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Brett Arends’s ROI: Why I don’t have Blackstone REIT envy

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Thanks, but no thanks, on the giant $126 billion Blackstone REIT known as “BREIT.”

OK, so early investors have apparently doubled their money in the fund’s first six years, as the private equity giant used their funds to go out and vacuum up thousands of American homes, mostly across the Sunbelt, as well as warehouses and other assets.

Total returns since the January 2017 launch: A stellar 93%, the fund reports. BREIT was even up in 2022, while REITs generally tanked.

No wonder the University of California has just plunged $4 billion of its endowment into the fund for the next six. I wish them the best.

But I don’t envy the rich and well-connected who get access to these glamorous high-hat funds. Maybe they’ll make out like bandits. Maybe they won’t. But here’s why I’m not green at the gills.

1. I notice that BREIT has been struggling with client redemptions for months. Blackstone actually had to cap the monthly withdrawals to stem the tide. The total amounts withdrawn aren’t huge. Nonetheless a fund capping redemptions looks to me like a nightclub that has the rope line on the inside, and only lets a few people leave at a time. Not appealing.

2. It’s not even clear that “REITs,” or real-estate investment trusts, are a separate asset class. I’m agnostic, but these guys think they aren’t.

3. Sure, the fund has widely outperformed U.S. public REITs so far, but is that sustainable? Larry Glazer, portfolio manager at Mayflower Advisors in Boston, says BREIT has benefited so far from some smart choices, like buying warehouses, and homes in the Sunbelt, and avoiding the disastrous office and retail industries. “It is understandable that the other real-estate investors would be jealous of Blackstone’s performance and their investment allocation decisions,” he tells me. “They were overweight Sunbelt multifamily residential while others were investing in office buildings. There’s clearly a case of BREIT envy.” But, he says, although Blackstone made good choices “ultimately the return is only the return of the asset class,” meaning real estate. Over time, you’d expect returns to converge.

4. The fund has also benefited from significant debt that has goosed returns: 47%, according to Blackstone
BX,
-1.82%
.
They’ve basically added a dollar in debt to each dollar invested. Leverage is a wonderful thing—so long as things go your way.

5. If this REIT continues to earn superior returns, I assume the extra benefits or “alpha” will accrue to the insiders more than to the outsiders: Either at Blackstone, or at all the competing firms that will follow its lead., or both. That’s not a nefarious prediction: It’s the way of Wall Street, whose greatest book is entitled “Where Are The Customers’ Yachts?” Let the record show that if you had invested in Blackstone’s BREIT six years ago you’d be up 93% — but if you had invested in Blackstone itself over the same period of time you’d be up way more. Try: 240%.

6. I’ll go further: By definition, anyone who really knows how to beat the market month after month, year after year with similar risk doesn’t need your money anyway. They can use their own. If I held a winning lottery ticket, would I share the winnings with strangers? If I discovered a gold mine in my backyard, would I wander around the neighborhood renting out shovels? This is why Renaissance closed its doors to outsiders.

7. The problem with the rope line at the exit (see point 1) is that when you buy into these private REIT vehicles you can’t just get your money out instantly when you want it. Redemptions can only take place monthly. Thanks, but no thanks. Like with leverage (point 4), restrictions on redemptions don’t really matter—until they do.

8. A major reason private REITs such as BREIT have done better than publicly traded ones is a simple matter of valuation. The REITs that trade on the stock market were, until recently, very expensive. They were trading at a substantial premium to their net assets. Now, however, they are trading at a substantial discount to their net assets. So they are a much better deal than they used to be. Glazer says “It is cheaper to buy real estate on Wall Street and not Main Street for the first time in a long time.”

The Blackstone REIT fund remains controversial. And not just because Blackstone is run by Stephen Schwarzman—this guy.

The private equity giant, like all in its industry, profits enormously from the “carried interest” tax loophole, a Robin-Hood-In-Reverse, steal-from-the-poor-and-give-to-the-rich boondoggle to make the Sheriff of Nottingham blush. There have been many fears and accusations that the firm is using its market power to buy up vast swaths of American homes, driving up prices, making homes less affordable, and giving it the power to gouge on rents.

Blackstone’s defenders argue the fears are misleading. Among the pertinent facts: The fund’s size, at $126 billion, is less than a third of 1% of the size of the U.S. housing market, at $43 trillion.

Still, $126 billion buys a lot of real estate, especially if you focus it on certain regions. Whether the conspiracy theories end up justified or not, only time will tell.

Meanwhile, I’m pretty happy with all the publicly available trusts, funds, bonds and stocks available to those of us in the cheap seats.

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