Blackstone Mortgage Trust (NYSE: BXMT) is a popular mortgage real estate investment trust (mREIT), primarily because it's sponsored by one of the largest investment firms and alternative asset managers in the world: Blackstone (NYSE: BX). Blackstone's incredible track record and extremely diversified portfolio make it an appealing buy for many investors in the world of real estate stocks.
But its mortgage operations, which operate through Blackstone Mortgage Trust, are an entirely separate entity with unique opportunities and challenges for investors to consider. If you're thinking about buying shares in Blackstone Mortgage Trust, find out whether it's a buy right now.
Careful execution has led to superior results
Blackstone Mortgage Trust originates and invests in commercial mortgages. The company's portfolio isn't huge, especially compared to other mortgage REITs that focus on commercial assets.
As of the second quarter of 2021, it held 125 senior loans valued at $19.2 billion, with the underlying collateral being located in 11 states in the United States, six countries across Europe, and throughout Australia. The company uses strict underwriting criteria to carefully select the loans it originates and holds, allowing its portfolio to remain 98% performing, despite pandemic-related economic challenges across the globe.
Its book value per share has dropped noticeably from pre-pandemic levels but is on the rise compared to 2020 performance. Earnings per share (EPS), however, is up 3% since Q2 2019. Its Q2 capital market activity increased the company's liquidity to $1.4 billion, bringing its debt-to-equity ratio to 2.7x -- high by most REIT standards, but relatively normal in the world of mortgage REITs, where debt and leverage are essential parts of the business model.
Not without risks
Considering the current real estate market conditions, particularly in the commercial sector, Blackstone Mortgage Trust is in a fairly strong position. But that doesn't mean there aren't future risks that should be carefully considered.
Low interest rates put financial pressure on mortgage REITs, particularly when loan prepayments are on the rise. In Q2 2021, the company saw $2 billion in repayments -- thankfully, exceeded by its lending of $2.3 billion -- but not by much.
When a loan repays, the company then has to redeploy the capital. Right now, it's likely at a lower rate than what it was previously collecting, which hurts revenues. Interest volatility is also challenging for mREITs because many earn a profit on the spread between the interest rate charged and borrowing costs. If these frequently fluctuate, it can decrease earnings for the company or put them in a vulnerable position for margin calls.
Making up the two largest asset classes for its underlying collateral, Office (51%) and hotel (17%) are both experiencing challenges as the delta variant draws out recovery time from the pandemic. Thankfully, it's near par for performance, but having 68% of its portfolio exposed to a volatile industry right now does mean there is risk exposure for delinquency in the future.
The Millionacres bottom line
Right now, Blackstone Mortgage Trust dividends pay a nearly 8% return. Share prices haven't recouped to pre-pandemic levels, meaning investors can purchase shares right now at a slight discount compared to their current performance. Personally, I think it's done an impressive job of mitigating risk and managing to grow at a rather tough time in commercial lending history.
For the right investor, I believe Blackstone is a buy right now. Still, it's important to remember that mortgage REITs are naturally riskier investments, so investors should be comfortable taking on the associated risks to earn a higher return.