PCE inflation comes in cool … Blackstone’s mortgage REIT slashes its dividend … the pain appears headed for multifamily … your latest AI report drops today
Good news on the inflation front.
This morning, the Federal Reserve’s favorite inflation gauge, the Personal Consumption Expenditures (PCE) price index came according to expectations.
The month-to-month reading increased 0.1% while the yearly reading was up 2.5%.
Core PCE, which removes volatile food and energy prices, showed a monthly increase of 0.2% and a yearly increase of 2.6%, both also in line with expectations.
Meanwhile, housing-related prices – which have been a big driver of inflation in recent quarters – rose 0.3%. That’s a slight deceleration from the 0.4% increase in each of the prior three months.
Focusing in on the consumer, personal income rose just 0.2% which was below the 0.4% forecast. Spending came in as expected at 0.3% – good news for a potential “soft landing.” However, the savings rate fell to 3.4%, which is the lowest level since November of 2022.
So, where does this leave us with rate cuts?
According to the CME Group’s FedWatch Tool, nothing in today’s report accelerated the market’s anticipated timing of the first rate cut. This means that the Fed is expected to hold rates steady when it meets next week (a 95% probability as I write), but then cut in September.
I’ll note that the FedWatch Tool puts a 0% probability on the Fed not cutting rates in September. And I’m not rounding down – there is literally not even a 0.1% expectation of the Fed holding rates steady then.
In the wake of the cool print, the market is clawing back some of its losses on the week. The Russell and the Dow are both up more than 1%.
So, all in all, it was a good report. Though nothing screamed “cut rates next week!” there were no roadblocks to a rate cut next month.
And while that’s good news for much of the economy, it’s especially so for one sector, and one company in particular that had a very rough week…
We hope you avoided this knife-edge…it’s exactly what we warned about…
You’re looking at BXMT, which is the mortgage REIT from private equity giant, Blackstone.
On Wednesday, it crashed 12% and hasn’t recovered.
To provide context for what happened, let’s rewind to our June 10 Digest:
(To avoid confusion, BXMT is Blackstone’s publicly traded REIT which just crashed. BREIT is Blackstone’s private real estate trust. However, the issues/market conditions they face are similar.)
Blackstone’s REIT (BREIT), which has nearly $60 billion under management, was limiting redemption in 2022. But it then penned a deal with the University of California’s investment arm, UC Investments. This $4.5 billion cash injection gave BREIT more cash on hand to help redeem investors wanting out.
In the wake of this deal, BREIT sent a memo to shareholders titled “Business as Usual for BREIT” but not everyone is buying it. Famous short-seller Carson Block is shorting Blackstone Mortgage Trust, saying there is “a lot of rot in its book.”
Block said that many borrowers on Blackstone’s books were at risk of being unable to make their payments. He predicted the trust will be forced to “substantially cut its dividend” this year.
From Block:
“I feel it’s inevitable that the cash flow gets significantly diminished by this macro environment. [The] only thing going for [Blackstone’s real estate fund] is being able to spread out the days of reckoning. I would not be sanguine on the office market in the U.S.”
This is perhaps the most likely risk for REIT investors – a cash-flow crunch that forces a substantial dividend cut, which triggers a major selloff as income investors race for the door.
And this brings us to earlier this week and the following headline from The Registry:
“Blackstone Mortgage Trust Slashes Dividend by 24% as Office Loans Pressure Portfolio”
As borrowers are struggling to make payments and/or refinance their loans, Blackstone is feeling the strain. To protect its cash flow, it just slashed its dividend, triggering a stampede for the door.
This is the exact scenario we warned about.
Let’s jump to legendary investor Louis Navellier from his Growth Investor Flash Alert podcast earlier this week:
By far, the biggest news this week is one of the biggest mortgage trusts out there – the Blackstone Mortgage REIT – announced it’s cutting its dividend 24% due to higher defaults as borrower struggle to make payments and/or fail to refinance their loans.
Now, this is a huge REIT. Blackstone has a lot of issues.
It turns out that roughly a quarter of BMXT’s $21 billion loan portfolio has commercial real estate exposure.
“A lot of issues” indeed.
If Blackstone’s REIT has lots of issues, you can be sure other REITs and regional banks do as well
Block has said that the troubles in the sector were likely in the “early innings.” He also warned that the next shoe to drop could be multifamily real estate.
The potential fallout isn’t limited to REITs. Many smaller regional banks have exposure too. On that note, here’s MarketWatch from yesterday:
New York Community Bancorp’s stock fell 10% on Thursday after the lender reported a second-quarter loss and larger-than-expected charge-offs mostly on office and multi-family property loans that it doesn’t expect to be paid back…
“The provision reflects an increase in charge-offs, principally office loans, and the continuing impact of market conditions on the multi-family portfolio as higher interest rates and inflationary impacts persist,” the bank said.
If you own REITs and/or banks with significant exposure to office and multifamily, and you’re hoping that interest rate cuts from the Federal Reserve will save you, be careful.
In our July 18 Digest, we did a deep dive into why there’s major refinancing pain coming for commercial real estate over the next 18 months, even if the Fed cuts rates as expected, beginning next month.
In short, despite anticipated cuts, we’re still looking at a refi rate somewhere between roughly 6.04% and 7.54% at the beginning of 2026. With many existing loans having an all-in interest rate between 2.50 and 4.00%, a potential refi in 2026 could be between 50% and 200% more expensive. (For our full analysis in that Digest, click here.)
Don’t let this take you by surprise. Make sure you’ve vetted the REIT holdings in your portfolio.
As to how to protect yourself, we’ll return to our June 10 Digest:
If you invest in REITs and want to avoid this scenario, keep your eye on your specific REIT’s payout ratio.
In general, a REIT with a payout ratio between 35% and 60% is deemed safe from dividend cuts. Ratios between 60% and 75% are somewhat safe. But payout ratios above 75% are considered at risk. The
Bottom line, continue to tread lightly in this corner of the market.
It’s usually quiet until the bad news suddenly explodes “out of nowhere.” Well, we’re here today hoping to shine a light on “nowhere.”
Before we sign off, a reminder that the latest AI research from Louis Navellier, Eric Fry, and Luke Lango drops today
In yesterday’s Digest, we looked at where the AI Revolution goes next. We quoted the following from Louis:
Certainly, [select dominant AI-related firms] will continue to succeed. We have no doubt that Nvidia’s head start will last for years to come…
However, the compounding pace of machine learning processing speed means that a new group of software firms will also succeed.
In short, Louis, Eric, and Luke believe we’re entering a new phase where AI software stocks will take over leadership in the AI Revolution.
To explain what’s happening, they’ve put together a special briefing that you can access right now by clicking here.
If you rode the first wave of AI with stocks like Nvidia and Super Micro Computer, this report from Louis, Eric, and Luke will provide you the blueprint for how to invest for “Phase 2” of the AI Revolution.
Again, to access it immediately, just click here.
Have a good evening,
Jeff Remsburg
