Investment analysis tends to be only as good as the expertise of its sources. Regarding commercial real estate, some of the biggest misconceptions held by people outside the industry include the assumption that all commercial properties are created equal and that office buildings make up the majority of the commercial real estate sector. (In reality, offices are about 15% of the market). Over the past couple of years, this has led to panicked headlines about the crisis in commercial real estate, when in reality, the concern has mostly focused on the office sector. In the last round in this genre, New York Times published a story earlier this week that questioned the valuations of Blackstone's BREIT non-traded REIT portfolio. Other media picked up the news, running headlines that included “Inside the growing alarm for Blackstone's BREIT real estate fund“and”Veteran analysts say the world's largest private company could be in deep trouble.
New York Times The article focused primarily on how Blackstone comes up with valuations for BREITs, given that the discounts it has posted over the past few years have been minimal compared to the more than 14% drop in NAV for publicly traded REITs between 2022 and today, according to consensus analyst estimates. . The authors pointed out that while BREIT uses a third-party valuer and an independent auditor to value its properties, the final valuation is determined after its adviser reviews it. The Black Stone released an update to its shareholders this week which included a section dealing with its evaluation process. It emphasized that its evaluation process and disclosures adhere to guidelines from the SEC, FINRA and the Institute for Portfolio Alternatives. Furthermore, “We believe there is no better affirmation of the rigor of our valuations than the fact that in the last two years BREIT has sold $20 billion in assets at an average price of 4% to book values, generating over 4 billion dollars in profit for our investors”.
“Our process requires us to use monthly property valuations that have been provided by a third party; we have never overlooked these in BREIT's history,” said a Blackstone spokesperson. “We stand by our rigorous valuation process, which is virtually identical to what we use for our open-ended institutional funds and has been proven by $20 billion of assets sold at a premium to NAV since 2022.”
However, according to Luke Schmidt, senior financial analyst with management consulting firm Blue Vault Partners, BREIT is not the only non-traded REIT using this approach. For example, Starwood REIT's ( SREIT ) prospectus contains the same language about retaining the authority to override third-party ratings as BREIT, Schmidt noted.
In fact, BREIT's property valuations may include higher discounts compared to its peers in the non-traded REIT space, he said. For example, while BREIT uses a cap rate of 7.2% for its multifamily properties, JLL Income Property Trust uses a cap rate of 7.0% and SREIT a cap rate of 6.8%. Meanwhile, while BREIT uses a cap rate of 7.5% for its industrial properties, SREIT, JLL Income Property Trust and Ares Industrial REIT all rate a cap rate of 7.2% on average.
In its latest note to shareholders, BREIT noted that it “widened assumed exit cap rates in its core rental and industrial sectors by +18% and discount rates by +13% (in each case , reducing asset values) as of December 2021. … We believe BREIT's valuation assumptions adjusted more quickly and are more conservative than non-listed REIT peers.”
While it may make sense to take a closer look at BREIT's assessment methods, “to say something is really wrong might be a stretch,” Schmidt wrote in an email.
“I don't see a real problem with how they are valuing these properties,” he added. “BREIT is also the most diversified REIT in the industry just because of its size compared to everyone else. Other funds that are more specialized, or less diversified, will naturally see more drastic changes in their values if these particular sectors are affected one way or another.
Similarly, Kevin T. Gannon, chairman and CEO of investment banking firm Robert A. Stanger & Company Inc., noted that the BREIT capital rates disclosed for each asset class it owns fall within the range of published ratings. in survey data used by commercial real estate professionals. For example, in March, equity rates for closed transactions involving multifamily properties averaged 5.4%, according to research firm MSCI Real Assets, showing significantly higher estimates than those listed by BREIT. Capital rates for transactions involving industrial property averaged 6.1%.
“We can't say they misjudged it,” Gannon said. “They seem to fall within market parameters.”
In addition, BREIT's portfolio carries a high concentration of properties in high-growth sectors, he noted.
Eighty-seven percent of BREIT's properties are spread across three sectors: multifamily rentals (including apartment buildings, student housing, single-family rentals and affordable housing), industrial and data centers. The remainder is split between net lease assets (5%), office (3%), hospitality and retail (both 2%) and self-storage (1%). The portfolio currently has an occupancy rate of 95%. It has a leverage ratio of 49%, with 86% of its funding coming from fixed-rate loans and the remaining 14% from floating-rate debt. Year-to-date, BREIT posted a total net return of 1.8%, including 0.6% in March.
While industry experts expect apartment and industrial rents to experience a short-term drop in demand due to the large volume of new construction coming onto the market over the next year, there is little concern about their performance prospects. long term. During the year ending in March, the industrial property price index tracked by MSCI Real Assets posted a 5.7% increase. Apartment properties fared worse, down 8.4%, but prices in apartment buildings remained 11% above their pre-pandemic level, MSCI researchers wrote.
Industrial properties and apartments also accounted for the lowest volumes of distresses, including bankruptcies, loan defaults and court administrations, in the commercial real estate universe in the first quarter. Of the $88.6 billion in distress, industrial assets accounted for just over $1.6 billion and apartment buildings $9.9 billion, MSCI Real Assets reported.
According to a recent one Looking for Alpha note in private REITs authored by Brad Thomas and Christopher Volk, BREITs' is a “large and diversified portfolio broadly concentrated in the Sunbelt states with 85% of rents derived from… three sectors prized for their reliability which surprisingly also rank among the highest rated in the publicly traded REIT space.”
One of the questions New York Times raised about BREIT's strategy asked why it has not disposed of significant amounts of apartments or industrial properties recently. However, property owners who do not experience hardship or an unforeseen need for cash generally do not sell assets in a discounted market. While BREIT sold some assets in 2023 to meet its buyback requirements, “my guess is that they would want to stay in these asset classes for as long as possible as they are performing better and are expected to continue with high performance in the near future,” Schmidt wrote.
Broader market trends bear this out. In the first quarter, sales of apartment building investments fell 25% year over year, MSCI Real Assets reported. Sales of industrial properties fell by 20%.
According to Gannon, investors and financial advisors do think BREIT may be overvalued, as evidenced by the fact that inflows did not exceed outflows in the first quarter. Brad Thomas, in his Looking for Afa note, argues that divestment may be the right move since publicly traded REITs can offer investors more for their money. But the company has met its repayments and has not closed them, Gannon said.
“Investors have the final say,” he noted. However, Blackstone has responded well, according to him. “They're standing in there; they are dealing with redemptions.”