Famous Short Seller's Commercial Real Estate Target Faces 'The Perfect Macro Storm' And Is 'At Risk Of Being Completely Wiped Out'

Negative headlines regarding commercial real estate are abundant, in large part because of high office vacancy rates lowering property values and high interest rates making the refinancing debt increasingly prohibitive.

Famed short seller Carson Block, the founder of Muddy Waters Research, found what he believes to be an optimal way to place a bet against the sector.

In a separate Dec. 6 report called "Here Comes the Cliff!", he revealed his firm is shorting the publicly traded Blackstone Mortgage Trust Inc. BXMT, in part given he believes it's facing "the perfect macro storm."

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Since the release of the report, it could be argued that the macro storm regarding commercial real estate has worsened.

According to Moody's Analytics, the national office vacancy rate rose to 19.6% in the fourth quarter of 2023, hitting an all-time high since Moody's began tracking the stat in 1979.

Additionally, since Dec. 6, the iShares 20 Plus Year Treasury Bond ETF TLT, which tracks long-term U.S. government debt, has declined over 3%. Since bond prices are inverse to yields, this means that long-term yields have risen even further. 

This benchmark is of importance to real estate investors given that a rise in long-term yields is correlated with an increased cost of both mortgage rates or the refinancing of existing debt.

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Muddy Waters estimates that between 70% and 75% of Blackstone Mortgage Trust's U.S. borrowers are "unable to cover interest expense from property cash flows."

Based on that estimate, Muddy Waters states this could lead the firm to eventually realize losses somewhere between $2.5 billion and $4.5 billion. Given the fact that the company's entire market cap is now around $3.5 billion, Muddy Waters flags that the trust is "at risk of being completely wiped out by these losses."

It should be noted that management of the Blackstone Mortgage Trust has fired back against Block's report, saying that its real estate investment trust (REIT) is "well positioned to navigate this environment" and that the report was "misleading" and "designed solely … for the short seller's own benefit."

However, there have not yet been any executives of the mortgage trust buying their own shares after the report's release.

For investors concerned about a commercial real estate crisis coming to fruition, riding the coattails of Carson Block's Blackstone Mortgage Trust research could be a way to express that view.

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