(Bloomberg) -- Carson Block said he’s short Blackstone Mortgage Trust, saying the publicly traded real estate investment trust is exposed to a perfect storm of economic conditions hitting commercial real estate and may face a liquidity crisis. 

The Blackstone Mortgage Trust makes loans collateralized by commercial real estate. Block, who heads short-selling firm Muddy Waters, said the trust is facing a possible liquidity crisis and may default on its loans, and he expects it will have to cut its dividend by at least half.  

“There’s been a lot of extending and pretending when things have been backed by paper profits,” Block said in an interview, speaking on the sidelines of the Sohn investment conference in London on Wednesday. “It’ll be the second half of next year that we’ll really start to see losses.”

Block predicted the trust’s borrowers will be unable to refinance and repay the trust and will need to post more collateral. 

A spokesperson for the Blackstone Mortgage Trust said in an emailed statement that the trust’s liquidity is at “record levels,” it has continued to reduce its leverage, and has taken steps that leave it “well positioned to navigate this environment.”

“We believe this self-interested and misleading report is designed solely for the purpose of negatively impacting BXMT’s share price for the short seller’s own benefit,” the spokesperson said, adding that the firm plans to issue a more detailed response to the report.

Read More: Block Shorts Blackstone REIT, Kintbury Targets BT: Sohn London

Even if the Federal Reserve lowers interest rates, Block estimates that losses on the trust’s $23.2 billion net book value of loans could reach between $2.5 billion and $4.5 billion, meaning the trust’s equity could be completely wiped out.

Blackstone Mortgage Trust shares fell 8.1% on Wednesday, to close at $20.68. 

The vehicle is separate from Blackstone Real Estate Income Trust, the firm’s $64 billion vehicle for wealthy individuals that began limiting withdrawals late last year amid commercial real estate market woes. BREIT has limited withdrawals for 13 straight months but has signaled that the backlog is easing. 

Higher Rates

Commercial real estate owners have come under pressure as higher borrowing costs complicate financing and many properties including offices face a shift in demand. Property prices have plunged, with a measure of those values falling 19% through October from its March 2022 peak, according to real estate analytics firm Green Street.

Landlords including Brookfield Asset Management Ltd. and Blackstone Inc. have defaulted on property debt, with some owners opting to take that path to kickstart talks to renegotiate terms with lenders. More than $650 billion of commercial property debt is expected to mature in 2024, according to Mortgage Bankers Association data.

The Blackstone trust hasn’t yet shown signs of distress because it has been modifying troubled loans by extending maturities and allowing payment in kind, Block wrote in a report published on his website. Block estimates that at least nine loans totaling $1.6 billion, or about 6% of the trust’s net book value, have already been modified through the third quarter of this year. 

Block, 46, built his reputation as a short seller with bets against companies including Sino-Forest Corp, which he accused of exaggerating its assets. The Chinese company filed for bankruptcy protection 10 months after his report was published. He’s also made several bets against European real estate companies, shorting both Corestate Capital Holding SA and the bonds of Vivion Investments. 

Real estate has been a theme for Muddy Waters this year. In November the firm said it was shorting the bonds of CPI Property Group SA. The Eastern European landlord said Block’s firm “purports to conduct research but thrives off shorts and explosive headlines.”

(Updates with closing share price in eighth paragraph)

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