Eureka! I have found it. The single least-attractive stock in a universe that has so many of them. In yesterday's RM column, Seinfeld Is Wrong, the Big Apple's Biggest Threat Is Not Going Away, I noted that NYC landlords are threatened by the work-form-home movement (that I have joined) and listed the top 10 commercial real estate holders in New York City, data cribbed from industry publication Real Deal. The only real outlier on that list was Blackstone (BX) . So, I did some digging on Blackstone.
BX stock has not been a stellar performer in 2020, but, let's face it, money is free now, and I don't see much risk in the name. After analyzing BX's second quarter earnings, I find the company to be a fairly safe behemoth, albeit one that is not particularly attractive in the current Tech-Tech-Tech market. I also know some folks who work there, relationships started during my days at DLJ in the 1990s, so I will spare Blackstone any scorn.
I just cannot resist taking a few shots at Blackstone spinoff Blackstone Mortgage Trust (BXMT) , however. This is the least favorably-positioned company I have analyzed at any time in 2020, and that is a strong statement given that, as I noted before, money is free now. So, it's not the Fed that BXMT or any Blackstone-affiliated entities have to worry about. Fed Chair Jerome Powell basically pledged never to raise interest rates again (fortunately he will not hold his position forever) in yesterday's Jackson Hole speech. So the only problem any U.S.-based financial company could have now would have to be self-inflicted, not money market-related.
Well, BXMT has such problems in spades, and the company reported an 80% decline in second quarter earnings as a result of mark-to-market losses. These losses, known as CECL under new accounting rules, force companies to recognize all expected losses over the life of an accounting instrument, whereas GAAP had previously only required loss recognition when a management team made the determination that such a loss was probable.
Including CECL, Blackstone Mortgage posted EPS of $0.13 per share in the second quarter of 2020 versus EPS of $0.59 in 2Q 2019. Unlike so many other such situations in which hours of discourse occur over the "real" earnings number, that $0.13 in reported EPS tells the true story for BXMT. Blackstone Mortgage really did make 80% less net profit than it did in the corresponding period in 2019.
The drivers for those CECL charges were two New York-based investments, one a rent-regulated apartment building and one a hotel, which together comprise 4% of BXMT''s total portfolio. As I mentioned in yesterday's column, things are tough now for commercial landlords in The City, and I don't see that improving any time soon.
What is more troubling in the BXMT documentation, though, is their list of "selected properties'' outside NYC. This is a management team that chose to highlight a hotel in Huntington Beach, California, a very uninspiring and not well-located London office building (I used to live there, too), and finally a three-building office complex in Minneapolis, of all places. Obviously this has been a very difficult summer for the folks in Minneapolis, and I cannot believe that the current unrest is not lowering near-term property values there.
Those were the highlights, and I will spare you the lowlights, although the company's additional documentation did disclose another loan (made in November 2019) for an NYC office building at a valuation of $895/square foot, one that is unlikely to hold up in the current market. With a stated book value per share of $26.45 as of June 30th and a share price of $23.80 yesterday, BXMT just has no appeal. I would expect further write-downs (especially via CECL) to hamper that book value going forward. Also, this is the type of market in which BXMT's 10% yield is looked on as a hindrance, not an aid, to delivering shareholder value.
Eventually Blackstone will have to cut that dividend -- BXMT paid out $0.62 for their 2Q dividend versus $0.13 in GAAP EPS in the second quarter, not a sustainable ratio -- and when they do, BXMT will lose the small amount of investing goodwill that it currently maintains. BXMT is good short to ballast out the good news in the other parts of your portfolio.
