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Blackstone Mortgage: ‘The Secret Sauce’

03/03/2015 7:00 am EST

Focus: REITS

Tim Plaehn

Investment Research Analyst, Investors Alley

Our latest featured recommendation is a major financial REIT which operates as a commercial mortgage lender, explains Tim Plaehn, editor of The Dividend Hunter.

The current business operations of Blackstone Mortgage Trust (BXMT) commenced in May 2013. Prior to that time, BXMT was a nearly defunct mortgage securities REIT managed by The Blackstone Group (BX).

Blackstone is a global leader in real estate investing, with over $136 billion of owned real estate and $78 billion of real estate debt. In 2013, Blackstone restructured BXMT to become a pure-play commercial mortgage lender.

With the large commercial banks mostly staying away from any commercial real estate lending that has any semblance of risk, there is plenty of potential business for lean, flexible, and creative lenders like Blackstone and Starwood.

The REIT makes mortgage loans across the US and Europe with the current loan portfolio weighted about 60% weighted to New York, California, and the UK.

The secret sauce for the Blackstone Mortgage growth opportunities is the company's management by and relationship with The Blackstone Group.

Since Blackstone is one of the premier commercial real estate operators in the world, Blackstone Mortgage gets first (and possibly the only) crack at supplying the financing for any real estate deals put together by Blackstone's other entities.

Blackstone Mortgage makes only variable rate loans; 100% of the company's net book value is backed by floating rate loans. The minimum rate for borrowers is Libor plus 3.5%, with most loans at a higher rate, based on the borrower risk.

In December, Blackstone Mortgage increased its dividend to $0.52 per share, up from the $0.50 paid in October 2014 and $0.048 paid for the preceding two quarters.  As we move forward, continued dividend growth will come from a combination of continued portfolio growth and the potential for higher short-term interest rates.

With both its portfolio loan rates and borrowings indexed to Libor, Blackstone management explains that as rates increase, so will the net profit for the company. BXMT currently yields 7.1%, with the next quarterly dividend to be declared in March and paid in April.

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