Dividend yields north of 10% on many mortgage REITs are an enticing siren call for yield-hungry investors. But heeding that call can be fraught with peril.
A Growing Role For Lenders
In the U.S., the shock of the commercial real estate downturn is wearing off slowly. “We are in the middle of the cycle in the commercial real estate market,” says Plavin. “Things have been slowly recovering since mid-2009. Economic growth has improved demand and new supply remains constrained. The commercial real estate market in the U.S. is in a good place right now.”
Commercial mortgage REITs like Blackstone’s, as well as other non-bank lenders, are playing an increasingly important role in the commercial lending world. As banks continue to digest the fallout from the real estate crash that happened just a few years ago, they aren’t eager to dive into many new commercial loans. At the same time, commercial property owners are eager to fund projects they believe will increase revenue and improve the value of their businesses.
Non-bank lenders are filling the gap. “We provide interim financing for property owners to get from point A to point B,” says Plavin. “If the deal looks attractive, we can lend before a property is fully leased. A lot of banks demand recourse loans, which aren’t acceptable for many borrowers. We offer nonrecourse loans. And we can make decisions quickly. Borrowers also know they can rely on the depth and breadth of our experience and the speed and reliability of our execution.”
In May 2013, the REIT increased its available capital dramatically when it raised over $634 million through a public equity offering. It quickly used the proceeds to write and acquire new loans. Plavin says the affiliation with Blackstone, the world’s largest private equity real estate firm, allows BXMT to benefit from existing professional relationships with property owners, real estate advisors and other key players.
The relationship also provides an early look at attractive deals. The portfolio’s biggest loan thus far, which closed in mid-2013, was a refinancing for a California group of office buildings. The REIT’s managers had learned of the deal through contacts at Blackstone’s private equity arm.
In a February report, Evercore Partners analyst Arren Cyganovich noted that the REIT’s close ties to Blackstone “provides BXMT with ample deal flow, informational advantages and substantial relationships within the [commercial real estate] industry. … We believe as BXMT continues to execute its strategy that it will garner a premium multiple toward the high end of its peers.” Although the stock already trades at a premium to book value, he believes that its “strong origination capability and benefits from its external advisor at Blackstone” justify the markup.
However, the report also noted that the REIT’s loan portfolio is highly concentrated among certain borrowers and geographic areas. And while there is ample insulation from interest rate risk because of the variable rate loans, the firm is not immune to it.
“While we view this [interest rate] risk as relatively low, BXMT’s underlying property collateral on its loans could fall if borrowing costs rise too high with rising long-term interest rates,” Cyganovich cautioned. “Rising short-term interest rates could cause credit issues for tenants as the cost of funds increases based upon a benchmark rate.”
Still, Plavin believes that in the universe of yield-generating investments Blackstone Mortgage Trust is among the best prepared to meet the challenges presented by upward marching interest rates. “Rising rates will not be kind to fixed-rate investments,” he says. “For our REIT investors, they will be good news.”
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