Blackstone's REIT Limits Withdrawals: What Does It Mean For Investors?

Summary

• Investors are pulling out of Blackstone's REIT and it recently pushed it to limit withdrawals.
• Is this is a signal that the real estate market is about to collapse?
• We don't think so. Here's why.
• Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our subscriber-only portfolios. Learn More »

ADragan

Blackstone (NYSE:BX) made many headlines last week when it announced that it was going to limit the redemptions of its public non-traded REIT, BREIT.

Here are just a few top stories that I found on Google by simply typing the name of the REIT:

Google

These headlines make it seem as if Blackstone and its REIT were facing severe difficulties. Negative and scary headlines get a lot of clicks!

But the reality is actually very different:

Blackstone is doing just fine and so is its REIT.

It is not limiting redemptions because of poor performance. Here are some of the highlights of BREIT's performance so far this year:

• Its net operating income has grown by 13%
• Its net asset value has continued to rise, despite materially increasing its cap rate assumptions.
• And this has resulted in a 9% net return year-to-date.

BREIT has performed so exceptionally well in 2022 because it is mainly invested in apartment communities and industrial facilities in strong sunbelt markets where rents are growing rapidly:

Blackstone

Moreover, they expect the strong rent growth to continue because their current rents remain well below market levels. This provides a bank of future growth as leases expire and rents are hiked:

Blackstone

Their debt is also almost entirely fixed rate for the next 6.5 years and therefore, the positive impact of rising rents should be superior to the negative impact of rising interest expense.

Right now, their rental housing and their industrial portfolio is valued at a 5.4% cap rate, which is quite conservative in my opinion, and I think that any material cap rate expansion from here is very unlikely. Blackstone has actually sold about $2 billion worth of assets at a nearly 10% premium to the carrying value of these assets, which shows that its NAV is quite conservative.

Finally, BREIT has ample liquidity to gradually meet redemptions and a structure to prevent liquidity mismatches. Their immediate liquidity was $9.3 billion before selling the rest of its interest in the MGM Grand and Mandalay Bay to VICI Properties (VICI), which will give it another $1.27 billion. Therefore, BREIT won't become a forced seller either.

So all in all, we think that the fears are way overblown and this is likely in large part because of all the fear-inducing media headlines.

The reason why there are so many withdrawals is not because BREIT is in danger. It is simply because investors realize that public REITs are today a lot cheaper than BREIT and so they are selling it to redeploy in discounted public REITs. Jonathan Litt recently pointed this out in a Tweet:

Jonathan Litt Twitter

Data by YCharts

There are many similar or even better public REITs that are now priced at a large discount relative to what you would pay for BREIT. Even Blackstone itself noted on a recent public call that public REITs are today more opportunistic than private real estate (or BREIT...):

The best opportunities today are clearly in the public markets on the screen and that's where we're spending a lot of time. - John Gray, Blackstone's COO

This explains why Blackstone has been buying out public REITs in 2022 instead of buying private properties in many cases.

So you need to ask yourself...

Why would you pay a premium to buy an illiquid, externally-managed REIT like BREIT, when you could buy a liquid, internally-managed REIT like AvalonBay (AVB) or EastGroup Properties (EGP) at a steep discount?

I recently also had a Twitter exchange about this with a BREIT investor:

Jussi Askola Twitter

Many investors are coming to this same conclusion and it is causing them to exit vehicles like BREIT.

Bottom Line

The takeaway is that both Blackstone and BREIT are just fine.

They are not headed for bankruptcy... Instead, capital is just flowing from a less attractive opportunity (BREIT) into better ones (Public REITs).

I think that Blackstone is undervalued today and I would give it a Buy rating following its recent decline, but I would stay away from BREIT because there are better public REITs that offer far better value for your money.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EGP; AVB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Jussi Askola, CFA]

UPDATE - I just posted a video on this topic: https://youtu.be/8FNewsT64GY

Thanks for your interest!

Jussi

[Maxlzzp]

That means I am adding at $75 and trimming at $100. Maintaining 3-4% stock portfolio allocation.

[Conscentatio Excellentiae]

I am leaning towards ARES instead of BX. I looked at performance over 5 years and they were pretty much neck and neck until 2022, when a gap began to open and has grown wider through the year. Is there any glaring reason for the performance difference?

[Jussi Askola, CFA]

@Conscentatio Excellentiae I think that many of its peers are more compelling today.

[daskapital1000]

"Blackstone is doing just fine and so is its REIT. ...And this has resulted in a 9% net return year-to-date."

In contrast to publicly traded REITs whose valuations are determined by the stock market, non-traded REITs are valued monthly by their sponsors (in this case by Blackstone). So, it is obvious that when the publicly traded REITs are 20% down, including rental properties in the Sun Belt (30% down) a 9% net year-to-date reported by the Blackstone is nothing but smoke and mirrors, or to be more specific it's the result of the valuation by the right type of "independent appraisers."

[Jussi Askola, CFA]

@daskapital1000 That is not correct. It is Blackstone that's correct and they also do independent appraisals. It is publicly lited REITs that are deeply undervalued. Property values for what they own are up in sunbelt markets in 2022, not down.

[mfposa]

@Jussi Askola seekingalpha.com/...

CEO and Co-Founder Stephen Schwarzman said Wednesday he found ongoing concerns about the private equity giant's $70B real estate fund to be "baffling," while touting the private fund's notable outperformance against publicly-traded REITs.

He's touting past performance while neglecting the current condition of private and public. I suppose that's his job.

[MrSlate]

As most of you probably know, Starwood operates a pretty large and similar BREIT like private real estate fund that has experienced similar withdrawals and enforced 5% quarterly limits. From what I can see, it may be spilling over on to the publicly traded Starwood Property Trust, which has fallen steadily over the past few days to below $19+ per share and, by extension, a dividend of are 9.75% or thereabouts. I’m curious if STWD might be in the buy range for some of you who tend to play the ups and downs of this stock. I am tempted to buy some shares at this level, but have hesitated given the events of the past few days and would like to see the dust settle a bit. Any thoughts?

[Jussi Askola, CFA]

@MrSlate It cannot spill over to their public REIT. Public REITs do not have any redemptions since they are liquid. The capital is permanent. You can only sell your shares to another investor, not back to the REIT via a redemption.

You will see many non-listed REITs limit withdrawals in the coming months. They all face the same challenge. Listed REITs are a lot cheaper and so investors want to invest in them instead. It could push listed REITs higher.

[MrSlate]

@Jussi Askola I meant spillover in the sense of sentiment or association more broadly with Starwood. I understand you point- guilt by association - people avoiding Starwood in general

[MrSlate]

@MrSlate Sorry about the confusion

[analysis first]

look, everyone knows how PE works. the valuations are inflated AND the fees are inflated. if you can get your money back for more than it's worth (compared to public reits anyway) and skip the massive fees... you probably should. it's just not conceivable that BREIT NAV is UP when very high quality reits are down 30-50% with less leverage. cap rates in the BREIT public filings are disclosed as "exit" cap rates... as far as i can tell... with no disclosure on how far out they are looking. and seems impossible to figure out what run-rate NOI is on the current asset base (let me know if you can). BX management of course doesn't want to mark down the NAV and suffer lower management fees and perhaps incentive fee reversals... so they deserve the "run on the bank" that is in the works.

[Jussi Askola, CFA]

@analysis first Yes, it is conceivable. The public REIT market is often mispriced by a large margin. BREIT NAVs are much closer to fair value than public REITs. The same happened early into the pandemic. Public REITs dropped by 43% even as real estate gained in value. One year later, public REITs had doubled in value.

[kata]

Wow what a conversation, CNBC trying to create a "panic" in Bx shares. Amazing. Schwartzman came out today to say he was "baffled" by the selloff in the shares after CNBC intimated, no, more than intimated, that investors in Bx BREIT were selling their shares because BX had limited redemptions.

Schwatzman said Far Easten investors who are more leveraged than non Far Eastern investors and who presumably were taking a hit in Far Eastern investments since Evergrande and looking for capital apparently wherever they could find it, were not going to get it from BREIT.

That has nothing to do with BREIT or the value of BREIT properties, and Bx management didn't want the Far Eastern panic to affect their fund or their shareholders.

CNBC took this all to mean they had another opportunity to say no, no "Panic", and yes they used the word, in BX shares since they talked it down to its 52 wk low with their first false analysis. Now they had a chance to do it again.

Amazing. Talk about trying to get a run on a bank with false flags. CNBC should be held accountable. Thats todays 5-6 show. How irresponsible can you get.

In any case Schwartzman said the company is doing fine. No effect. But shareholders are taking a beating from CNBC.

[Jussi Askola, CFA]

@kata It is not quite that simple. BX's growth will slow down as a result of this and therefore, its valuation should be lower. But yes, I agree that it is undervalued

[kata]

@Jussi Askola

We agree to disagree. I think they are going to take advantage of this pullback since they have lots of dry powder and go pedal to the medal. One has to take one's advantages when one has them regardless of how one got them.

[Jussi Askola, CFA]

@kata I don't understand. Their BREIT vehicle will not grow, it will become smaller if the withdrawals continue.

[retbiotech1]

I smell opportunity when others are fearful. I've been looking for a good entry point on BX and will start adds.

[mike ekim]

@retbiotech1 yep...hard to say, but can't mess up much with a starter position here

[This won't hurt a bit.]

I just keep adding.

[grcinak]

FOMO runneth over. Just look at the bull-rush into "alt" assets over the past couple of years... and ask why the BX business model is now worth >50% more than it was a couple of years ago. And question the prospects for potential upside. Personally, I ain't takin' the bait. YMMV.

[NT 61]

@grcinak Ask away. And don't pay any attention to the fact that BX switched from an LP to a C-corp in 2019. Pure coincidence.

BX is doomed. It's an FTX just waiting to implode. Run while you can.

Might be less than $1/share by the end of the week.

[grcinak]

@NT 61 OK. So, I guess you think the BX div is safe and you also like other alts equities like APO and KKR. Mebbe OWL. Considering the likelihood of a slowing global economy / productivity... Please share your bull case...

[mike ekim]

@grcinak already have plenty OWL/APO...and don't care for KKR at all

[Workinhard]

Jussi - I know that public reits don't generally publish their estimate of NAV , but I'm assuming you , like many analysts, do a calculation as part of your process. Are most of the bigger public reits trading at a discount to your estimated NAV's? If they are, that is part of the reason that private reit owners may want to get out - to sell the private reits at nav and buy publicly traded ones at a discount.

As far as the BREIT investors, they will be fine in the long term, even after paying the big fees to Blackstone, but they knew the rules going in regarding redemption's and can't complain about it now. The redemption rules make sense for a portfolio of assets that can't be easily liquidated and that's why they have them in place.

[Jussi Askola, CFA]

@Workinhard Yes, they are, and the discounts are historically large. You are correct. BREIT investors are getting out to invest in REITs instead.

[Jussi Askola, CFA]

FYI: We just posted a blogpost on our largest real asset investment for 2023: seekingalpha.com/...

It is relevant to this article.

Have a great Sunday!

Jussi

[Askar Top]

it goes to $40

[Jussi Askola, CFA]

@Askar Top Based on what?

[Stash2]

@Askar Top From your mouth to God's ears, because I will buy with both fists!!!

[NT 61]

@Askar Top Investing is not a dart-board exercise.

[Humble Eagles]

It could be the canary in the coal mine and it could be a bottom indicator--I lean a bit toward the former. Here is yesterday's WSJ headline if you have a subscription and want to read it for yourself:

>>Investors Yank Money From Commercial-Property Funds, Pressuring Real-Estate Values<<
>Blackstone and Starwood funds limit withdrawals following surge of redemption requests<

[MrSlate]

On perhaps a somewhat related note, a Blackstone board member, Ms Porat, who is the current CFO for Google-Alphabet, bought 20,000 shares of Blackstone on Friday as the stock fell at a cost of $1.7 million. Blackstone stock doubled over the last couple years and now could be headed for a round trip back to $65 per- or not? Hmmm. Tough call.

[Jussi Askola, CFA]

@MrSlate Yes, I saw that as well. Quite interesting. I like BX at these prices. I just prefer some other opportunities.

[brian05]

I almost invested in BREIT last March and decided against it as rates started ticking up. Real estate pros are always in a heap of debt.

In my area, high-end apartments are going up everywhere. The rents are pushed to all-time highs. I listened to the last BREIT conference call and what spooked me was that BREIT's retail rents are lower than the average and it was suggested that raising rents would be appropriate.

All I can think is, how? I let my renter know that the rent would remain the same as inflation is everywhere...food, gas, clothing, credit card interest... She said she's now working two jobs to stay afloat and was grateful.

There is a time when REITs make sense. For me, this is the wrong time.

[Jussi Askola, CFA]

@brian05 I don't quite understand your viewpoint. BREIT suggests hiking the rents of its retail properties because they are below market and their retailers are very profitable. This is a good thing. I wouldn't invest in BREIT but public REITs are priced at a large discount to fair value right now.

[brian05]

@Jussi Askola Raising rents in this environment is a risk. Renters who need to cut back expenses will look to vacate for cheaper housing.

I would have rather heard something along the lines of "...we do not need to raise rents to maintain a healthy profit margin."

Anyway, I hope BREIT continues to be one of the best investments in the market and can navigate the current economic changes. They do a lot of things right. At the moment, I am still not ready to invest in it.

As for public REITs I'll be watching. Thank you for posting.

[nationalnotes]

@brian05 So far, our average rents for 2023 are 30% higher than 2022. Not a single notice of intent to vacate. 95% occupancy. This is Florida, your area may be different.

[Jussi Askola, CFA]

FYI: We just posted a blogpost on our largest real asset investment for 2023: seekingalpha.com/...

It is relevant to this article.

Have a great Sunday!

Jussi

[Bill_G]

@Jussi Askola I clicked the link and got RICK rolled. 🤣Thanks, Jussi!

[leslie mccarver]

Just raised annual distribution rate. I will stay w/ smartest guys in room.

[CJlove4all]

BX is now exposed as another DEM/ESG supporting entity using investor funds against investors' best interests.

These folks are toxic to freedom and have sold out their investors with their promotion of DEM politicians and woke ideology.

Recessions always flush these out

[leslie mccarver]

@CJlove4all They own warehouses and casinos.

[Jussi Askola, CFA]

@CJlove4all They do not use investors' funds.

Why do you have to make this about politics?

[Contrarian Max]

@Jussi Askola clearly there is extremist politics involved with blackstone its negligent to not mention it, extremist companies like blackstone eventually cause massive loss for investors ticking time bomb.

[Just Some Guy]

Not so much a question of real estate collapsing as of BX collapsing, that is its current price/dividend, or what it has to do to cope with liquidity issues. If it holds these separate funds at arm's length perhaps the current drop is a buying opportunity, but we do have a new TTM low today.

The charts aren't too terrible, yet, that is still within the (wide) daily Bollinger band. In fact, on the weekly Bollinger band, now just at the bottom edge *and* come down to meet the rising weekly 200ma. Yet back on the daily we're far below the falling daily 200ma, and no price/volume support in sight. Decision point!

[Jussi Askola, CFA]

@Just Some Guy BX is in danger and it is very cheap

[Stash2]

@Jussi Askola BX is one of the select, massive asset management accumulators in, not only the USA but the world. It's stable of properties and strategies, while somewhat opaque, is massive and innovative. While its revenue stream will be hit some by the reduction in AUM from BREIT, it has serious asset management flow otherwise. The issue, as with every bubble, is the inevitable drawback in Real Estate prices that will attend the Fed's elimination of its "put" on the market and backstop of zero cost liquidity. The dividend has been put a bit at risk and this past quarter, with the drawdown to $.90, reflects that. This is a bubble correction and is justified, but BX is still a serious cash generator as you can see from its 10-K and 10-Q filings. I, unfortunately, began my position in the 90s. So, I am possibly a tax loss seller at these levels and repurchaser which may fit with a continued drawdown in Real Estate pricing. This fits with my strategy of cash accumulation until 2nd quarter of 2023. Thank you.