CRE Class A defaults already starting – Blackstone is leading the way in sheer dollars.

via Reddit:

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To follow-up on my CRE post over the weekend, I had a number of people dm me asking what my positions were or how I arrive at candidates. Well, looking over this graphic, I wasn’t surprised to see A class properties already in default and/or in “Special servicing” – which is “yeah, they are a problem but we don’t want to put them into default category.” What’s interesting to me is the last column – many of these are a large number of buildings, not just one or two. A bit harder to rent say 14 buildings to get a loan performing again than 1 building. Plus, they were CMBS – before any 2023 haircuts.

Blackstone ($BX):

  • Revenues in 2021 were $22.57billion and dropped to $8.5 billion in 2022. OUCH
  • Worse, net interest income dropped from $461 million to NEGATIVE $105 million.
  • Long term debt rose from $7.7 billion in 2021 to $12.3 billion in 2022 – I think BX is trying to borrow to buy itself time.
  • BX does have access to about $187 billion in credit to bring to bear so its not like they will go out of business. think of them as one of the Too Big To Fail CRE firms.
  • BX runs an internal non traded $71 billion REIT – which they have halted withdrawals for 4 months and counting.
  • Operating income dropped from $13 billion in 2021 to $4.9 billion in 2022.
  • But the big data point for me is that over the last 6 months, BX insiders sold 97.83% of BX stock. Now, a lot of this selling was from various BX limited partnerships which companies like BX use to hide the salami but still, that is a crap ton of selling.
  • BX has a current PE of 35 and a forward PE of 13ish while the industry has a PE of 9
  • BX has a PEG ratio (PE plus what earnings are expected to grow at) of 3.43 while the industry average is .73
  • By these two metrics, BX is priced at a premium, probably due to the fact that they have some very smart people working for them. But smart people cannot overcome negative momentum when it starts to affect things they cannot control.
  • Finally, while they do have a nice 5% div, their payout ratio is 208%.
  • So, falling revenues, falling asset performance, falling asset values, negative dividend coverage, insiders dumping. Not a good picture.

I do not think in anyway that BX is going out of business. I do believe their recent defaults of $1 billion in CMBS, not straight mortgages, are just the tip of the iceberg. The question is, how deep does it go?

For me, I believe that the CRE market dive is only starting. If a rising tide raises all ships, the opposite occurs with a falling tide.

One last note: BX earnings and revenue drops were BEFORE the last 2 months when CRE started feeling pain. Just when they were recovering from Covid, Yellen’s incompetence created a huge (imo) outlier risk.

BX reports earnings soon so a surprise to the upside or the Fed announcing a cut could screw up my thesis but I think that BX will fall to $70 with a possibility for a flush to $60 my real target. Thats -13 and -23 from the current price.

So, I am looking at SEPT 60-70 puts, haven’t decided yet. Projected return if BX falls to $60 would be 200%ish. MY stop will be right above this months high, $92.50. If that happens I will lose 60% on the premium. So Reward to risk is 3.3X, not great but not bad (I usually look for 10X option plays on 20% moves) if BX falls to $60 by July 1.

DISCLAIMER: You are a grown ass person so if you decide this is a trade you like, it’s on you. I am not telling or recommending this to anyone. And I am prepared to manage the position on spikes or dumps if need be – this is not to me a set and forget.

TLDR: BX is very over valued by traditional metrics, insiders have sold 97% of their stock, and I am taking a shot.

Thanks and I welcome intelligent comments. Stupid comments not so much.

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