Mortgage real estate investment trusts, or mortgage REITs, are well-known for their above-average dividend yields, but there's quite a bit more that investors should know about these income-focused investment vehicles before buying shares.
One of the more popular mortgage REITs, Blackstone Mortgage Trust (NYSE: BXMT), has attracted investor attention because of its relationship with massive alternative assets manager Blackstone (NYSE: BX). In this article, we'll take a closer look at Blackstone Mortgage Trust's business, recent developments, and stock price performance over the years.
Blackstone Mortgage Trust company profile
Blackstone Mortgage Trust is a REIT that originates and invests in commercial real estate loans, investing primarily in senior loans collateralized by the underlying properties. With operations in North America, Europe, and Australia, Blackstone is one of the few mortgage REITs with a truly international portfolio. The U.S. makes up about 70% of the portfolio, with Western Europe accounting for most of the rest.
Blackstone Mortgage REIT is managed by a subsidiary of well-known investment firm Blackstone, which has about $650 billion in assets under management.
At the end of the first quarter of 2021, the company had an $18.7 billion mortgage portfolio. More than half of that (54%) is currently collateralized by office properties, with hospitality and multifamily properties collectively making up another 29%.
Despite the portfolio's current concentration of office and hospitality properties, it's also worth mentioning that Blackstone Mortgage Trust is quite selective about the commercial real estate sectors it originates loans for at any given time. Currently, the REIT is choosing to focus on sectors with strong fundamentals and a high tolerance for recessions or economic uncertainty.
Recent originations have focused on the industrial, multifamily, and life sciences sectors of commercial real estate. In fact, these three real estate subsectors accounted for 92% of Blackstone Mortgage Trust's first-quarter originations.
Like all mortgage REITs, Blackstone Mortgage Trust has some pretty important risk factors to understand. Specifically, mortgage REITs use significant amounts of leverage (borrowed money) to finance their purchases of mortgage investments.
And while this allows them to pay large dividends, it also makes them vulnerable to turbulent markets and interest-rate fluctuations. Blackstone Mortgage Trust ended Q1 2021 with an $18.7 billion mortgage portfolio but had $14.9 billion in outstanding debt.
When interest rates spike, the borrowing costs incurred by these REITs increase. Since the "profit margin" is the difference between the interest rates paid by the mortgages and the rates paid by the REIT to borrow money, this can cause margins to shrink or even disappear.
Blackstone primarily invests in floating-rate loans, which helps mitigate this effect, but it doesn't eliminate it entirely. Conversely, when interest rates fall rapidly, borrowers tend to refinance their mortgages, which can obviously cost mortgage REITs income.
Finally, during turbulent or uncertain times, the market value of mortgage-backed securities can decline rapidly, which increases the mortgage REIT's leverage ratio and potentially leads to margin calls (forced asset sales at fire-sale prices). This is exactly what happened in the mortgage REIT industry in the early days of the COVID-19 pandemic, as we'll discuss more in the performance section.
Blackstone Mortgage Trust news
First, let's take a look at the latest numbers. Blackstone Mortgage Trust's recent loan volume has rebounded sharply due to the high demand for mortgages. In Q1 2021, the company originated $1.7 billion in commercial mortgage loans, 33% more than in Q1 2020. As mentioned, the portfolio sits at $18.7 billion, but the company estimated that it could build to more than $20 billion with its existing capital.
The COVID-19 pandemic is another major news item. Many mortgage REITs were absolutely devastated by the pandemic in the early days, leading to margin calls and plunging book values. Blackstone Mortgage Trust's stock price plummeted during that time, though the business wasn't hit nearly as hard as many of its competitors.
In fact, in its Q1 2020 earnings report, Blackstone Mortgage Trust reported that 100% of its loan portfolio was performing (meaning borrowers were making payments). The company took no loan losses or impairments. And during the turbulent first quarter, the company's book value per share declined by just over 3%, which is much better than most of its mortgage REIT peers.
Blackstone Mortgage Trust also had no margin calls and maintained ample liquidity throughout the pandemic. The company ended up selling 10 million common shares to raise some working capital in mid-2020, but it was relatively unscathed by the pandemic. In fact, the worst effect was from declining interest rates on the company's floating-rate loans, which caused earnings to decline slightly as 2020 progressed.
Finally, another recent news item is that Blackstone Mortgage Trust recently had a major leadership change. Steve Plavin, who has served as Blackstone Mortgage Trust's CEO since its initial public offering (IPO) in 2013 and will continue to oversee the company's European operations, was recently replaced by Katie Keenan, who previously served as the company's president.
Blackstone Mortgage Trust stock price
Blackstone Mortgage Trust traces its roots in the public markets back to the 1980s, when it was known as Capital Trust, but the company has existed in its current form since its "re-IPO" in May 2013. So, we'll use that date to analyze the company's performance history.
Since the re-IPO on May 7, 2013, Blackstone Mortgage Trust's stock price has increased by 19%. This may sound like a terrible performance over more than eight years. But it doesn't tell the full story.
Specifically, Blackstone Mortgage Trust is designed to produce returns in the form of income, with stock price appreciation being a secondary goal. As of mid-2021, Blackstone Mortgage Trust's dividend yield is more than 8% and has consistently been in the 6% to 8% range since 2015.
So, the best way to judge performance is through total returns. Here's how Blackstone Mortgage Trust's performance has compared to the S&P 500 benchmark index over certain time intervals.