Blackstone Mortgage Trust: This 7% Dividend Yield Remains Safe (NYSE:BXMT)
One of our favorite income investments, Blackstone Mortgage Trust (NYSE:BXMT), reported very strong Q4 GAAP earnings and gave plenty of details that make us confident on the sustainability of its more than 7% dividend.
Fourth quarter GAAP earnings per share were $0.76 and Distributable Earnings per share were $0.78, $2.77, and $2.62, respectively, for full year 2021. Fourth quarter originations were very significant at $6.0 billion, with 68% of lending activity from repeat sponsors. For the full year 2021, originations were $14.6 billion with a weighted average origination loan-to-value (LTV) of 64%, which is about where the company likes to operate. Continued portfolio turnover produced an evolving collateral mix, multifamily exposure more than doubled to 24% of the portfolio at year-end. The company also reported reduced Current Expected Credit Loss (“CECL”) reserve of 29% year-over-year.
Currently, 98% of the portfolio is floating-rate, and it is increasingly focused on growth markets and sectors that provide strong protection against inflation. As can be seen in the graph below, the company is much more focused now on multi-family, and the portfolio is becoming less concentrated in office assets.
Conference Call Highlights
Reading the last earnings call transcript, we find several relevant tidbits worth sharing here, most of which make us confident the company is on the right track and that the dividend is safe. CEO Katharine Keenan summarized the quarter in the following way:
Fourth quarter’s outstanding results capped off a banner year for BXMT with record originations and pull portfolio growth translating into one of our best quarters of earnings ever. We originated $6 billion of new investments in the fourth quarter alone, equivalent to a full year of production throughout much of our history. For 2021 in total, originations reached a remarkable $14.6 billion.
She also addressed the lingering effects of the pandemic, and why even older vintage office assets should be for the most part fine, given BXMT has always focused on the most desired segment:
While the lingering effects of the pandemic exacerbate longer term challenges for older vintage commodity office, we have long been focused on the segment of the office market most desired by tenants even pre-pandemic, newer, well amenitized assets in dynamic locations that cater to growing knowledge economy businesses.
During the Q&A session, the question of the portfolio performance during COVID came up, and Katharine explained why they had such good performance despite the challenges.
Secondly would be on credit. Wondering what your thoughts are on that. It seems like COVID was the cyclical turn that folks have been anticipating and we didn’t really see much in the way of credit hiccups, probably largely related to the amount of government support and then all the pent-up demand that caused things to come surging back. What would be your outlook now? And how would you compare the credit quality, the surge in originations versus perhaps the prior vintage?
Sure. So I think that the credit performance of our portfolio over COVID really was a very significant validation of our brand of balance sheet lending. So certainly, the government interventions helps. But I think that when you look at our credit performance in our business, very strong and I think a testament to the low leverage lending, the strong, well-capitalized sponsors with long-term time horizons and really just the quality of our assets and the equity support that we have in them. And that all translated through to as your point, a very strong credit performance through the period of COVID for our balance sheet portfolio. I think as we look at the credit profile of the loans we’ve been doing this year, we see really strong characteristics in that portfolio.
The graph below compares normalized diluted earnings per share to the dividend per share for the last few years. As can be seen, in the period 2017-2020, earnings and dividends were very close, with the company distributing almost all its earnings to shareholders. In 2020, earnings went significantly down due to COVID, but the portfolio behaved well enough that management decided to maintain the dividend. Finally, in 2021 earnings have started exceeding dividends, and that has prompted some questions from analysts as to whether the company might increase the dividend.
For example, in the Q&A portion of the call, analyst Steven Delaney pointed out the dividend coverage ratio of 106%, and if this could mean the company is considering increasing the dividend:
Focusing on the dividend coverage ratio of 106%. We’ve got a backdrop, obviously, of rising LIBOR, and you’ve commented that you expect that to be accretive to run rate earnings going forward. As we model, where should we — at what point in dividend coverage, whether it’s , , ? When — how high does that have to go before you would consider — seriously consider adjusting your dividend payout?
I think our most significant focus is making sure that we have the most stable, reliable dividend that we can for our shareholders. And with that being said, we revisit the dividend every quarter with our Board. And I think that if we saw the possibility of a sustained consistent increase in our earnings, we would certainly be talking about that. But I think that we need to think about the sustainability of the dividends first and foremost.
Given the fact that the main reason to own BXMT is the dividend, we think the most reasonable way to value it in relation to its average dividend yield. For the last few years, the dividend yield has averaged ~8%, with a high of 19% during the Covid crisis and a low of 6%. Right now, shares are yielding ~7.7%, and we think that given the increased dividend coverage and how well the portfolio performed during the stress of Covid, we think shares are fairly valued and can be a good purchase for income-seeking investors.
Zooming in on the last year and focusing on the forward price/earnings ratio, we see that it has averaged 12.67x, very close to the current value of 12.65x. Reinforcing our opinion that shares are currently fairly valued.
While the company is conservative in its lending approach, with a ~64% LTV and lending only against very high-quality collateral with experienced sponsors, we have to note that this is a leveraged company with a debt-to-equity ratio of ~3.2x. So if things got difficult, for example, a very deep recession, losses could be significantly amplified due to the leverage. Also, while the company has good sector and geographic diversification, it still has more concentration in office than we would like to see, and its concentration in NY and California is very significant.
We believe BXMT shares are currently fairly valued and that they are one of the best options for investors seeking high dividend yield. The company distributes most of its earnings, but we see the dividend as stable with dividend coverage improving and solid portfolio performance. Close to 50% of the portfolio was originated post-COVID, and the value of the collateral has improved, especially when you look at the loans that are of an older vintage. This is partly driven by inflation and rising replacement costs. In some cases, replacement costs are up anywhere from 10% to even 30% depending on asset class and markets.
The quality of the loans has been a powerful driver of their track record, and we expect their portfolio to continue to perform well. We also like that the business is designed to succeed in any rate environment. With a very high mix of floating rate loans as rates move higher, earnings should further increase. For these reasons, we believe this is one of the best options for investors seeking high dividend yield.