Blackstone Mortgage: Get 8% passive income with this trusted gem (NYSE: BXMT)

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Blackstone Mortgage Trust, Inc. (NYSE: BXMT) is a well-run real estate finance company that pays a consistent dividend fully covered by distributable earnings.

The mortgage trust also has a significant interest rate advantage, which becomes a bigger problem for investors now that the central bank has made two massive dividend increases of 75 basis points in the past two months.

Black Mortgage is an attractive passive income investment due to passive income and the continued strength of originations.

Demand for new creations is robust

In the second quarter, Blackstone Mortgage issued $3.0 billion in new commercial real estate loans, compared to $3.4 billion in the previous quarter. The average loan-to-value ratio for Blackstone Mortgage’s 2Q-22 issuances was 59%, with a loan amount of $313 million.

The loan to value ratio is a measure of risk for real estate trusts that shows the level of leverage an investor faces at the asset level. A loan-to-value ratio of 59% is low and indicates a moderate level of risk in Blackstone Mortgage’s portfolio.

As of June 30, 2022, the weighted average loan-to-value ratio of the Trust’s portfolio was 64%. The trust’s investment portfolio grew to $26.5 billion after subtracting $1.4 billion in 2Q-22 redemptions.

2Q wallet activity

2Q wallet activity (Blackstone Mortgage Trust)

A solid foundation to support growth

Commercial real estate markets in the United States are doing well, which is why Blackstone Mortgage anticipates strong demand for new issues.

Blackstone Mortgage is sponsored by Blackstone Inc. (BX), the world’s largest alternative asset manager with $941 billion in assets under management. Blackstone Mortgage capitalizes on its affiliation with its sponsor by seeking out new deals through its extensive industry network.

Blackstone Mortgage also has access to significant liquidity resources, enabling it to capitalize on investment opportunities. On its balance sheet, Blackstone had $284 million in cash and cash equivalents and $1.5 billion in access to liquidity. Aside from $200 million due to be repaid in 2023, Blackstone Mortgage has no debt maturing before 2025.

Corporate debt maturities

Corporate debt maturities (Blackstone Mortgage Trust)

Dividend is covered by distributable earnings, rising earnings

Dividends are systematically covered by distributable profits in solid trusts. By doing so, they give shareholders the assurance that the dividend will be paid even if the real estate market or the economy as a whole suffers a downturn.

Blackstone Mortgage’s investment loans have generated $2.70 per share in distributable earnings over the past twelve months, while the trust has paid out $2.48 per share, implying a payout ratio of 92%. Due to higher income from the trust’s loan portfolio, the payout ratio has improved QoQ.

The payout ratio

The payout ratio (Table created by author using trust information)

Based on the dividend payout ratio, Blackstone Mortgage has a moderate headroom and will most likely be able to sustain its dividend going forward.

An added benefit: rising profits

Blackstone Mortgage’s balance sheet is positively correlated to interest rates, which is a useful feature given that the central bank has begun raising interest rates aggressively over the past two months, with two consecutive hikes of 75 basis points aimed at containing inflation.

The positive correlation of the trust’s mortgage loans with interest rates translates into earnings growth for Blackstone Mortgage. According to the trust’s most recent earnings sensitivity chart, Blackstone Mortgage expects earnings per share to be $0.38.

Earnings Sensitivity to Rising Rates

Earnings Sensitivity to Rising Rates (Blackstone Mortgage Trust)

P/B-Multiple

At $31 per share, you’re not buying a Blackstone Mortgage for capital appreciation; you buy it for the 8% passive income covered by distributable profits. On June 6, 2022, the book value of the trust was $27.17, representing a 14% premium to the book value. For most of 2022, shares of Blackstone Mortgage have traded at a premium of 14%.

Chart
BXMT price at book value given by Y-Charts

Why Blackstone Mortgage Trust Could See a Lower Share Price

Inceptions in the second quarter, a solid earnings trajectory and an improved payout ratio demonstrate the strength of Blackstone Mortgage’s fundamentals. However, that could change. During a recession, origination volumes typically decline significantly as real estate investors and developers scale back new projects and focus on keeping existing projects afloat.

A recession could impact Blackstone Mortgage’s book value growth and ability to increase distributable earnings through new arrangements.

My conclusion

Blackstone Mortgage originations remained resilient in the second quarter, reflecting the strength of the commercial real estate market and indicating that the origination business of the trust is not yet impacted by a recession.

Blackstone Mortgage also continued to hedge its dividend with distributable earnings in 2Q-22, indicating the trust business has a high margin of safety. BXMT should be bought primarily for its 8% passive income.

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