Criticism of Blackstone mortgage REIT shows 'froth' draining from market

A noted short seller, Muddy Waters Research, said Wednesday that 2024 could be a horrendous year for Blackstone Mortgage Trust Inc., forecasting a cut in its dividend and large numbers of borrowers unable to refinance and repay the REIT, according to a report released yesterday, titled "Here comes the cliff!"

The Blackstone Mortgage Trust makes loans collateralized by commercial real estate, according to Bloomberg. Carson Block, who heads Muddy Waters Research, said in an interview on Wednesday that the REIT is facing a possible liquidity crisis and may default on its loans, and that he expects it will have to cut its dividend of 12% by at least half.

The Muddy Waters' critique and warning about the Blackstone Mortgage Trust underscored broader concerns about investing in commercial real estate, specifically office and mortgage REITs, according to industry analysts. And REIT investors are highly sensitive to seeing dividends cut, as financial advisors often recommend REITs as a way to generate income in retirement.

Industry analysts were also quick to note that Blackstone Mortgage Trust was a different entity from the Blackstone Real Estate Income Trust Inc., , also known as BREIT, a $64 billion nontraded REIT that began limiting withdrawals by clients last year as interest rates rose and commercial real estate values came under pressure. According to Bloomberg, BREIT has limited withdrawals for 13 straight months but has signaled that the backlog is easing. 

"With rising interest rates, loan maturities, and the fact that banks aren’t lending to real estate developers, it's a perfect storm for financing in general," said Brad Thomas, CEO of Wide Moat Research and a long-time writer and analyst of real estate investing. "Mortgage REITs are like modern day banks, and they've worked pretty well since the great recession."

"The question is, will Blackstone Mortgage Trust cut the dividend," Thomas said. "Based on earnings projections, it looks like it's going to be tight, but I don’t know if that will equal a cut, particularly due to the quality of the real estate in the portfolio."

"It's fair to say that these concerns about commercial real estate are expressing themselves in recent mortgage short-seller reports, including Muddy Waters' call on Blackstone's mortgage REIT," said Hunter Hopcroft, managing director of portfolio solutions at Armada ETF Advisors. "But I'm not convinced that the trade itself is well reasoned. Short sellers have to cover the dividend."

"Mortgage REITs overall are up 9% so far this year, with the broad REIT index half that," said Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers, an investment manager focused on real estate securities like listed REITs and private funds that are not listed. "Mortgage REITs are at a crossroads.

"They could originate new loans as banks pull back from the market, but some are having trouble with legacy loans, particularly those from three years ago, when the market for commercial real estate was at its top," Hill said. "It's part of the broader narrative that the froth is coming out of the market."

Blackstone Mortgage Trust shares fell 8.1% Wednesday to close at $20.68, but didn't fall any further on Thursday and finished the day up slightly, closing at $20.85.

A Blackstone spokesperson wrote in an email that the Muddy Waters report was "highly misleading" and showed a "fundamental misunderstanding of our senior secured lending business."

The REIT is running at record liquidity levels of $1.8 billion, collected $3.8 billion of repayments in the last 12 months, and generated near-record dividend coverage of 126% in the third quarter, according to the Blackstone spokesperson.