Mortgage Real Estate Investment Trusts (REITs) have found themselves navigating turbulent waters amidst the repercussions of rising interest rates on commercial real estate borrowers. This has led to significant challenges for key players in the sector, including Starwood Property Trust and Blackstone Mortgage Trust, which have seen their share prices decline by 15% and 35%, respectively, since the onset of rising rates in early 2022.
The heightened scrutiny surrounding these mortgage REITs prompted analysts like Stephen Laws at Raymond James to delve into how these firms are managing reserves for potential loan losses. Insights gleaned from the December quarter results for most of the 15 companies Laws follows indicate a trend of increasing reserves. This reflects not only their outlook on the economy but also the impact of rising interest rates on loan performance.
Interestingly, mortgage REITs with a higher exposure to office loans, such as Granite Point Mortgage Trust, Ares Commercial Real Estate, and Blackstone Mortgage, have set aside the largest reserves. Conversely, those focused on apartment loans, like ACRES Commercial Realty and Franklin BSP Realty Trust, have maintained relatively lower reserve levels.
Accounting regulations mandate that lenders establish reserves not only in response to specific loan issues but also based on broader industry trends and economic forecasts. While these reserve increases are noncash charges, they have a tangible impact on the earnings of these REITs, influencing investor sentiment and market dynamics.
In particular, Starwood Property Trust and Blackstone Mortgage Trust, as major players in the mortgage REIT market, have faced heightened scrutiny. Blackstone Mortgage, with its significant exposure to office loans, has seen its reserves double since late 2022, reaching 2.25% of its loan commitments. Conversely, Starwood’s reserves have tripled over the same period, amounting to 1.7% of its loans.
The allocation of reserves reflects the contrasting risk management approaches of these firms. While Blackstone Mortgage is addressing specific loan challenges, Starwood is adopting a more proactive stance, reflecting a broader sense of caution prevailing in the market.
Despite Starwood’s cautious approach, it has encountered specific loan issues, including properties taken over through foreclosure. However, these specific challenges are not factored into its reserve calculations, highlighting the complexity of risk assessment in the mortgage REIT sector.
Overall, the divergence in reserve management strategies between Blackstone Mortgage and Starwood Property Trust underscores the nuanced dynamics at play within the mortgage REIT landscape. As these firms navigate the evolving economic landscape and regulatory environment, their ability to effectively manage risk will remain crucial in sustaining investor confidence and driving long-term value creation.