Wall Street Short Seller Muddy Waters Takes Aim At Blackstone Mortgage Trust

Blackstone Inc. is famous for being one of the world's largest private real estate investment trusts (REITs). The company also has a public mortgage REIT known as Blackstone Mortgage Trust Inc. BXMT. Now, Muddy Waters Research, one of Wall Street's most infamous short-selling firms, may be taking aim at Blackstone Mortgage in 2024.

2023 Has Been Challenging on All Fronts for Blackstone

It's been a challenging year for both Blackstone Inc.'s private real estate investment trust (REIT) and Blackstond Mortgage Trust Inc. BXMT. The private REIT made waves when it announced it was reducing, and in some cases eliminating, shareholder redemptions to maintain its cash flow. This policy was announced as a temporary measure, but it lasted for almost the entire year. It was only last month that Blackstone announced it would allow shareholder redemptions again.

Blackstone's mortgage REIT has been struggling to adapt to the new normal of elevated interest rates. Its shares opened the year at around $22 and remain near that number. The year has been a bit of a roller coaster ride, with shares going for a high of $24 in late January before falling off a cliff for the next two months. The stock hit a low of $17 in both March and May before rebounding in June.

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Blackstone Mortgage REIT Has Been Struggling For Years

The five-year picture is indicative of the struggle brought about by interest rate increases and tightened lending requirements. For most of 2019 and the early part of 2020, Blackstone Mortgage Trust shares were trading between $35 and $38. By the time the pandemic was in full swing in March 2020, they had nosedived to $18.62 per share.

The price rebounded to the low $30 range in June 2020 but slumped to the low $20 range, where it remains today. These struggles are indicative of the challenges faced by the mortgage REIT sector writ large in the wake of the Federal Reserve's adoption of aggressive interest rate increases to counter inflation. They also offer some insight as to why a short-selling firm like Muddy Waters Research may see an opportunity.

Blackstone Mortgage REIT's Commercial Lending Risk Exposure

It's not just the high interest rates that Blackstone Mortgage is dealing with; it's also the sector it operates in. Blackstone Mortgage primarily focuses on offering financing for commercial real estate. In the wake of the COVID-19 crisis, the commercial and office sectors have taken huge hits in terms of vacancy rates. This has left many of them unable to meet their mortgage obligations, which is in turn, hitting shares of mortgage REITs hard. Blackston Mortgage is no exception.

Some analysts believe there is about to be an explosion in defaults in the commercial sector because of the combination of high finance costs and a 13.3% vacancy rate. That vacancy rate represents a 10-year high and nearly 60 million square feet of empty office and commercial space nationwide.

Muddy Waters Sees An Opportunity

The game of business can be unforgiving because no one takes time to let an injured player recuperate and get back to full health. It's the opposite. When outfits like Blackstone Mortgage show signs of weakness, short sellers circle like a pack of wolves waiting for the perfect moment to attack. Muddy Waters believes that the time to attack Blackstone Mortgage may be coming soon.

It predicts that many of Blackston Mortgage's borrowers won't be able to refinance their debt or make their loan payments in the upcoming year. It believes Blackstone Mortgage will have to make a 50% reduction in its quarterly dividend by the second quarter of 2024. It also forecasts Blackstone Mortgage will hit an extreme liquidity crisis when its borrowers fail to repay their debts in 2024.

If those things happen, Blackstone Mortgage could see between $2.5 billion and $4.5 billion in losses. According to Muddy Waters' estimates, those losses could occur even if the Fed cuts interest rates next year. Blackstone Mortgage's current market cap is around $4 billion, which means if Muddy Waters' forecast is accurate, it's at risk of insolvency next year. That's why Muddy Waters sees a short-sell opportunity in BXMT.

The Future Is Unclear

Blackstone Mortgage disagrees with the bearish assessment made by Muddy Waters. However, Muddy Waters has built quite a reputation for making accurate, short predictions on companies both foreign and domestic. No one knows what the future holds, but Blackstone Mortgage shareholders planning to ride out the storm may want to prepare for choppy waters. 

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