Scott Kennedy’s mREIT Earnings Series: Assessing Blackstone Mortgage Trust’s And Granite Point Mortgage Trust’s Performance For Q4 2023
Introduction section by Colorado Wealth Management Fund.
Article section by Scott Kennedy.
Bringing More of Scott’s Work to Our Website
The REIT Forum is a service produced by Michael Vanloon (better known as Colorado Wealth Management Fund) and Scott Kennedy. After intense consideration, I decided to launch our service through Substack. Since then, we’ve seen great success. Substack enables us to give readers real-time alerts with entire articles delivered directly to their inboxes.
You’re probably used to seeing the “from” field saying: “ColoradoWealthManagementFund from The REIT Forum”.
In some of our future e-mails, it may say:
“Scott Kennedy from The REIT Forum”.
That will simply mean we’ve updated the backend of the website for Scott Kennedy to directly post his articles.
I want to make browsing our work as simple as possible for readers. This will be another step in that direction.
For the moment, I’ll be posting Scott’s work. The following articles are a direct copy and paste from Scott. While we get the back end set up, there is a delay in getting the articles posted. Rest assured that it should be solved soon.
Finding Our Positions
I posted a subscriber-exclusive article with links to our Google Sheets. You can always access our positions there. Scott’s positions are updated each week. CWMF’s positions are usually updated on the same day as the trade.
Disclosures
Related to the stocks in this article:
CWMF is long: RITM-D, GPMT-A, DX-C, EFC-A, RITM-C, EFC-B, PMT-C, AGNCP, CIM-D, RITM-B, RITM, SLRC, GPMT, RC.
Scott Kennedy is long: RITM, RC, SLRC, GBDC, GPMT, ARCC, RITM-D, MITT-B, MITT-C, GAINL, ECCC.
The rest of this post is from Scott Kennedy.
Summary
This 12th earnings assessment article reviews BXMT’s and GPMT’s BV and core earnings/adjusted core earnings performance during Q4 2023.
BXMT’s BV and core earnings were both a minor underperformance. GPMT’s BV matched my/our expectations while its adjusted core earnings was a modest underperformance.
BXMT received a 5% recommendation range “downgrade”. This resulted in a risk/performance rating downgrade to 4. BXMT currently has some value.
GPMT also received a 5% recommendation range “downgrade”. No change in GPMT’s risk/performance rating though (remains at a 5). GPMT continues to have nice value.
BXMT’s and GPMT’s quicker/larger-than-anticipated rise in the company’s total non-accruals is a bit troublesome. Subscribers may want to wait until market sentiment regarding commercial real estate improves (can be/remain patient).
Introduction:
Hi subscribers. For new members, my name is Scott Kennedy and currently I fully cover 20 mortgage real estate investment trust (mREIT) and 15 business development company (“BDC”) common stocks within this Investing Group regarding research/data, subscriber questions, weekly projected book values/net asset values (BV/NAV), and common stock recommendation ranges. Colorado (“CO”) Wealth Management handles the mREIT preferred stocks and he and his team handles all other applicable REIT sectors outside the mREIT sector. CO also provides some mREIT common stock and BDC articles from time-to-time which are more of an “overview/introduction” discussion; typically based either on my or our combined research/data. This also includes some macroeconomic trends and data. My name is always attached to all Investing Group articles I personally wrote so there is no confusion for subscribers.
This REIT Forum article is part of a series of articles over a span of 6-7 weeks which will analyze my previously projected BV/NAV and core earnings (or core earnings equivalent)/net investment income (“NII”) figures and compare these metrics to each mREIT’s and BDC’s actual reported results, respectively. For readers who are familiar with my public mREIT and/or BDC articles, these types of articles are beneficial to readers who desire to pursue a more active investing strategy and/or want more “real time” thoughts/analysis.
I hope my services/contributions ultimately help enhance a subscriber’s total investment returns or minimize their total investment losses within the mREIT and BDC sectors. At the very least, I hope subscribers will gain more insight into the mREIT and BDC sectors by reading my/our exclusive REIT Forum articles.
1) BXMT’s BV and Core Earnings Q4 2023 Performance (Projected Versus Actual Results):
On 2/14/2024, Blackstone Mortgage Trust Inc. BXMT 0.00%↑ reported the company’s earnings results for the fourth quarter of 2023. Table 1 below provides BXMT’s BV and earnings summary.
Table 1 – BXMT Q4 2023 BV and Earnings Summary
Source: Taken Directly from the REIT Forum’s © Analytical Spreadsheets/Data
I provided the following commentary in regards to BXMT’s results for the fourth quarter of 2023:
“Hi subscribers. I was able to review BXMT's Q4 2023 earnings results. BXMT reported a BV as of 12/31/2023 of $25.16 per share (2.9% decrease) versus my prior projection of $25.50 per share (1.5% decrease). I consider this a minor (greater than a 1.0% but less than a 2.5%) underperformance and was within my $24.30 - $26.70 per share range. In a nutshell, BXMT recorded slightly more severe quarterly loss reserves and valuation fluctuations within the company’s investment portfolio when compared to my expectations.
First, let us discuss BXMT’s quarterly loss reserves. As noted throughout the quarter to subscribers in comments, I correctly anticipated BXMT would increase the company’s current expected credit loss (CECL; just a fancier way of stating loan impairments/loss reserves) during the quarter on its investment portfolio. Again, regarding setting an appropriate CECL, a very high degree of managerial judgement occurs/specialized expertise is needed. All of BXMT’s commercial whole loans are level 3 assets per Accounting Standards Codification (“ASC”) 820. Simply put, there is not a widespread, active marketplace for commercial whole loan pricing/valuations as each mortgage (and underlying collateral) is unique. This makes setting valuations difficult; especially pertaining to impairment testing. With continued deteriorating credit conditions within commercial real estate, especially the office sub-sector (including “cracks” starting to form in multifamily), BXMT increased the company’s total credit reserves by $114 million during the fourth quarter of 2023. In comparison, I projected a $75 - $105 million BXMT CECL reserves increase for the fourth quarter of 2023 (mean increase of $90 million). This assumed a minor decrease in BXMT’s overall investment portfolio size during the fourth quarter of 2023 whereas a relatively unchanged investment portfolio size occurred (based on principal balance; excluding the CECL reserve increase). When calculated, BXMT’s larger CECL reserves increase, when compared to my expectations, directly led to a BV underperformance of ($0.14) per share this quarter.
Second, let us discuss BXMT’s quarterly investment portfolio valuation fluctuations when compared to my expectations. Outside the CECL reserve, BXMT’s commercial whole loan investment portfolio experienced a fair market value (“FMV”) decrease of (0.48%) during the fourth quarter of 2023. In comparison, I anticipated a FMV decrease of (0.45%) – (0.25%) (mean decrease of (0.35%)). When calculated, this slightly more severe investment portfolio FMV decrease (versus my expectations) directly led to a BV underperformance of ($28) million or ($0.16) per share.
When the 2 variances noted above are combined, along with a core earnings underperformance of ($0.037) per share (which will be discussed next) and de minimis equity activity, this directly calculates to BXMT’s BV underperformance of ($0.34) per share when compared to my expectations.
Regarding credit metrics, BXMT continued to keep 1 NY hotel loan, 1 DC office loan, 3 CA office loans, 3 NY office loans, and 1 FL office loan on non-accrual status as of 12/31/2023 when compared to 9/30/2023. As noted in prior BXMT earnings notes, I previously stated I expected additional credit risk/portfolio stress/non-accruals as 2023 progressed. This especially held true within the office sub-sector and certain geographical locations (in particular parts of CA). This largely came to fruition during the fourth quarter of 2023. BXMT disclosed 2 CA hospitality loans and 1 NY mixed-use loan were placed on non-accrual status during the fourth quarter of 2023. While I correctly identified the 2 CA hospitality loans (in San Francisco) as exhibiting extremely heightened credit risk (and would be placed on non-accrual status during the fourth quarter of 2023), the NY mixed-use loan was a surprise. These loans had a combined principal balance of $488 million as of 12/31/2023 (large combined size of new non-accruals).
As such, BXMT’s non-performing/non-accrual loans increased from 5.81% of the FMV of the company’s investment portfolio balance as of 9/30/2023 to 7.91% as of 12/31/2023. In comparison, I projected a non-accrual FMV percentage as of 12/31/2023 of 7.25%. As noted over the prior several quarters, I continue to believe non-accruals will experience at least a modest “uptick” during 2023 - 2024. We already began to see this occur during BXMT’s third and fourth quarters of 2023. Again, this is already “baked” into my/our sub-sector modeling, percentage recommendation ranges, and risk/performance ratings. That said, when peak non-accrual percentages are forecasted to increase from prior modeling (including the direct impact to projected core earnings), changes to price targets/recommendation ranges will occur.
Moving on, BXMT’s core earnings/earnings available for distribution (“EAD”) of $0.688 per share for the fourth quarter of 2023 was a minor underperformance versus my prior projection of $0.725 per share. BXMT’s core earnings/EAD was $0.777 per share for the third quarter of 2023. As such, I projected a core earnings/EAD decrease of ($0.052) per share. In actuality, BXMT reported a core earnings/EAD decrease of ($0.089) per share. The institutional analysts’ consensus average for BXMT’s core earnings/EAD was $0.625 per share for the fourth quarter of 2023. Even though LIBOR/SOFR/PRIME remained relatively unchanged during the fourth quarter of 2023, I previously highlighted to subscribers last quarter that BXMT’s core earnings/EAD would likely be negatively impacted by a recent decreasing investment portfolio size and rise in non-accruals. As such, let us “hone in” on these 2 key metrics.
First, as of 6/30/2023, BXMT’s investment portfolio had a FMV of $24.1 billion. As of 9/30/2023 and 12/31/2023, BXMT’s investment portfolio had a FMV of $23.3 and $23.2 billion, respectively. When calculated, this was a quarterly decrease of ($0.8) and ($0.1) billion, respectively. In comparison, I projected BXMT’s investment portfolio would decrease ($0.4) – ($0.2) billion (mean decrease of ($0.3) billion) during the fourth quarter of 2023. When calculated, BXMT reported a $0.2 billion larger investment portfolio size as of 12/31/2023 when compared to my expectations. When calculated, based on BXMT’s weighted average quarterly yield plus the applicable 1-month LIBOR/SOFR/PRIME spread (including impacts of foreign currencies and their underlying hedges that combat this risk), this directly led to a core earnings outperformance of $0.036 per share when compared to my expectations.
Second, as noted earlier, BXMT added loans with a total principal balance of $488 million to the company’s non-accrual status during the fourth quarter of 2023. In comparison, I projected BXMT would add loans with a total principal balance of approximately $350 million ($348 million to be exact). As noted earlier, 1 additional NY mixed-use loan was placed by BXMT on non-accrual status during the fourth quarter of 2023 whereas I previously kept this loan as a “risk rating 4” and on accrual status as of 12/31/2023. Simply put, a negative quarterly event/outcome (being placed on non-accrual status). When calculated, based on this specific loan’s weighted average quarterly yield plus the applicable 1-month LIBOR/SOFR/PRIME spread, this directly led to a core earnings underperformance of ($0.073) per share when compared to my expectations (no offsetting interest expense impact as non-accrual loans technically still need collateral for financing).
When the 2 variances noted above are combined, this fully reconciles to BXMT’s core earnings underperformance of ($0.037) per common share during the fourth quarter of 2023 when compared to my expectations.
So, all-in-all, a minor underperformance on BXMT’s BV (variance of 1.4%) and the company’s core earnings (variance of $0.037 per share). As such, a bit of an underperforming quarter when compared to my expectations. That said, BXMT exceeded the market’s expectations.
When taking BXMT’s recent and projected performance into consideration, along with macroeconomic trends/events (mainly Fed monetary policy, the general projected movement of rates/yields, and projected economic performance over the foreseeable future), I/we are “downgrading” our BXMT percentage recommendation ranges (relative to CURRENT BV) by (5%). This change is already reflected in the subscriber spreadsheets (resulted in a price target decrease of approximately ($1.25) per share). This also results in a downgrade to BXMT’s risk/performance rating from a 3.5 to a 4. While a rise in credit/recessionary risk has already been “baked” into the modeling for quite some time now, BXMT’s quicker-than-anticipated rise in the company’s total non-accruals (and projected higher peak non-accruals) is a bit troublesome and needs to be reflected in our updated modeling/ratings/recommendation ranges (which it now is).
At a closing price as of 2/14/2024 of $19.21 per share, BXMT is deemed to be UNDERVALUED/a BUY recommendation (price target of $24.40 per share). As such, BXMT has some good (but not great) value at or around current pricing. However, as echoed last quarter, cautious subscribers may want to wait until more market participants believe it is safer to invest in commercial real estate as a whole. I currently believe, in a couple years, BXMT’s stock price will be higher than its current per share amount (especially with the recent move lower). However, it will likely be a “bumpy/see-sawing” road over the next several quarters. As continuously pointed out in this service, subscribers need to have patience for cycles/trends/catalysts to play out. For the commercial whole loan mREIT sub-sector (ACRE, BXMT, FBRT, GPMT), this is still going to take some time to play out (very likely not until late 2024 – early 2025)…”