📊 Investors Hit Pause in 4Q23 per Burns + CRE Daily Fear and Greed Index. See the full report here.

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

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

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Good morning. Carson Block is shorting Blackstone Mortgage Trust amid a tough commercial real estate market. In Texas, buyers face high debt and cautious lenders, but distress deals are on the horizon. Meanwhile, new federal rules enforce prior notice for tenant evictions due to unpaid rent.

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Market Snapshot

S&P 500
GSPC
4,594.63
Pct Chg:
0.6%
FTSE NAREIT
FNER
702.39
Pct Chg:
0.9%
10Y Treasury
TNX
4.155%
Pct Chg:
1.3%
SOFR
1-month
5.33%
Pct Chg:
0.0%

*Data as of 12/06/2023 market close.

THE BIG SHORT

Prominent Wall Street Short Seller Targets Blackstone Mortgage Trust

Carson BlockPhotographer: Jordan Vonderhaar/Bloomberg

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%.

➥ THE TAKEAWAY

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.

A MESSAGE FROM VIKING CAPITAL

Protecting Capital, Producing Returns

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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.

TRENDING HEADLINES

  • Luxury tomfoolery: Travelers are currently navigating a bewildering array of new hotel brands, deciding between "classic luxury" and "lifestyle luxury." What’s the difference?

  • Breaking barriers: CRE investments typically require HNWIs due to SEC rules dating back to 1933. However, proposed changes aim to expand or restrict the pool of eligible investors.

  • Refinancing rescuer: Ares Bank earmarks $3.3B to assist asset managers with refinancing amidst increasing sector rates. I never thought I’d say this about $3.3B—but is it enough?

  • Reviving downtown: Denver plans to acquire a high-profile office building for $89.5M to revitalize its downtown area, aiming to fill it with government workers.

  • Not the best news: The October Job Openings and Labor Turnover (JOLT) report revealed there were 8.73M job openings, down 617K from Sept. and down 2M from last year.

  • NAV confusion: Non-traded real estate funds have varying net asset values (NAVs), leading to difficulty comparing their performance to publicly traded REITs.

  • Checking out: KSL Capital Partners' $1.4B acquisition of Hersha Hospitality Trust concluded, leading to a $736M CMBS offering backed by 19 hotels.

  • The secret sauce: Private equity offers an average 15.1% annual return over 10 years, outperforming public equities, real estate, and fixed income.

  • Making waves: Kash Patel, Peter Bostrom, and Andrew Beachler spent $21M on waterfront properties in Fort Lauderdale despite being in the news for the wrong reasons.

  • Go against the grain: UBS Group (UBS) advises affluent clients to increase alternative asset investments to 22% due to potential higher returns.

  • Seizing swings: A former Blackstone executive plans to launch Makarora, an investment management firm targeting US real estate distress, and aims to raise billions.

  • Office exodus: Verizon (VZ) has put up its 143 KSF space at Essex Crossing for sublease after abandoning plans to relocate employees.

  • Azure apartments: MBK Rental Living sold the Azure apartment complex in Santa Maria for $113.5M, meeting high demand given the shrinking rental inventory.

  • Surprise, surprise: The infamous American Dream mall in NJ just hit 89% occupancy with 200 retailers and 30 F&B outlets, experiencing growing footfall and leasing activity.

  • Asset auction: Yellow Corp's bankruptcy auction has garnered $1.9B for 130 trucking terminal-related properties, with XPO's $870M bid being the highest offer.

  • Borrower boon: Last week, the average 30-year mortgage rate in the US fell to 7.17%, prompting a 14% increase in refinancing requests.

  • Residential revolution: Miami-based firms Eagle Property Capital Investments and BEO Investments plan to invest over $500M in US residential properties. Eagle closed a $309M fund for multifamily, while BEO allocated $200M for condos.

  • Office construction pipeline: Somehow, LA leads the nation in office investment with 2.2MSF of office space under construction.

DISTRESS SIGNALS

Texas Investors Remain Active Amid Rising Multifamily Market Challenges

As multifamily distress looms, Texas buyers still on the prowl

(Getty, Google Maps, LinkedIn/Shakti C’Ganti, Ashland Greene, Marcus & Millichap)

Texas' multifamily real estate market is experiencing a shift, with a dwindling crowd of buyers due to high debt costs and cautious lending. Yet, some investors remain active, seizing opportunities amid the market downturn.

Distressed opportunities: The Texas real estate market, once bustling with investors, is slowing due to uncertainties in pricing, interest rates, and increased costs. This shift has led to a decreased pool of active investors. However, the current market presents opportunities for acquiring valuable properties at lower prices, though securing financing remains a significant challenge.

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.

Equity's rising role: This challenging credit environment has shifted the focus to equity. Small to mid-sized private equity groups, both locally and from other regions, are capitalizing on this shift with their ready funds. They can close deals within 45 days, bypassing the need for extensive fundraising. Consequently, sellers are now favoring cash-ready buyers over those with higher offers, leading to a notable change in transaction dynamics in the Texas real estate market.

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.

➥ THE TAKEAWAY

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.

QUICK HITS

📖 READ: What’s a real estate fund worth these days? According to WSJ, it depends on a lot of factors, including what NAV means to the person doing the calculations… 

🎧 LISTEN: Office keeps getting all the bad press, but other CRE sectors are also strained. Find out which CRE sectors may be in for a reckoning in this episode of Odd Lots from Bloomberg.

FINAL NOTICE

New Rule Requires 30-Day Eviction Notice for Subsidized Housing

New White House Rule Aims to Curb Evictions in Affordable Housing

Photographer: Piero Damiani/Moment RF

The Biden administration has introduced a new federal rule to strengthen tenant protections in federally subsidized housing. This rule mandates that landlords provide a 30-day notice to tenants before filing for eviction, significantly extending the pre-eviction notification period.

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.

➥ THE TAKEAWAY

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.

CHART OF THE DAY

Apartment Rents Remain Flat, and Could Be for a While

According to RealPage, nationwide apartment rent growth is leveling off steeply on a YoY basis. We’re still well above the lockdown era (where rents basically only fell), but not by much. Currently, apartment rent growth is near 0, clocking in at 0.08% in October and 0.16% in November. In other words, apartment rents finally got a much-needed bounce—but they need a lot more where that came from.

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