Description

(Not Investment Advice, please do your own research!) 

Would you like to look at a stock chart from late 2021 and go back and sell at year end 2021 prices? I've got the trade for you! 

Short Trade - Redeem from BREIT (Blackstone Real Estate Income Trust) if you have exposure. BREIT has not written down their NAV since year end 2021. BREIT gates the redemption to 2% of NAV per month and 5% of the NAV per quarter. But investors can get about 1/4 to 1/3 of their redemption fulfilled per month. So the liquidity is there. BREIT has not marked down their NAV since the Fed started increasing interest rates. In a way, this is a time machine trade. You can go back in time and redeem and get out from BREIT at prices higher than year end 2021. By comparison, the FTSE NAREIT All Equity REIT is down over 30% peak to trough. You can either believe that Blackstone is God's gift to investors and trust their NAV and future value creation. Or you can say "let me exercise my redemption at your mark-to-model." 

Valuation - By my estimate, BREIT trades below 5% for a collection of mostly Sunbelt multifamily, Industrials, and other misc cats and dogs. If we net out the NOI generated by their debt strategy and use their asset value for the debt, we get $138bn - $24.8bn which equals $113.2bn of real estate asset value. Now the Q2 NOI is $1,663mm - $314mm = $1,349mm multiply by 4 equals $5,396mm. This equates to a 4.8% cap rate. 

By comparison, you can buy Mid America ($MAA) and Camden which has similar Sunbelt exposure at almost 7% cap rate. 220bps is a huge spread in real estate. the large cap public REITs are much more cost efficient and the SG&A runs around 30-40bps and they do not charge a promote. BREIT by comparison charges about 140bps in SG&A and management fees. More importantly, the redeeming members in BREIT stays in and wind up buying more of BREIT at 4.8% cap rate while the redeeming holders get out at a 4.8%. There are other fees for coming into BREIT similar to a mutual fund load. I am not super verse in the various fees. But it appears that BREIT is built to skim a ton of fees from their investors. 

Aside from the industrial, data centers, and self storage assets, the hospitality, net lease, office, are trading at high single digit to low double digit cap rates in the public markets. To further break down the residential rental, a portion of BREITs' residential is affordable housing which comes with regulation and headaches. Another big chunk is student housing which historically trades at much higher cap rates. They got the student housing exposure by buying American Campus. 

We owned Preferred Apartments (Sunbelt MF REIT) when Blackstone bought them for a huge premium at or below 4% cap rate IIRC. I mention this because I personally benefitted from Blackstone taking out a few companies in my portfolio. We jokingly call it the "Blackstone Lottery." The one thing that Blackstone has done well is fixing 90% of their debt. I'll give them credit. But a 220 bps spread is a huge delt to make while BREIT charges more traditional Alt Manager fees. Another interesting detail is that Blackstone raised a new fund and half of their Q1 allocation was to public REITs. 

If you redeem, you can creat BREIT's exposure by buying a basket of $MAA $CPT $PLD according to the same rough ratios. 

Risk - The public REIT alternatives have much lower leverage and less left tail risk. They charge less in fees which will likely out perform and investors will start with a 220 bps advantage on the public REIT side. If BREIT outperforms in 5-10 years, it is likely because the leverage at 44% of asset value versus 20-35% in the large cap public REITs.  

Summary - Blackstone's PE is a great business because it forces investors to stay invested for a decade. BREIT's kryptonite is that it allows up to 2% per month redemption. Due to hubris or due to optics, BREIT keeps claiming that NAV deserves to be the same today versus late 2021. As such, you can redeem from BREIT at higher than year end 2021 prices. 

Catalyst

You can redeem from BREIT if you or your family have BREIT exposure. It will take about 3-4 months to get your full redemption at current liquidity profile.