Fitch cuts Blackstone Mortgage outlook to negative over office exposure

Ratings agency flagged deteriorating credit, more impaired loans

Fitch Cuts Blackstone Mortgage Outlook to Negative, Citing Office Trouble
BXMT's Kate Keenan (Blackstone, Getty)

Fitch Ratings revised its outlook for Blackstone Mortgage Trust from stable to negative, a vote of eroding confidence in the REIT’s loans given its exposure to the troubled office sector.

The ratings agency said a rise in credit provisions — money set aside for loan losses — and non-accrual loans — those at least 90 days late — could impact earnings through 2024 as BXMT resolves problem loans. That is, takes the hit on its balance sheet.

The adjustment is not a ratings downgrade, though the agency said BXMT could be downgraded “if it experiences further credit quality weakening…especially if meaningful credit losses are realized.”

In a statement, BXMT said the revision “reflects macro concerns that are already well-understood by the market.”

“Over the course of 2023, BXMT increased liquidity to near-record levels and reduced leverage while maintaining strong earnings — results that demonstrate the resilience of the business model amidst a challenging backdrop,” the statement added.

Fitch highlighted that about 8 percent of BXMT’s loan book at the end of 2023 was impaired — unlikely to be repaid in full. That’s more than double the percentage impaired last year.

The increase, Fitch said, was mostly driven by the REIT’s U.S. office loan book, which comprises the bulk of its portfolio at 27 percent, according to BXMT’s fourth quarter earnings report.

Moreover, about 11.5 percent of the REIT’s loans were risk-rated 4 on a scale of 1-5 — 5 being the highest. Fitch said it believes that these loans “have a potential risk of loss of principal due to challenged collateral values.”

Office buildings have recently sold at discounts ranging from 57 percent, in the case of FiDi’s 100 Wall Street, to 72 percent for a San Francisco tower. It’s unclear, though, if the market in major cities has hit bottom, as trades remain sparse. 

Starwood Capital Group’s Barry Sternlicht earlier this year ballparked offices are worth $1.8 trillion, compared to the previous value of $3 trillion.

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Amid those challenges, BXMT reported a greater share of non-performing loans in the fourth quarter at 7 percent, compared to just 3 percent in the first, according to its earnings.

Still, the REIT noted its 93 percent performing portfolio demonstrated “resilience through market volatility and rapidly increasing interest rates.”

BXMT also hiked its reserves for current expected credit losses or CECL in the fourth quarter by 73 percent year over year to $592 million.

CEO Katie Keenan in a fourth-quarter statement did stress that borrowers in 2023 had continued to repay loans.

The demerit by Fitch follows a scathing take by famed short-seller Carson Block of Muddy Waters a few months ago.

Block said that as much as 75 percent of Blackstone Mortgage’s borrowers are unable to cover interest expenses without rate swaps, a hedge against rising rates. At the time, a spokesperson for BXMT countered that it has no swaps, only rate caps, though both function similarly.

The analysis targeted the REIT’s collateralized loan obligations — short-term floating rate debt once beloved by the value-add multifamily buyers now struggling to pay or refinance those loans. 

Arbor Realty Trust is another CRE CLO originator that has come under fire by a short seller for its heavy exposure to those struggling multifamily borrowers, many of whom are syndicators.

Block forecast that most BXMT borrowers will be unable to refinance and that the REIT would be forced to modify debts to stave off heavy losses.

BXMT’s spokesperson rebutted Block’s claims, providing a third-quarter fact sheet that showed 90 percent of loans that matured in the past 12 months had either been repaid, qualified for an extension, or been extended with an additional equity commitment from their sponsors.

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