Senior beautiful senior woman in casual clothes sending an air kiss
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Investing maven Peter Lynch perhaps best summed up the “keep it simple” approach (or K.I.S.S.) when he advised everyone to, “Buy a business so simple, even an idiot could run it. Because sooner or later, one will.”
To reference another smooch-related quote, do any of you remember the classic Hall & Oates song, “Kiss on My List”?
In case you forgot (or maybe you’re too young to know), the duo sang that they “only smile… because your kiss is on my list.”
That’s good advice to take.
Don’t worry. Although I do appreciate the fact that you’re reading this article, I’m not going to send you all a kiss today. I’m simply touting the benefits of owning companies that are simple in nature.
Over my 30+ years’ experience in real estate investing, I have learned that avoiding complexity is one of the secrets to success. Trying to be too cute, on the other hand, is oftentimes the opposite of smart.
That’s the nice way of saying it. If you prefer I be blunt, it’s just dumb.
The Ins and Outs of Blackstone Mortgage
Blackstone Mortgage (BXMT) is a commercial mortgage REIT that primarily originates and purchases senior mortgage loans collateralized by properties in the U.S. and Europe. The company is managed by its “big brother,” Blackstone (BX) a world leader in alternative assets with nearly $367 billion of assets under management.
The private-equity firm Blackstone Real Estate, meanwhile, has over $102 billion of assets under management. And this makes the company one of the world’s largest real estate investors.
Although numerous new players have entered the commercial mREIT space, we consider this time to be a favorable investment environment for senior commercial real estate debt. Blackstone Mortgage’s portfolio is predominantly comprised of loans on major market assets with top sponsors. It is also well-diversified across asset classes and geographies.
In short, the company’s large-scale and high-quality operations provide it with stable earnings and dividend growth.
In those operations, Blackstone Mortgage focuses primarily on lending to office (44%), hotels (23%), and multi-family (14%) REITs, with very little exposure to retail (3%) or self-storage (2%) plays.
Economic conditions remain favorable for commercial real estate overall. The U.S. economy grew by an annualized 3.2% in Q1-19, easily beating market expectations of 2% and following a 2.2% expansion in the previous three-month period. Growth was mainly supported by personal consumption expenditures, private inventory investment, exports, state and local government spending, and non-residential fixed investment.
This creates a sound macroeconomic backdrop for commercial real estate fundamentals, fueled by continued job growth and positive consumer sentiment. Real estate operating fundamentals have continued to improve (as have REIT earnings), and supply has been limited in most markets and asset classes.
As noted above, Blackstone Real Estate has proprietary insight, long-standing expertise, and superior access to deal flow. And accordingly, Blackstone Mortgage’s affiliation with it makes for a great competitive advantage. This strong commercial real estate environment marked by healthy property transaction volume gives rise to strong borrower demand for transitional capital.
Better yet, Blackstone Mortgage is one of the most elementary commercial REITs that exists, fitting nicely into our K.I.S.S. goals.
It continues to optimize debt financing, recently closing on a newly structured $500 million corporate term loan that significantly adds flexibility to its already tremendously flexible balance sheet.
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Blackstone Mortgage Trust’s performance in Q1-19 further demonstrates the strength and stability of the floating rate senior-mortgage lending business model with a large portfolio. The largest loan that closed in Q1-19 was a £240 million mortgage participation secured by the U.K.’s market-leading Convention and Exposition Center along with other complementary assets located in Birmingham… which are owned by Blackstone Equity Fund.
During the first quarter, Blackstone Mortgage also originated a low loan-to-value (LTV) transitional acquisition loan for office buildings in Canada, London, and New York City for $195 million. The 55% loan-to-cost deal was secured by a vacant historic department store in Downtown Oakland undergoing conversion to creative office space.
After carefully underwriting that loan, Blackstone Mortgage’s credit analysis was validated five month later, and a lease was signed with Square (a major tech tenant) for 100% of the office space that exceeded underwriting. With the lease in place, the property can now attract a more efficiently priced bank or insurance company.
As described on Blackstone Mortgage’s recent earnings call, the company was able to work to maintain that loan, ultimately reaching an agreement to include “an upside to the loan amount, a reduction in rate, and an extension of call protection.”
For the full quarter, Blackstone Mortgage generated $0.71 per share of core earnings. The company said on the recent earnings call that “is 115% of its consistent 62% dividend, a further indication of the strength and stability of the platform.” This suggests that there’s room for divided growth and, most importantly, it provides assurance to the overall strength of the underlying dividend.
Thus, this REIT is focused on dividend quality and stability… making for an ideal K.I.S.S. to help you sleep well at night.
In Summary
While Blackstone Mortgage doesn’t pay out the highest dividend of its commercial mREIT peers, we maintain a healthy exposure to it because of its simplistic business model. We believe there’s brand equity affiliated with Blackstone, and we continue to utilize the company as a heavy income component for the Durable Income Portfolio.
There’s also a nice margin of safety associated with the dividend that signals that a future increase is likely.
With commercial mREITs, I’m less interested in forecasting future performance because this sub-sector doesn’t enjoy contractual leases like equity REITs do. I rely more on economic, and supply and demand data here. That being said, here’s what Blackstone Mortgage’s CEO, Steve Plavin, said on the already mentioned Q1 earnings call,
We’re really focused on the quality of the dividend, and we really like the coverage and the fact that we’re able to retain earnings. The retained earnings have been beneficial, adding to book value. You’ve seen a steady progression in our book value per share over time.
We’ll continue to evaluate the dividend and, obviously, we’re proud of the strong coverage. But right now, we like $0.62… what we’re trying to do now is get investors to appreciate the $0.62 – how well it’s covered – and have the multiple and the dividend yield reflect that.
While he made plenty of other statements that stood out, we’re going to close with one last choice pick:
… we feel that we have better insight and a better ability to make assessments on the margin than some of the banks do, but we continue to be very cautious in our growth and whatever we do from a credit standpoint does reflect an investment committee process and analytical model that’s highly focused on risk and I think exercises great caution.
That caution might not sound impressive, but it’s served the company well this far. And we think it’s going to serve us just as well going forward.
I own shares in BXMT.