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Hedge fund Muddy Waters on Wednesday revealed a bet against a publicly listed real estate investment trust managed by private equity giant Blackstone.
New York-listed Blackstone Mortgage Trust, which Blackstone began to manage in 2013 as part of a push to diversify its assets beyond traditional private equity investments, provides loans to commercial real estate groups in North America, Europe and Australia. It manages $22bn in assets.
The chief investment officer of US-based Muddy Waters, Carson Block, told the Sohn investment conference in London that there was “a lot of rot in its book”, and that many of the borrowers whose loans make up the trust’s holdings were in danger of being unable to make payments. He predicted that the trust would have to “substantially cut its dividend” in the middle of next year and was “at real risk of a liquidity crisis”.
“I feel it’s an inevitability that the cash flow gets significantly diminished by this macro environment,” Block said in an interview with the Financial Times after his presentation.
“[The] only thing they have going for them is being able to spread out the days of reckoning. I would not be sanguine on the office market in the US.”
Shares of the trust, which carries a market capitalisation of $3.6bn, fell more than 8 per cent in Wednesday trading. Muddy Waters, a short selling group, often publicises its bearish bets after extensive research.
Blackstone Mortgage Trust said in an emailed statement: “This report is highly misleading and represents a fundamental misunderstanding of our senior secured lending business.”
Block said he believes higher rates and a weaker real estate market were making loans more expensive for borrowers while the underlying collateral, including some office buildings, is below the value of the loan.
While borrowers have hedged many of their variable-rate loans against higher interest rates, Block said many of those hedges would expire next year, exposing them to the full force of higher rates and refinancing costs.
Block argued that the losses on the book of loans in the trust could be between about $2.5bn and $4.5bn, close to its market capitalisation.
Blackstone said its trust was “well positioned to navigate this environment” and has more than fully covered its dividend in its most recent quarter by generating distributable earnings — a metric analysts favour as a proxy for cash flows — equivalent to 126 per cent of its quarterly dividend. It also said it had a “record” $1.8bn in liquidity and had collected $3.8bn in loan repayments over the past 12 months.
Real estate investment trusts must pay most of their profits to shareholders in dividends, but if profits cannot fully cover those payments, analysts consider it a warning sign that its payouts are unsustainable.
Katie Keenan, chief executive of the trust, told shareholders in October it had either recorded impairments or put on watchlist 40 per cent of its US office loans, which make up about 27 per cent of its holdings. It also increased loss reserves by more than tenfold over the past year, Keenan said.
Blackstone took control of the trust in 2013 and two years later dramatically expanded it with the purchase of a $4.6bn portfolio of commercial mortgage loans from GE Capital.
Blackstone has a financial exposure to the trust. It owns a minority equity stake worth less than $150mn, according to securities filings, and generates tens of millions of dollars in management fees from the trust annually. But that is modest relative to the $8.4bn in cash that sits on Blackstone’s balance sheet and its more than $6bn in annual management fees.
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