One of Wall Street’s Most Feared Short Sellers Takes Aim at Blackstone

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Prominent Wall Street Short Seller Targets Blackstone Mortgage Trust

Carson Block, the notable short seller and leader of Muddy Waters, has taken a public short position against Blackstone Mortgage Trust, a REIT focused on commercial real estate loans. He foresees a liquidity crisis for the trust, driven by challenging economic conditions in the commercial real estate sector.

Looming crisis: Block asserts that the Blackstone Mortgage Trust is vulnerable to a perfect storm in the commercial real estate market, potentially leading to a liquidity crisis and defaults on its loans. He forecasts a significant cut in the trust's dividend, at least by half, and predicts that the trust's borrowers will struggle to refinance or repay, necessitating additional collateral. Block anticipates substantial losses to manifest in the latter half of the next year.

Blackstone’s take: In response, a spokesperson for Blackstone Mortgage Trust has refuted Block's claims, asserting the trust's record-level liquidity, reduced leverage, and strong positioning to navigate the current environment. Despite these reassurances, Block estimates that losses could range from $2.5 billion to $4.5 billion on the trust’s $23.2 billion net book value of loans, potentially erasing its equity. Following Block's announcement, shares of Blackstone Mortgage Trust dropped by 8.1%.

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The bottom line: Carson Block, a renowned short seller, estimates that at least nine loans totaling $1.6 billion, or about 6% of the trust’s net book value, have already been modified through the third quarter of this year. His track record includes significant bets against companies like Sino-Forest Corp, leading to its bankruptcy and targeting European real estate firms. His firm, Muddy Waters, recently focused on real estate, notably shorting CPI Property Group SA, demonstrating a consistent theme in their investment approach.

Disclaimer: Please note that past performance is not indicative of future results. This post contains sponsored content and should not be used as the sole basis for any investment decision. Investing in commercial real estate involves a degree of risk, including the potential loss of the entire investment. Prospective investors should carefully consider their investment objectives and the risks involved before making any investment decisions.

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Less money, more problems: Access to credit in the Texas real estate market has become increasingly challenging due to higher interest rates and lenders' reluctance towards highly leveraged deals. A report by IPA Texas shows a 10% drop in loan-to-value ratios since early 2022, making financing for acquisitions and construction more expensive and affecting common investment strategies for Class B and C apartments.

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Not seeing eye to eye: The gap between sellers' perceived property values and the amounts buyers are willing to pay has also widened, especially for owners who purchased their buildings in the past three years at peak prices. These recent buyers may sell at or below their debt value. In contrast, landlords who invested more than three years ago are in a more favorable position, able to sell their properties for a return and reinvest in the current, less competitive market.

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Looking forward: Industry experts anticipate that the most significant market distress is still on the horizon. The end-of-year period, typically slow for investment sales, is expected to lead to a surge in distressed property listings in the coming months. Many of these distressed opportunities seem to be emerging from multifamily syndicators who entered the market in recent years, now burdened with high levels of floating-rate debt.

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When late doesn’t mean late: Landlords of public housing and properties in federal rental assistance programs would be required to give a written 30-day notice before initiating eviction proceedings in court. This proposed rule applies to a variety of housing programs, aiming to offer better safeguards for millions of renters who might face eviction due to missed rent payments.

Setting the scene: Previously, public housing residents received only a 14-day notice before eviction proceedings could start. During the pandemic, an interim rule extended this notice period to 30 days. The new rule, effective from December 1, makes this extension permanent, covering approximately 3.9 million tenants across various programs. However, it does not apply to tenants under the Section 8 voucher program.

Between the lines: The new HUD rule also mandates that landlords provide information to tenants on how to recertify their income, allowing for an assessment of their rent responsibility. Additionally, it enables tenants to apply for a hardship exemption, which helps them remain in their homes. If the rule is finalized, these protections will be integrated directly into tenants' leases.

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Balancing stability and cost: This regulation represents a significant shift in housing policy, aiming to balance the needs of tenants and landlords. HUD anticipates annual savings between $8.3M and $52.5M due to decreased social costs like emergency services and shelter use. While landlords might face some costs from delayed rents, HUD estimates that the annual costs for public housing agencies or owners of project-based rental assistance properties will be minimal, amounting to only 55 cents per occupied unit vs. $1.14 for the latter.

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