The Big Bad BREIT Post
One year after writing our BREIT white paper, here it is. Along with the story about how it got stifled.
They tell you not to turn over rocks. There could be dangerous creatures hiding under them, and it’s not a good idea to startle snakes or scorpions. It’s safer not to turn over rocks.
More than a year ago I did look under some rocks. And I did find something startling, which turned my world upside down. This is the story of why I looked, what I saw, and what jumped out at me from under the stone.
This is the story of BREIT, and this is the story of an industry that would rather ignore than address uncomfortable truths.
I didn’t think much of any of this at the start. At the start I thought I was embarking on a simple competitive analysis. I had a sense of admiration for what private equity firms had been able to accomplish in delivering real estate exposure to investors. Blackstone, in particular, had achieved massive success. I wanted to understand it so I could learn from it, and maybe even build upon it.
With the purest of intentions I set out to understand the secret sauce behind their sustained and consistent outperformance. I set out to understand how illiquid assets were made liquid. I set out to understand how risk could be subdued, and how the same real estate property that might look like crashing ocean waves in the public markets would look like a still lake in the non-traded REIT wrapper.
What I found was a product that had, in fact, solved so many structural issues for investors seeking commercial real estate exposure while incentivizing distribution from the largest distribution channels. I found a firm that invested in the best properties in the best markets. I found a firm that managed those properties with unmatched efficiency and scale and professionalism.
And I also found a firm that had become trapped by that very success. I found an investing public that can’t help themselves but to crowd into asset classes at valuation peaks. I found a fund that had become the victim of its own success. I found a company overzealous in an effort to protect its name and stifle analysis.
What follows is that analysis. This work was done by my brilliant friend Richard Wiggins and I, in consultation with countless experts (who chose to be unnamed) across the domains addressed. It builds on work that appeared in Grant’s on April 21, 2023, and continued in conversations on Seeking Alpha, Substack, Twitter/X, in DMs and on phone calls from curious and smart people asking good questions and doing the deep work to honestly and critically answer them.
The first iteration of this paper was produced one year ago, almost to the day. In the year since the publication of the paper has been stalled, delayed and ultimately canceled by four different publications. At least two of those publications did so in response to a letter from an Alexandria VA law firm which can most generously be described as dishonest. Much like political scandals, the coverup is often worse than the crime. This letter itself, should it be revealed publicly, would likely become a bigger scandal than the fund analysis it sought to stifle.
In the weeks that followed my attempt to publish this analysis, Finra contacted us and asked to review marketing collateral which had previously been approved. Upon their review they informed us that we were not allowed to mention BREIT anywhere in our fund collateral - not even a comparison table of FFO, AFFO and cap rates comparing our basket of public market REITs to BREIT - the most elementary and critical valuation metrics.
There were other curious things that happened. A REIT industry executive emailed my entire advisory board with a list of tweets and memes he found objectionable. An outsourced CCO abruptly quit. There’s more, even, that someone more paranoid than I might question.
An engineer who discovers a structural flaw on a bridge, a doctor who finds a cancerous tumor on a patient, a financial analyst who identifies a fund that can’t possibly meet liquidity demands. Three examples where there is a moral obligation to share findings, regardless of the popularity of the discovery.
We had a moral obligation, and we had truth. I can forgive those who didn’t have the fortitude or fight for this, there is nothing wrong with just wanting to get along. Most days I felt that way myself. Which is why I am publishing this paper in June 2024 instead of June 2023.
So here it is, our analysis of Blackstone’s Real Estate Income Trust. The data presented is as-of the original publication of June 2023. It should be noted that over the past year everything has played out as we warned, including the gating of Starwood’s SREIT. Last thing I’ll say: I’d have much preferred to be wrong.
-Phil
Blackstone’s BREIT Is Far Ahead of Public REITs
The primary difference between the two is the method used to estimate their value: Blackstone uses a discounted cash flow model to estimate BREITs’ Net Asset Value (NAV) while public REITs use traded market prices.
The quarterly returns for private real estate investments are volatile, we just don’t see the volatility. Of course, you already knew that. The very notion that volatility ceases to exist simply because an investment is not traded in a liquid marketplace is silly. Just because an investment is not traded cannot possibly make it less volatile or less correlated but smooth returns are very much part of the appeal; so much so that industry wag Cliff Asness humorously observed that ‘volatility laundering’ is not just a feature, it’s the main attraction.
Things started to get weird last year, however, when investors wanted to redeem…but couldn’t. The fund was up 7.5% as long as you didn’t want to sell it. Overnight, the disconnect between BREIT and public REIT performance became ‘interesting’. For some folks this was okay. Because they don’t see their losses, they don’t believe that they exist. “What’s all the excitement about?”, they asked. For others - Those-Who’ve-Watched-Jaws (TWWJ) - not so much. They remember that ominous pulsating cello theme that John William’s composed for Jaws. Without seeing the scary fish, they figured things out and knew ahead of time when someone was gonna get it.
Where You Invest Matters. Or Not.
Listed valuations cratered while private market values were impervious, but Blackstone has an explanation. The yawning gap is due to listed REIT indexes not reflecting their 70/80/90 subsector and geographical portfolio makeup. Blackstone’s fund is 70% concentrated in the fast-growing South and West; approximately 80% focused on the top performing rental housing and industrial sectors; and benefits from approximately 90% fixed-rate financing. Public REITs weren’t so smart. They swam out a little far and tired. A fishing boat came along. They had a ‘boating accident.’
When you’re in an index fund, you own real estate but there’s a lot of stuff you probably don’t want. The FTSE NAREIT index owns everything while BREIT is more narrowly focused. Indexers stink up their portfolios with malls and office buildings while BREIT is heavy in beds and sheds - the two property sectors with the most growth in front of them. So the story goes.
It’s a nice narrative but the concentration in residential and industrial property sectors theory doesn’t hold up. Craig McCann and Regina Meng of SLCG Economic Consulting re-weighted all of the NAREIT sectors indices to match BREIT’s reported allocations. Their BREIT-weighted portfolio did not decline by 31.7%; it declined by 29.0%. Mic drop.
BREIT’s Property Mix Doesn’t Explain Divergent Performance
Blackstone Allocations at Public REIT Valuations
Evidently, BREIT’s 2022 returns are not because of superior sector positioning. So, where did the additional return come from?
Is Blackstone a Better Operator?
There is nothing magical about BREIT’s properties. Commercial real estate is a commodity and BREIT is – arguably - too huge to be special. If BREIT were a public company, its reported value would make it third amongst all equity REITs in terms of equity market capitalization. Critically, the larger in scale one goes the truer this commoditization is. With more than $135 billion in enterprise value, BREIT is larger than the entire publicly traded apartment sector combined so it’s a safe bet that BREIT’s returns are going to be close to the broader commercial real estate (CRE) market.
An apartment complex in Phoenix behaves in a similar manner to other apartments in Phoenix so it’s not a stretch to expect that BREIT’s residential property in the American sunbelt will look and perform similarly to Camden Property Trust and Mid-America Apartment Communities.
Buying properties and not listing them on an exchange doesn’t change much. They’re investing in the same thing. Both are subject to the same real estate market forces. For the last 25+ years, public REITs have delivered approximately the same returns as commercial real estate.
Valuations Matter (of course)
The idea that “interim valuations don’t matter” has a built-in assumption that prices are going to rise. Otherwise, you’d want out as soon as possible before the mark downs take effect. And that’s exactly what’s happening. If ultra-low rates created a bubble, then it follows that the ‘everything triple super bubble’ might turn into the ‘everything triple super burst’. Real estate is the most shorted industry globally and the third most in the United States, according to S&P Global.
Let’s Do the Time Warp - NAV Timing Strategies
If investors think the real estate is worth less than the reported NAV, they have an incentive to pull out cash since the fund buys the shares back at those reported values. It’s a form of arbitrage. And that’s exactly what savvy investors did – they entered the queue early. BREIT’s situation is reminiscent of 2005-2006 when a number of German open-ended funds suffered significant withdrawals requiring some funds to freeze transactions and be propped up by parent organizations. Selling before re-valuation and re-purchasing after is nothing new.
Historically, there has been an opportunity to make money by redeeming ODCE funds and investing in traded REITs when traded REITS have crashed, and nontraded real estate valuations are late marking down.
The most recent example was the great financial crisis. Traded REIT prices started declining in 2007 while the ODCE was still increasing. The FTSE traded REIT index was down approximately 16% while the ODCE nontraded REIT index was up 16%. By 2009, the FTSE traded REIT index was posting strong positive returns while the ODCE Index was still freefalling; +28% vs -29.8%, respectively. There was a lot of delta and money to be made because nontraded real estate valuations are much slower to react than market prices. It’s like time travel.
If public REITs are undervalued like Blackstone says that would just reinforce that investors should turn off their BREIT reinvestment. When public REITs trade at discounts to underlying value of their assets, BREIT investors should put their money into public REITs instead and get close to 30% more property per dollar invested.
Pay close attention because I’m a modern-day Nostradamus: The traded REIT vs non-traded REIT valuation divergence will not hold forever.
When public and private valuations realign, there will be an easy 30% delta. Either private market NAVs are coming down or public market REITs are coming up - or some combination of the two.
The Blackstone’s Hellish NAV Disclosures
Given the vital role that “NAV” plays in fundraising and performance reporting, it’s surprising that a greater amount of transparency is not provided by sponsors into their valuation methodology. Remind me again why they don’t provide a comprehensive explanation for each input in the DCF model? Contrary to popular assumption, NAV is not based on appraisals that utilize sales comparisons. Instead, it’s based on an opaque discounted cash flow (DCF) methodology that is based on assumptions that are at the discretion of the sponsor who realizes fee streams pegged to the asset values they assign.
BREIT’s self-reported performance is – by their own admission – “not reliable.” Why we didn’t take a closer look at it before is as much a mystery as how they compute it. Management can’t just pull numbers out of thin air, and they’ve done nothing illegal, but they have a lot of discretion on where they estimate share values to be.
According to their prospectus, Blackstone values the fund itself once a month; then once a year it brings in an outsider who prepares a valuation based on their direction. But in its March 28, 2023 prospectus amendment, BREIT removed the steps in bold. (1) a third-party appraisal firm conducts appraisals and renders appraisal reports annually; (2) an independent valuation advisor reviews the appraisal reports for reasonableness; (3) the advisor (Blackstone) receives the appraisal reports and based in part on the most recent appraisals, renders an internal valuation to calculate NAV monthly; (4) the independent valuation advisor reviews and confirms the internal valuations prepared by the advisor. (5) BREIT will promptly disclose any changes to the identity or role of the independent valuation advisor in its reports publicly filed with the SEC.
The verbiage in their disclosures doesn’t suggest that their calculation will be better than relying on market prices. The highlighted portions seem to be saying that Blackstone uses baseless returns in their SEC filings. They are not using a methodology prescribed by the SEC or any regulatory body. They do not adhere to any accounting rules or standards. Nor is their monthly NAV calculation audited by an independent public accounting firm. Blackstone uses it solely to determine the price at which the fund will redeem and sell shares. The NAV also happens to dictate the fees they can earn.
BREIT’s disavowal of its NAV for calculating historical performance is unambiguous but Blackstone’s website, press releases, presentations and SEC filings prominently tout returns based on it. Despite this clear admission, they’ve been using it to report performance to the SEC and felt comfortable enough to pay themselves $4.6 billion in asset management and performance incentive fees based entirely on it. If it can’t be used as a measure of performance, what’s all this bragging about?
If it’s not reliable, please don’t do it again for me.
Very Few Investors Have Made BREIT’s Stated Return
BREIT uses misleading language when it says, “BREIT has delivered strong returns...” BREIT has not delivered any returns except distributions to 80% of its investors. And about half of those haven’t received a dime, since they elect to reinvest their distributions.
BREIT has sold 5,380,409,198 shares since inception and has met redemption requests for just 1,318,817,970 shares. Only investors who bought and redeemed shares have experienced both distributions and changes in NAV. Most of the remaining 76% have been told they cannot sell their shares, so few investors have received what BREIT claims as returns delivered to investors.
The Dividends Are Fake
Did they compute the yield by asking themselves what would sell? Because they’re not earning it. One of BREIT’s big selling points was the ability to get a dividend of around 4% when interest rates were near zero, but the fund cannot – and has never been able to - cover the dividend payment. The current Class S distribution of 3.74% and Class I yield of 4.6% aren’t fully earned based on a key REIT cash-flow measure: Available Funds from Operations (AFFO). AFFO is used to approximate the recurring free cash flow from an income producing real estate vehicle and calculate the dividend coverage.
Blackstone reports AFFO, but their reported number is janky. It omits the management fees they charge. Their rationale is that they have not taken their fees in cash but instead converted their $4.6 billion in fees into I-Shares, which is a class of BREIT shares that has no sales cost load. But their election to accept shares is optional, the shares they receive are fully earned and they can redeem their shares at stated NAV. What’s more, they have redemption priority over other BREIT investors; there is no monthly or quarterly redemption limitation. Blackstone has already redeemed $658 million in shares.
BREIT’s AFFO also omits recurring real estate maintenance capital expenditures and stockholder servicing fees which are part of the sales load. Computing an AFFO more consistent with public company peers would result in a payout ratio for the first half of 2023 of more than 250%.
BREIT Doesn’t Make Enough Income to Pay Their Distribution
BREIT, unlike most big public REITs, has only covered about 13% of their promised dividend distribution. There’s not a single year in which they could cover their payment if everybody elected to receive it. Since inception, the company has delivered $950 million in AFFO and declared $7.3 billion in distributions. That’s a stunning 768% dividend payout ratio.
The website allows users to toggle between the various share classes to see their yield. There’s a distinction between yield on cost and yield on NAV that is important. Investors rolling their dividends are paying 17% above cost.
BREITs recurring distributable cash flow doesn’t come close to covering the dividend. Dividend payout ratios tend to average around 70% or so but Blackstone established a dividend yield unmindful of how much cash was really there to pay it.
And leverage won’t bootstrap these returns. BREIT is levered approximately 49% against NAV and closer to 60% as measured against cost - the average cost of BREIT’s secured borrowings stands at approximately 5.5 % before hedges so the cost of their debt exceeds the yield. There are few ways you can turn these numbers into a double digit return. Rents would have to go to the moon. The only way there can be positive leverage over a holding period (IRR) is if there is a shedload of positive income growth. And that’s exactly what BREIT has baked in the valuation cake. Interest rates went up so the NPV should be way down but – in a fabulous coincidence – future cash flow expectations went up by just enough to offset it. The numerator where revenue growth shows up made up for the rise in rates in the denominator. It’s like a Christmas miracle.
BREIT’s is an odd business model but no analysts cover them – only Robert Stanger and they don’t produce reports for shareholders. The data is out there for anybody to see but Wall Street excels at selling things and there’s no motivation for anybody to connect the dots.
Here’s the BREIT Story in a nutshell: They’ve reported an annual return since inception for its Class S investors north of 10% with real estate investments that have a gross current rate of return of less than 5% on their cost. They’ve been buying assets at a 4% cap rate, paying a 4.5% dividend and reporting 10+% returns. And nobody has called bullshit.
Attracted by marquee name sponsorship, high distribution rates and the promise of non-correlated returns, investors poured large sums of capital in. At its peak, BREIT was raising more than $3 billion in new equity a month and approximately half of BREIT’s investors elect to reinvest their shares, which reduces the amount of cash that must be distributed.
Blackstone is very clear in their marketing materials that distributions are primarily paid through subscriptions, borrowings and asset sales - and not necessarily from recurring cash flow which is typical for listed REITs.
If you’re an investor, you’d like to think you’re buying new real estate, not subsidizing fellow investors who want their cash. But that’s exactly what you’re doing. Newly sold shares, together with reinvested dividends, is cashing out investors who have elected to redeem their shares at NAV and receive their declared distributions in cash.
It’s hard to overcome a bad business model even if you’re Blackstone. Having such high fees and front end load and paying out yields on uninvested dollars is a steep hill to climb. Then, to make it worse, they raised money at light speed at a time when interest rates were low and. Real estate values for the sectors they chased were really high. Blackstone assuredly would have preferred to dollar cost average but they didn’t have that luxury.
AFFO yields generally approximate the recurring equity yields that could be paid to investors if all the cash were to be distributed. As low as BREIT’s current 1.8% AFFO yield is, BREIT’s debt maturities could make it even worse. In 2023, $632MM of their secured borrowings comes due; that number rises to $4.7B in 2024, $9.8B in 2025 and $17.5B in 2026. They will need to roll this debt or distributable cash flow will be further pinched.
NAV is Inflated Because They’re Using Unrealistically Low Cap Rates
By taking BREIT’s current NOI and dividing it by the NAV, investors can compute the implied cap rate on BREIT’s portfolio as they are valuing it – and compare it with public REITs. Interest rates have moved 200-300 basis points in recent months, and in public markets elevated cap rates have driven a 25% decline in values. A recent analysis of two vehicles in the non-traded REIT space concluded that both funds are being valued at implied cap rates of approximately 4.0% when publicly traded REITs with a similar property sector and geographic are trading at an implied cap rate closer to 5.75% . Applying that 5.75% cap rate to BREIT would result in a reduction in shareholder NAV of more than 50%. The current valuation of roughly $14.68/ share should be closer to $7-8/share.
BREIT’s been delivering yields they don’t earn but if I was in their shoes, I would have done the same thing because I don’t have a fiduciary bone in my body either. But it creates a serious problem. Through the end of 2022, BREIT’s performance management fees averaged approximately 1.5X its base management fee, coming entirely from reported appreciation and not increases in real estate yields. Some market participants suggest that the published NAV of BREIT as of December 31, 2022 may be more than double of its true value. The table below shows the potential extent to which BREIT’s shareholders may have overpaid in management fees alone in 2022:
As Robert Chang of Fideres points out, “To the extent that it emerges that inflated valuations resulted in overpayments in management and performance fees, BREIT’s shareholders may consider legal action to seek compensation for their losses. Given Blackstone’s earnings greatly rely on such fees generated by BREIT, potential misconduct could also have a profound impact on the NYSE listed Blackstone’s future earnings.”
Rate hikes have led to a cap rate inversion. The interest rate used to finance real estate is now higher than the average cap rate. How does one own real estate at a negative spread - and justify the values? Cap rates have lagged interest rates, leaving room for cap rates to move higher and put further downward pressure on asset values. Unless interest rates reverse, on a forward-looking basis, we’re going to see write downs that are substantial*.
Who would want to own a bunch of 4.6% real estate at cost in a market with 1-year Treasuries earning north of 5% and 5.5% borrowing costs? And it gets worse: if BREIT investors don’t know anything about Gresham’s Law – they will soon. Their recent report titled ‘Strategic Asset Dispositions: Maximizing Value and Recycling Capital’ notes that “Since January 2022, BREIT has sold $12 billion of real estate assets at a 4% premium to carrying values.” What does that mean exactly? “Premium to carrying values”? Their balance sheet assets are held at cost less depreciation so these so-called 4% gains could be below original cost. The footnotes further report “Profit reflects BREIT’s net sale proceeds and cumulative income.” I’ve never seen a profit disclosed like that. Other verbiage is equally worrisome: “Analysis excludes sales in our single family rental housing and affordable housing sectors where certain third parties, including existing tenants and joint venture partners, have certain buyout rights that may not be reflective of market value.” In the past, BREIT sold assets to newly launched Blackstone funds so they can provide a floor to the assets themselves.
BREIT liquidity means the right to buy, but not to sell BREIT. Blackstone has been adept at damage control, but its handling of the redemption process will rightly open it up to criticism. And potentially litigation. If the true liquidation value is $8-$11/share and the sponsor has been selling shares to new investors at the stated NAV of $14/share, who would pay to defend such suits - BX as sponsor, or the existing BREIT shareholders? YTD, the write down has only been $.27/share. If the NAV is overstated and the assets being sold are their best holdings, shareholders redeeming increase the mispricing of the remaining shares.
If I’m very cynical, and I am, I’d say BREIT has dramatically overstated its performance.
I understand the economics behind what Blackstone did. As you can see, it’s a beautiful day, the beaches are open, and people are having a wonderful time. Blackstone is a summer town. It needs summer dollars. The higher the NAV, the higher the fee and private-equity firms, particularly publicly traded ones, must continually add assets under management to earn more fees and satisfy their shareholders. A management fee of 1.25% applied to BREIT’s Q1 shareholder NAV of $70 billion is $875 million. If the assets are 20% overvalued, that’s almost $325 million extra per year adjusted for leverage. But there’s more to it than that. Blackstone makes a performance fee if the fund exceeds a 5% rate of return. The fund pays 3.7% to Class S investors as a dividend so it doesn’t take much reported appreciation to push this over 5%. Remembering, of course, that they never could afford to pay that 3.7% dividend if shareholders showed up en masse with their palms turned up.
Redemption queues beget more queues. When you yell ‘Gates up!’ you get a panic on your hands. In April, May, and June, BREIT fulfilled 29%, 30% and 17% of share redemption requests as it bought in 5% of its reported share value for $3.4 billion. Meanwhile, new share issuances for the quarter could not help meet the redemption demand, coming in at just $668 million. The imbalance between investments (ex-California) and withdrawal requests reveals their problem. Withdrawals exceed new capital so they are in the position of having to liquidate to meet withdrawals…$3.3 billion per quarter or $13.2 billion per year. The company is shrinking, the balance sheet is contracting, they will have to start liquidating assets and the values they realize are not likely to be those reported via their discounted cash flow analysis.
The spread tells you that Mr. Market does not believe the NAV is right. For the first two quarters of 2023, redemptions requests outnumbered honored redemption requests by about 4:1.
Despite a public-relations blitz by Blackstone, BREIT still has a backlog of billions of dollars’ worth of redemption requests to work through so reassuring investors remains paramount.
The wide chasm between the quarterly demand and the paltry new issuance reveals a supply/demand curve wildly out of synch.
On January 3, 2023, BREIT announced an extraordinary $4.5 billion emergency investment by the University of California Board of Regents. The cash infusion eased pressure on Blackstone to raise cash by selling properties, but it came at the cost of a preferential waterfall. The University of California agreed to hold the position for six years and Blackstone pledged $1 billion of its own BREIT shares to guarantee them a minimum 11.25% annual return. The investment accounted for over 80% of the new shares sold by BREIT in the first quarter, while shares redeemed from selling shareholders amounted to $3.4 billion.
Blackstone says the UC Regents investment of $4.5 billion is an affirmation of their strategy but it’s quite the opposite. It's extraordinary to give one investor preferential treatment. You can’t get your money out, but BX is incentivizing new investors with a better deal than you? They wouldn’t have sold shares at a 22% discount if they were confident that they could defend the franchise without paying $1 billion. Blackstone would only do this deal if it thought burning $1 billion would save the BREIT fee franchise. It is telling that UC didn’t own a share of BREIT until offered a 22% discount.
Blackstone and BREIT’s time and dollar-weighted performance might soon be in a very similar situation. Why? The money came rolling in all at once and they took it, investing in some of the lowest yielding real estate possible. If BREIT honors redemption requests at posted NAVs, it will have to sell properties but most of its assets have been on the books less than two years and are likely under water because they were the biggest buyers of commercial real estate at the top of the market. Private real estate investors couldn’t help themselves from buying record amounts of property at peak prices in 2021-2022. This buying binge is referred to as the “Pie Eating Contest of 2021-22”. The fact that BREIT was paying out distributions on uninvested cash elevated the investment urgency. Investors often invest at the top of the market – it’s not Cathy Wood’s fault, nor is it Blackstone’s. In all fairness to Blackstone, these arguments apply to Starwood, KKR, Hines, Nuveen, and Ares/Black Creek as well.
Mark to Magic
Everybody is slow to sell amid higher rates. Private equity, residential homeowners, commercial real estate – they’ll all in denial. The private market has yet to mark down its assets, while the public market has already re-rated. Principal published a chart recently showing that listed and private infrastructure is in the same predicament:
Where Do We Keep the ‘Beach Closed’ Signs?
The BREIT outflow bear case is playing out. Steve Schwarzman is the Mayor of Shark City, and he finally realizes that he has to close the beaches. Blackstone is the largest commercial landlord in history. This is their crown real estate fund; there are a lot of real estate investors in it. It’s possible they get out of this jam but, short of a reversion of interest rates to historic lows, it ain't gonna be easy. Not like going down to the pond chasin' bluegills and tommycods.
Selling properties to meet liquidity demands is the obvious thing to do but they’re doing everything they can to avoid it because it could be the catalyst for NAV marks to true up to reality. Even with the gates closed, nearly $70 billion in equity NAV with 47% embedded leverage means that if they allow 20% redemptions per year, they will need $27.6 billion in asset sales. $6.9 billion in real estate sales per quarter; $2.3 billion per month. Unless they can start selling properties at the appraisal-based NAVs, they’re in big trouble.
BREIT is the poster child for the “democratization of private assets” but the discounted deal with the University of California doesn’t sound very democratic at all. If your fund manager has to lure investors with an 11.25% guarantee to invest alongside you, you should probably get out as soon as you can - or get your own 11.25% guarantee. In its UC sale, BX appears to have acknowledged that its claimed after-tax yields and tax-equivalent yields were inflated nearly 25% for every webpage report for the six month-ends September 30, 2022 through March 31, 2023. The mammoth increase in alts allocations was driven by a belief shift, propelled in part by performance.
Are We at Peak E&F Model?
Blackstone’s extreme outperformance, however, appears to reflect more than the reporting methodology difference between public and private markets. What if Blackstone has been reporting inflated returns for years? What if it all ends with them saying, “Just kidding”? It might call everything into question. This space has been gaining market share at a rapid pace but if this doesn’t have a happy ending people might not trust these guys in polyester vests as much as they used to. And if you don’t trust PE guys, who do you trust?
This should not be that hard to understand. If you’re awake, you know there is material softness in the commercial real estate market. Brookfield has already defaulted on more than a billion dollars of loans this year. The industry is grappling with growing redemption queues. Investors know something’s coming and don’t need to wait until they see it.
Any investor in BREIT should be monitoring this situation and receiving their dividends in cash. We suggesting getting in the redemption queue, and to remember that it’s not an illiquidity premium that you want to pay for. It’s a liquidity premium. Because when liquidity matters, it suddenly matters the most.
*Footnote: NCREIF National Property Index (NPI) cap rates are value weighted and reflect a blended rate that values the entire NPI as a portfolio based on its most recent NOI. NOI is accounting based and what was collected – not projected next year. Implied Interest rates are based on the interest reported relative to the beginning loan balance on those properties in the National Council of Real Estate Investment Fiduciaries (NCREIF) Index that have leverage. These returns are at the asset level, before fees.