What Happens to a REIT When Markets Get Scared?

According to Stanger Investment Banking, non-traded REITs raised almost $12bn in 2019 and nearly $11bn in 2020. In 2021, Blackstone Group’s BREIT fund raised just short of $25bn. Real estate research firm Green Street estimates that, at the peak of fundraising in the fourth quarter of 2021, non-traded REITs were taking in astonishing net flows of $4bn per month.

In September 2022, when the federal reserve started to raise rates, that had significant consequences for real estate over the next six months. The 1^st Quarter 2023 report from CBRE on the capital market stated the following:

• U.S. commercial real estate investment volume fell by 57% year-over-year in Q1 to $78 billion.
• The annualized NCREIF total return fell to -1.6% in Q1 from 5.5% a year ago.
• The annualized total return for office and multifamily fell to -8.8% and -0.4%, respectively, in Q1.
• Returns are expected to weaken throughout 2023 as private funds write down property values and cap rates continue to expand.

With the news of large inflows to the non-traded REITs over the last four years, interest rates increasing since last September 2022, and the CBRE report mentioned above, DDW wanted to look at the Blackstone Real Estate Investment Trust (“BREIT”) and see how the previous statements have affected that specific REIT. DDW chose BREIT because it is the largest non-traded REIT in the market and has been very successful at raising money.

As of June 30, 2023, the BREIT had $49.4 Billion in total equity. The offering has $138 Billion in total assets and a loan-to-value ratio of 64.87%. (LTV is the calculation by dividing investments by outstanding debt).

In September 2022, the I shares NAV for the offering reached $15.11. The I shares were chosen because it is the share class with the lowest fees and no upfront commission. As of June 2023, the last NAV per share reported for the I shares was $14.69, which equates to a decrease in value of 3.19% over 9 months. As of June 2023, the offering has lost -3.39% for the year, which is worse than the NCREIF Fund Index - Open End Diversified Core Equity, which only lost -2.68% over the same period.

In a letter dated May 1, 2023, (view letter) management for the REIT stated, …

...the Share Repurchase Plan (the “Repurchase Plan”) has allowed for repurchases up to 2% of net asset value (“NAV”) in any month and 5% of NAV in a calendar quarter, subject to BREIT’s majority independent Board of Directors’ broad repurchase discretion. This structure was designed to both prevent a liquidity mismatch and maximize long-term shareholder value. BREIT has paid out $6.2B to redeeming shareholders since November 30, 2022, when proration began. An investor who began submitting repurchase requests when proration began has received ~84% of their money back and the semi-liquid structure is working as intended. 

BREIT received repurchase requests of $4.5B in April, which is flat month-over-month and 15% lower than the peak in January 2023 despite market volatility. Importantly, ~96% of our U.S. investor base and ~93% of investors overall elected to remain invested in BREIT this month. In accordance with the Repurchase Plan, BREIT is fulfilling approximately $1.3B, which is equal to 2% of NAV and represents 29% of the shares submitted for repurchase. Repurchases were fulfilled on March 31, 2023 NAV per share for your applicable share class. 

Source: Blackstone Real Estate Investment Trust Quarterly and Annual Financial Statements

The table shows the number of shares repurchased since October 2022 and the number of dollars possibly tendered. To calculate the dollar amount tendered, DDW assumed the Average Share Price of the tendered shares to calculate dollar amount tendered. That is the best estimate of the dollar amount tendered because management does not disclose that specific number within their quarterly or annual financial statements.

With the decrease in NAV since September 2022, the offering has experienced a decline in NAV of 3.19% but an additional withdrawal of 14.93% of AUM. Over the last 9 months, 670 million shares have been repurchased by management. That equates to around $9.9 Billion of shares repurchased or 14.93% of the total shares as of June 2023.

The troubles facing the offering are further compounded by the offering not covering its distribution. The following table shows the distribution amount for the 6 months ending on the 2^nd Quarter of 2023 and the annual distribution in 2022, 2021, and 2020. The table shows the Adjusted Funds from Operation AFFO for the offering. AFFO is an industry-accepted calculation of how much the underlying real estate pays as a dividend.

Source: Blackstone Real Estate Investment Trust Quarterly and Annual Financial Statements

In an 8-K filed on July 27, 2023, (Link) Management stated the following, 

Since proration began, BREIT has paid out $8.1B to redeeming shareholders and a shareholder who began submitting repurchase requests when proration began has received over 90% of their money back.

DDW does not know where real estate is going over the next 3 to 5 years, and current underperformance could be a blip on the radar. Still, with the offering having a large percentage of shares not being redeemed, a broker dealer might want to look and see what amount of shares has been tendered over the last nine months and if that amount is increasing or decreasing. From that information, you should consider the options available to the firm, their advisors, and their clients.

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Contact Mike Freeman

973.567.6600 | michael.freeman@duediligenceworks.com