Estate) subsector. I believe that transparency is one of the reasons BXMT is able to command a premium in a sector filled with discounts.
Want to know when great income investments go on sale? Consider joining The Mortgage REIT Forum. For the cost of one lunch per month, you can get access to the research I'm using for managing my own investments. On average, I publish about 3 subscription articles per week. One is for calculating new estimated book value for several mortgage REITs and finding the current discounts to those estimates. Another covers the preferred shares for each mortgage REIT that has preferred shares. The third is used to either preview articles I'm working on for the public or to provide real-time updates on liquidity failures where prices for a small number of securities detached from other similar stocks.
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Disclosure: I am/we are long RSO, RSO-B.
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