Carson Block, Muddy Waters Head Shorts Blackstone Mortgage REIT

Block, the head of Muddy Waters, a short-selling firm, has raised concerns about Blackstone Mortgage Trust, a provider of loans backed by commercial real estate. He anticipates a potential liquidity crisis and defaults on loans, predicting a probable dividend cut of at least 50%.

Speaking at the Sohn investment conference held in London, Block expressed skepticism about the trust’s ability to navigate challenges, stating that losses might become evident in the second half of the following year.

Block contends that the trust’s borrowers could struggle to refinance, leading to a need for additional collateral. The Blackstone Mortgage Trust, in response, asserted that its liquidity is at “record levels,” emphasizing reductions in leverage and strategic measures to navigate the current environment. A spokesperson accused Block’s report of being self-interested and misleading, designed to impact the trust’s share price negatively.

Even if the Federal Reserve decreases interest rates, Block estimates potential losses stretching from $2.5 billion to $4.5 billion on the trust’s $23.2 billion net book value of loans, possibly wiping out the trust’s equity entirely. Following Block’s statements, Blackstone Mortgage Trust shares experienced an 8.1% decline, closing at $20.68.

Commercial real estate owners, including Blackstone, have faced challenges due to higher borrowing costs & shifting demand. Property values have dropped 19% from the March 2022 peak, reflecting market uncertainties.

While the Blackstone Trust has not shown immediate distress signs, Block highlights its modification of problematic loans by extending maturities and permitting payment in kind. Approximately 6% of the trust’s net book value, or $1.6 billion, is estimated to be modified loans.

Block, known for successful short-selling strategies, has targeted various companies, including Sino-Forest Corp. and European real estate entities. The real estate market’s challenges, reflected in the Blackstone Mortgage Trust scenario, underscore broader concerns about maturing commercial property debt and uncertainties in the industry.

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