This is a really important piece and needs to be shared widely. I have been referring to $BX as Omar (“if you come at the King…”) in my work. The tactics they have employed to stifle Phil’s public interest work are beyond sinister. Stay strong 💪
This is a fascinating story, thanks very much for sharing. One question about this passage: "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.". I am assuming this is quite legal, but how is this different in *conceptual* terms from a good-old-fashioned pyramid scheme? Or is that the whole point?
Ponzi* and I'm with you. I get that investor A sells to fund, while investor B buys from the fund, A is effectively selling to B. But it gets stinky when redemptions are gated to LPs but the GPs get to the front of the line without waiting.
I'm really glad I don't have assets with black rock. Saves me from the work of having to fire them.
Phil: Great work on your part. Best I’ve seen on BREIT. Please Google me for my REIT chops then email me if you would like to discuss more re BREIT. I have been sending the points you raise and others to Peter Grant and others at the WSJ for years yet they never show the justified skepticism that you demonstrate. They always let Jonathon Gray have the last word with nonsensical arguments, such as the one you highlight about selling assets at a “profit”. I have two major points that I think you miss (don’t worry, on balance they strengthen your argument), that I would like to share with you. Jon Fosheim. jonfosheim33@gmail.com.
Top notch piece Phil. I shared it over on Twitter. This needs be shared far and wide. I've worked in CRE for over 20 years now and I've simply never seen anything like this.
Great level of detail here. Note that, while they continue to mislead investors, principals of BREIT and SREIT have been aggressively lobbying for lower interest rates so as to rescue asset values.
Anyone in this industry knows that if you were buying CRE, multifamily in the sunbelt especially, from 2020-2022, you were playing a fool's game. This was the time of bridge loans, syndicators, and 3-caps. That's not investing, it's just garbage speculation.
Ah yes, real estate. The real "too big to fail" sector. With the amount of leverage across the asset class, forced selling is likely to expose a massive air pocket. That's an existential threat to the banking system, and the fraud at its core.
You note this is using original publication of data as of June 2023, can you give a high-level summary roll forward of trending/forecasting as of 2024 (do all arguments still hold true, are the cap rate to cost of debt comparisons trending up/down or flat)? If cap rates aren't above 5% at this point, and that's not been adjusted in private valuations at this point, then this short case is stronger than ever.
I'd like to do that. I should do that. Too few hours in the day but I'll see if I can update everything next month or if the story changes to the point where a refresh is appropriate.
There remains significant 'negative leverage' in multifamily, i.e., costs of debt are still substantially higher than cap rates. Cap rates themselves are subject to significant manipulation (use of dubious T-3 figures, etc.) so pinning down precisely where cap rates are for an entire industry or geography is difficult. However, sunbelt multifamily in the Class A/B category is, broadly speaking, around a flat 5-cap when properly underwritten. Agency loan interest rates are in the low-mid 6s.
This is a really important piece and needs to be shared widely. I have been referring to $BX as Omar (“if you come at the King…”) in my work. The tactics they have employed to stifle Phil’s public interest work are beyond sinister. Stay strong 💪
Amazing work. For the life of me I don't know how you managed to avoid using the word Ponzi in every other paragraph. Or Prison.
Fantastic Phil
This is a fascinating story, thanks very much for sharing. One question about this passage: "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.". I am assuming this is quite legal, but how is this different in *conceptual* terms from a good-old-fashioned pyramid scheme? Or is that the whole point?
Ponzi* and I'm with you. I get that investor A sells to fund, while investor B buys from the fund, A is effectively selling to B. But it gets stinky when redemptions are gated to LPs but the GPs get to the front of the line without waiting.
I'm really glad I don't have assets with black rock. Saves me from the work of having to fire them.
Really appreciate your thoughtfulness, diligence, hard work, and courage. Thanks, Phil. Dont stop. Keep plugging.
The world is better off because Grant's Interest Rate Observer exists.
100%
I mistakenly referenced the wrong Grant's article, actually. They were on this way before 2023.
Phil: Great work on your part. Best I’ve seen on BREIT. Please Google me for my REIT chops then email me if you would like to discuss more re BREIT. I have been sending the points you raise and others to Peter Grant and others at the WSJ for years yet they never show the justified skepticism that you demonstrate. They always let Jonathon Gray have the last word with nonsensical arguments, such as the one you highlight about selling assets at a “profit”. I have two major points that I think you miss (don’t worry, on balance they strengthen your argument), that I would like to share with you. Jon Fosheim. jonfosheim33@gmail.com.
Phil: Correction on my email. jfosheim33@gmail.com
terrific analysis. thank you for this great work.
Great post
Top notch piece Phil. I shared it over on Twitter. This needs be shared far and wide. I've worked in CRE for over 20 years now and I've simply never seen anything like this.
Thank you sir
Excellent and important work, Phil. Must-read.
Thanks Melody!
Great level of detail here. Note that, while they continue to mislead investors, principals of BREIT and SREIT have been aggressively lobbying for lower interest rates so as to rescue asset values.
https://mises.org/mises-wire/private-reits-hide-commercial-real-estate-distress-while-begging-bailouts, original here: https://mtsobserver.substack.com/p/private-reits-hide-commercial-real
Anyone in this industry knows that if you were buying CRE, multifamily in the sunbelt especially, from 2020-2022, you were playing a fool's game. This was the time of bridge loans, syndicators, and 3-caps. That's not investing, it's just garbage speculation.
https://mises.org/mises-wire/fed-enabled-apartment-bubble-unraveling, original also on my substack.
Brilliant post.
Ah yes, real estate. The real "too big to fail" sector. With the amount of leverage across the asset class, forced selling is likely to expose a massive air pocket. That's an existential threat to the banking system, and the fraud at its core.
"Liquidity injection" inbound...
You note this is using original publication of data as of June 2023, can you give a high-level summary roll forward of trending/forecasting as of 2024 (do all arguments still hold true, are the cap rate to cost of debt comparisons trending up/down or flat)? If cap rates aren't above 5% at this point, and that's not been adjusted in private valuations at this point, then this short case is stronger than ever.
I'd like to do that. I should do that. Too few hours in the day but I'll see if I can update everything next month or if the story changes to the point where a refresh is appropriate.
There remains significant 'negative leverage' in multifamily, i.e., costs of debt are still substantially higher than cap rates. Cap rates themselves are subject to significant manipulation (use of dubious T-3 figures, etc.) so pinning down precisely where cap rates are for an entire industry or geography is difficult. However, sunbelt multifamily in the Class A/B category is, broadly speaking, around a flat 5-cap when properly underwritten. Agency loan interest rates are in the low-mid 6s.
https://mises.org/mises-wire/negative-leverage-feds-latest-gift-apartment-investors, original here: https://mtsobserver.substack.com/p/negative-leverage-the-feds-latest
How do they get away with this? Sounds like a house of cards akin to CDOs in the last housing bust.