A Small-Cap Mortgage REIT Might Be The GE Capital Deal's Biggest Winner
On April 10, Dow 30 stalwart General Electric Company (NYSE: GE), hogged most of the headlines generated from selling the majority of its ~$23.5 billion GE Capital real estate asset portfolio to Blackstone Group LP (NYSE: BX) and Wells Fargo & Co (NYSE: WFC).
The biggest winner, though, might be the small-cap receiving a $4.6 billion mortgage portfolio from GE: Blackstone Mortgage Trust Inc (NYSE: BXMT). More on that in a bit.
Broadly speaking, this deal both reinforces GE's core business focus and continues to reduce company exposure to riskier financial and real estate assets -- an initiative spearheaded by GE Capital's Synchrony Financial (NYSE: SYF) consumer finance spinoff this past August.
Mr. Market - Votes Approval
GE - Problem Solved
GE Capital required a liquidity transfusion from the Federal TLGP during the 2008 financial meltdown. This also led to GE's designation as a "systemically important financial institution" (SIFI), and adherence to strict SIFI compliance requirements.
This ongoing transformation will likely result in the SIFI label being removed from GE moving forward.
Notably, GE Capital intends to keep its Aviation Services, Energy Financial Services and Healthcare Equipment Finance arms to support sales of its core industrial manufacturing business groups. GE intends to utilize proceeds from these sales to fund part of a large stock buy-back.
BX & WFC - Business As Usual
Wells Fargo's reported purchase of a $9 billion international portfolio of GE Capital performing commercial mortgages barely registers a blip, given the size of its balance sheet.
The Blackstone Group will reportedly add $3.3 billion of SoCal, Chicago and Seattle office buildings, as well as $2 billion of international properties and commercial mortgages to its industry leading ~$85 million of real estate AUM (assets under management).
BXMT - Game Changer
However, the $4.6 billion portion of GE Capital's commercial mortgage portfolio being acquired by $1.65 billion cap Blackstone Mortgage Trust, effectively doubles the size of the existing BXMT portfolio of assets.
Wells Fargo is providing BXMT with a $4 billion acquisition financing package of which $3.8 billion will be funded at closing, the balance will be funded with a combination of BXMT cash on hand and/or an additional capital raise.
Blackstone "expects the acquisition to result in a stabilized $0.24 - $0.28 accretion to annual Core EPS, benefiting from an attractive average portfolio credit spread of 4.21% combined with an efficient financing structure."
Blackstone Mortgage leverage will increase 50 percent, from a fairly modest 2x debt to equity ratio, to 3x debt to equity, as a result of this one large transaction.
Existing Blackstone Mortgage Portfolio - February 2015
The portfolio to be acquired by BXMT "consists of 82 first mortgage loans secured by a diverse set of commercial property types across its core and target markets, including the United States (68%), Canada (15%), the United Kingdom (10%), and Germany (7%) with an estimated weighted average loan-to-value ratio in line with BXMT's existing portfolio."
Not All Mortgage REITs Are Alike
When most investors think of mortgage REITs (mREITs) the images that often comes to mind are risky high-yielding mREITs typically leveraged (5x or more), or largely residential mortgage portfolios containing long-term fixed rate mortgages and mortgaged backed securities.
This strategy can result in a high degree of volatility when interest rates change, resulting in sudden losses of book value and dividend cuts, if rates move the opposite of how the portfolio is constructed and hedged.
The Blackstone Mortgage Trust model is basically 180 degrees different from that, and therefore is potentially much more attractive to the average investor.
The BXMT Secret Sauce
The BXMT "secret sauce" is making shorter duration, floating rate loans on commercial real estate, which are typically tied to a spread above LIBOR of 3.5 percent or more. This locks in a minimum return, which potentially could increase in a rising rate environment; not lose value like long-term fixed rate mortgages.
This strategy is currently paying BXMT shareholders a yield of ~7.4 percent.
Blackstone Mortgage - Deeper Dive
All slides are from a February 2015 Blackstone Mortgage presentation.
All things being equal, by doubling its AUM, Blackstone Mortgage should be better positioned to deliver higher margins due to increased scale moving forward.
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