11%-Yielding Blackstone Mortgage: A Second Chance To Buy (NYSE:BXMT)

It’s almost the end of the year, and it looks like there won’t be a Santa Claus rally, as what some have come to expect. However, that’s ok for value investors like me, who view low prices as being a gift in and of itself. With a number of high yielding opportunities on the market today, it pays to build a basket of stocks to mitigate risks in any one sector.

This brings me to Blackstone Mortgage Trust (NYSE:BXMT), which as seen below, is giving income investors a second chance to layer into the stock with a second dip since the first one in October, pushing the dividend yield to 11.3%. In this article, I highlight why this presents a great second chance for dividend investors seeking to build a basket of high yield stocks.

Why BXMT?

Blackstone Mortgage Trust is a giant in the commercial mortgage REIT space, generating senior loans collateralized by real estate in three continents, in North America, Europe, and Australia. It’s externally managed by Blackstone (BX), one of the largest asset managers in the world, with over $200 billion worth of real estate assets under management. This affiliation benefits BXMT in that it provides it with a deal pipeline and valuable line of sight into the commercial real estate space.

One of the main advantages of investing in Blackstone Mortgage Trust is its focus on high-quality, income-generating loans. The company’s portfolio is comprised of 100% senior mortgage loans, which are typically considered lower risk because they are secured by the underlying property and have priority over other forms of debt in the event of default. At present, BXMT has a $26 billion portfolio of 205 loans secured by institutional assets.

Moreover, BXMT’s underlying loans come with an average origination loan-to-value ratio of 64%. This means that borrowers have significant equity skin in the game, and that the property values would need to decline by an average 36% before BXMT incurs losses on invested principal.

While high inflation and risks of a recession have made a lot of headlines, BXMT has demonstrated strong operating fundamentals, with 99% performing loans and 13% YoY earnings growth during its third quarter. Importantly, it generated $0.71 in distributable EPS, which more than covers its $0.62 quarterly dividend rate with a 115% coverage ratio.

One of the risks to BXMT is its high exposure to office properties, which comprise 41% of its loan portfolio, followed by multifamily (24%), hospitality (19%), industrial (7%), and retail (4%). Office assets have made plenty of headlines in recent times due to work from home trends. However, BXMT’s office properties are high quality in nature, with 92% of them being classified as Class A.

Typically in real estate, the cream rises to the top. To draw an analogy from retail, Simon Property Group (SPG) continues to thrive with its portfolio of Class A malls, outlets, and destination centers, while lower quality mall peers such as Washington Prime Group have succumbed to pressures in the space. As such, a similar dynamic could play out in the office space.

In addition, management recognizes pressures in the office space and is shifting towards industrial assets, as reflected by 78% of loans being tied to this asset class in the last reported quarter. Also encouraging, management is being conservative with recent originations have an even lower LTV ratio of 58%, sitting below the 64% portfolio average.

Looking forward, BXMT is well positioned for the current high and rising rate environment, with 100% floating rate exposure. Management estimates $0.06 incremental quarterly EPS with every 100 basis point increase in interest rates.

Also, having access to credit markets is especially important for commercial mortgage REITs. BXMT currently has plenty of financial flexibility, with a record $1.7 billion in liquidity, a 60% increase from the same time last year, and has no material debt maturities until 2026. BXMT employs a term-matched asset-level financing structure to mitigate refinancing risk and notably, faced no margin calls at the peak of the pandemic during 2020.

Turning to valuation, BXMT appears to be very cheap at the current price of $21.90 with a price to book ratio of just 0.8x. As shown below, BXMT’s valuation has returned 2020 levels, when there were arguably a lot more uncertainties. Analysts have a consensus Buy rating on BXMT with an average price target of $27.86, implying the potential for very strong total returns from here.

Investor Takeaway

No commercial mortgage REIT can be thought of as being a sleep well at night stock (and BXMT does carry a BB- credit rating). However, BXMT has demonstrated its ability to navigate through choppy waters over the past 3 years, and has strong operating fundamentals.

Management is pivoting the portfolio towards safer assets with lower LTV, and BXMT stands to continue benefiting from high interest rates. Lastly, I find the current valuation to have baked in more than BXMT’s fair share of risks, giving income investors an opportunity to layer into this 11%+ yield.