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BREIT: Blackstone’s Bonfire of the Bagholders

Illustration: Edel Rodriguez

Blackstone’s mammoth real estate investment trust, BREIT—more formally, the Blackstone Real Estate Income Trust—recently filed its Securities and Exchange Commission form 10-K annual report, and it’s safe to say the trust has some problems.

These issues matter because Blackstone has made BREIT the centerpiece of a long-term strategy to capture over $1 trillion in wealth management assets from individual investors. At about $240 billion, the firm is well on its way.

In mid-2023, Investigative Reporting Online began reporting on BREIT, six months after the volume of investor’s share repurchase requests compelled Blackstone to exercise its right to restrict repurchases to stabilize the trust’s liquidity.

Based on extensive reporting and the review of SEC filings, BREIT’s troubles in the fall of 2022 were the thin end of a colossal wedge.

The bottom line: Individual investors are paying a high price for a fund with elite marketing and provenance but a problematic valuation. Put another way, BREIT is not out of the woods. Not by a long shot.

That’s because the closer one looks into BREIT, the more red flags there are.

Begin with the obvious: At a current net asset value of $59.26 billion, BREIT is bigger than all but a handful of rivals. From 2020 to 2022, it was almost certainly the fastest-growing investment product in the capital markets. However, by portfolio cashflow measures, it’s generally as profitable as its key competitors, who are vastly cheaper. And 2024 looks like a weak year in BREIT’s key portfolio segments.

Then, there are BREIT’s Securities and Exchange Commission disclosures. They state that the trust is generating ample cash flows. That is not true. The trust can’t pay its 4.7 percent distribution in cash, so it pays half in stock, creating significant dilution for investors. Using one metric, the trust pays at least 150 percent of its free cash flow; with another, it pays over 300 percent. Its competitors average 75 percent.

Investors are pulling a lot of cash out of BREIT. Filings show that the trust had a net outflow of $10.7 billion last year. To fund its repurchases, the trust is selling assets. In turn, BREIT’s already high leverage is now over 57 percent. It appears safe to say that the trend of BREIT declining in size while leverage increases will be a theme for the trust in 2024.

In this light, in December 2022, Blackstone didn’t just dodge a bullet; it also created two classes of BREIT investors: Those fortunate enough to have redeemed their shares before November 2022 and those stuck holding a bag that isn’t worth nearly as much as Blackstone says it is.

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Revealing comparisons

Public market data and basic real estate industry metrics suggest that BREIT’s net asset value is inflated.

A quick way to see this is to use the funds from operation (FFO) multiple. In the simplest sense, the FFO multiple is the REIT market’s equivalent to the ubiquitous price-to-earnings ratio. Specifically, it gives the investor a more accurate look at a REIT portfolio’s operating income because the calculation adds non-cash charges like depreciation and amortization to net income.

(What most REITS call FFO, BREIT calls adjusted funds from operations, or AFFO.)

BREIT’s AFFO multiple is 28.3. In a Citigroup research database tracking over 130 publicly-traded REITs, this year’s average estimated FFO multiple is around 14.

This would usually imply that BREIT’s cash flow generation is superb, its growth is unique, or its net asset value is inflated. (As discussed further below, the trust’s cash flows are unusually poor.) Either way, its multiple is so much higher than nearly all its peers that it warrants examination.

Only two other REITs had FFO multiples that topped BREIT: Equinix, a data center REIT, at 31.4, and Veris Residential, a high-end real estate developer, at 28.4. Equinix is notable because data centers were the highest-performing REIT sector last year. Also, BREIT has made a significant economic and reputational wager on this segment, starting in June 2021 when BREIT and other Blackstone units agreed to purchase QTS Realty Trust at a 21 percent premium to the market. With eight percent of its portfolio in data centers, BREIT’s share of QTS is $6.5 billion, the value of which is centered on developing additional properties. (The sector’s performance is still below June 2021 levels.)

With 78 percent of BREIT’s portfolio in Rental Housing (53 percent) and Industrial (25 percent ), Prologis and Camden Property Trust, the trust’s two most prominent “pure play” competitors in those sectors, are decent proxies.

Prologis, the largest Industrial REIT, has an FFO multiple of 19.4, while Camden, the largest purely Rental Housing sector REIT, has a 14.3 multiple. It is worth observing that comparing FFO multiples should, in theory, be problematic for BREIT, as the more leverage a REIT employs, the lower its FFO multiple should be—and Camden and Prologis have much lower debt levels than BREIT.

Looking more closely at the reasons for the differential in FFO multiples, the net operating income of BREIT’s properties that have operated for longer than a year is an effective tool for comparing its profitability to that of its competitors.

BREIT’s same property NOI was up a little over 5.5 percent last year, lagging Prologis’ 8.5 percent but ahead of Camden’s 4.3 percent.

However, a better side-by-side comparison between BREIT and Camden is possible using “same property” rental revenue growth: Last year, BREIT’s Rental Housing segment reported a 4.9 percent increase in revenues, while Camden’s was 5.1 percent.

While BREIT’s properties generate cash, they hardly perform at the world-beating level a 28.3 FFO multiple would imply.

Another way of looking at it is that the trust’s properties generate cash in line with its established competitors. That shouldn’t be surprising: All else being equal, broadly equivalent assets in a heavily commoditized industry are valued similarly.

Seen that way, BREIT’s actual killer application is its relentless, slick marketing—its website is almost certainly the best in the REIT business—and the cache of the Blackstone name among retail investors. While those attributes are essential in gathering assets under management, they do not support the idea that BREIT’s management is any better at their jobs than their competitors.

Of note: The Industrial and Rental Housing sectors are facing headwinds this year that will likely depress NOI levels. In January, Camden disclosed to investors that the midpoint of its guidance for NOI this year was zero. On April 17, Prologis lowered its full-year guidance due to softer-than-expected trends in industrial real estate.

In an emailed statement, Blackstone disagreed with using cash flow metrics to compare BREIT to listed REITS.

“Comparing the AFFO of BREIT to listed companies is not an appropriate comparison because it excludes non-income producing assets. QTS’ $18+ billion pre-leased development pipeline will generate significant revenue and AFFO in future years.”

Blackstone addressed its skeptical view of the public market’s ability to fairly value a REIT using Camden and the multifamily REIT market as an example. (The answer was given in response to a different question, but it bears on this subject.)

“Specifically, multifamily REITs have traded at a discount to NAV 90% of the time over last four years with Camden today trading at a 22% discount to its NAV per [real estate research and analytics firm] Green Street.”

Public vs. private

While Blackstone objects to comparing private REITs with publicly held competitors—and the firm expands on their thinking below—interviews Investigative Reporting Online conducted with current and former REIT and real estate investment management executives, several of whom worked at Blackstone, though not for BREIT, strongly suggested otherwise. (None of these people would speak on the record because they weren’t allowed to talk to the press, or in the case of the former Blackstone executives, for fear of possible legal issues.)

The consensus view of these individuals was that while BREIT was correct in arguing intermittent public market volatility would distort REIT values, real estate investment managers understood that dynamic and made allowances. However, the idea that a comparison shouldn’t be made between the profitability of portfolios of a large private REIT and a publicly held trust was considered absurd, especially given BREITs sheer size and asset diversification.

Blackstone certainly has a point when it argues that public markets can be erratic and occasionally inefficiently reflect value. Then again, that’s the nature of all markets everywhere. The U.S. dollar-denominated real estate markets are the world’s most liquid property markets, with each sector having numerous competitors, many of them with portfolios with multiple billions of dollars in assets. While these market sectors occasionally distort from manias or panics, they have a track record of at least reflecting a consensus view of an asset’s income-producing capabilities.

Bluerock and BREIT

To that end, consider Bluerock Total Income + Real Estate Fund. A publicly traded $5.42 billion fund-of-funds that invests in institutional private equity real estate securities, the fund’s holdings are a roll call of the world’s largest real estate investment managers, with a collective $380 billion in assets under management.

Bluerock is not a REIT, but its 34 investments meaningfully overlap with BREIT’s key portfolio segments: 70 percent of Bluerock is invested in the Industrial and Apartment sectors, whereas 78 percent of BREIT is in Industrial and Rental Housing. The fund also invests in Blackstone Property Partners, a fund that Blackstone tailored to institutional investors but which co-owns some assets with BREIT.

(Over 11 percent of BREIT’s portfolio are apartment assets. Much of this, though not all, is student housing, and at the trust’s current gross asset value, is worth at least $12 billion.)

Given that 43 percent of Bluerock’s holdings are Industrial REIT securities, a sector whose REITs have been solid performers over the past six months, it’s natural to assume that it would be outpacing BREIT, with its heavy exposure to the slumping multifamily sector.

But that’s not the case. At $28.66, Bluerock’s current net asset value for its class I shares (a $1 million minimum investment) is down over 19 percent from its five-year peak of $35.59, reached in August 2022. Looking closer, in 2023, Bluerock’s NAV per share declined about TK10.8 percent, despite decent returns across the Industrials, Apartments, and Life Sciences sectors, which are 85 percent of its portfolio. Over the past year, the fund has been down a little over 15 percent and has continued its downward drift, with a five percent decline year to date.

In contrast, BREIT’s Class I shares, with a $1 million minimum investment, saw its NAV increase 9.13 percent since January 2022. Bluerock, for the same period, is down 17 percent.

While not explicitly speaking about Bluerock, Blackstone emphasized in a series of comments that BREIT was designed to avoid the volatility that, in its view, handicaps publicly traded REITs and their investors.

“Public REITs, which represent only ~8% of the $21 trillion U.S. commercial real estate market, are inherently more volatile than private real estate values. BREIT was designed to track private market real estate, with its NAV reflecting the fundamental fair value of its portfolio absent the effect of public market volatility.”

“Publicly traded REITs declined 74% during the Global Financial Crisis and 44% during COVID-19, far greater than any decline in private markets. This works in both directions: in 2021, publicly traded REITs in BREIT’s major sectors returned +63%, far exceeding private real estate and BREIT in 2021.”

“Additionally, since 2010, public REITs have seen moves greater than 10% more than 50 times. This has never occurred with net asset values of private real estate over a quarterly period. Unlike most publicly traded REITs that are narrowly focused and invest in a single property type, BREIT’s thematic investing across sectors where we see outsized growth potential has added significant value. This includes exposure to sectors like student housing and affordable housing, which are not readily available to
investors in the public market.”

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There are so many accounting terms and so little time

Investigative Reporting Online’s conversations with BREIT investors and registered investment advisers who have clients invested in the trust illuminated a substantial disconnect between their interpretation of the trust’s finances and its actual disclosures.

Bar none, the most commonly held misconception was that BREIT’s 4.7 percent annual distribution rate is paid out of its free cash flow, “like other REITs,” one investor said, claiming that the evidence for that, “is right there in the damned filings.” (This investor described their initial investment in BREIT as being “about seven figures,” but declined to be identified, “because I’m retired and I don’t need any [more] headaches.”)

Another concerning aspect of the distribution question is consumer behavior. Based on Investigative Reporting Online’s investor interviews, a prevailing sentiment among investors was that the dividend’s size was particularly attractive because of their perception of Blackstone’s strength. To paraphrase one investor, “Blackstone is strong, so the dividend is paid in cash, and thus, the net asset value is reasonable.”

Despite these investors’ firm conviction, neither BREIT nor its non-traded REIT competitor SREIT (the Starwood Real Estate Income Trust) can pay distributions from their free cash flow, unlike their publicly traded competitors, which almost uniformly do.

It is an understandable mistake because BREIT’s filings make figuring out its cash flow situation difficult.

Which, of course, is the first clue that something is likely wrong here.

The official disclosure is what Blackstone calls “Cash flows from operating activities,” which it described as “Sources of Distribution.” It’s an unusual concept for a REIT to cite, and BREIT appears alone in using “cash flow from operating activities” as a key metric, at least among its more prominent, publicly held competitors.

When questioned about this approach, Blackstone argued that there’s nothing to puzzle over. In response to a question about whether there might be a measurement that’s more reflective of BREIT’s recurring income capacity, the firm said, “103% of inception to date distributions were funded from cash flows from operations (“CFO”), which is a GAAP metric. BREIT’s CFO coverage in 2023 would have exceeded 100% if you factor in the $1.6 billion net gain from asset dispositions, which reflects significant incremental value generated by BREIT’s portfolio that is not included in CFO.”

(A recent Financial Times article explored how BREIT’s cash flow from operations fell short of its distributions.)

It’s also noteworthy that BREIT cites its $1.6 billion net gain from asset dispositions as a reasonable source of funds for distribution. There are two ways to look at this; neither is flattering to Blackstone.

First, if a company has to sell its assets to pay its distribution, it is, by definition, not sustainable or recurring because there will come a point where there aren’t enough assets left to sell. Second, the $1.6 billion gain is based on GAAP accounting, where assets are valued based on cost minus depreciation, not the fair value method Blackstone uses to value the trust. This means nearly all the $1.6 billion net gain referenced was already included in BREIT’S net asset value per share before the assets were sold.

To be sure, funding distributions from asset sales are legal and permitted in the trust’s filings; it’s also an implicit acknowledgment from one of the world’s largest financial corporations that they are burning the furniture to save on heating bills.

However detailed Blackstone’s response may have been, the firm didn’t address the critical question of recurring earnings.

So, let’s step back and say that recurring earnings are better understood as free cash flow. While discussing the concept invariably involves navigating a thicket of accounting terms, the simplest explanation is that free cash flow represents the money available to a REIT’s management for distributions, investments, and share repurchases.

More importantly, free cash flow is left after a REIT pays vital expenses like capital expenditures, management fees, and payments to joint or minority partners.

It makes little sense that Blackstone insists that BREIT’s cash flows from operations—before capital expenditures—is a fair measurement of its ability to make distributions. The metric is not a reasonable barometer of its portfolio’s ability to convert revenues into cash flow. After all, who would rent at a property where the plumbing didn’t work or the heating was spotty?

This is why nearly all REITs report a recurring economic cash flow metric that accounts for capital expenditures.

(For the record, BREIT spent over $1.49 billion last year on capital expenditures.)

BREIT’s version of this metric is called “funds available for distribution,” which, as the name suggests, is the recurring income the trust can distribute. Notably, however, it’s a fraction of “cash flows from operating activities.”

Last year, it was just under $1.74 billion. This means that BREIT’s distributions are 157 percent of its funds available for distribution, to use its term. (This is obtained by dividing the trust’s $2.724 billion distributions by its $1.738 billion in funds available for distribution.)

The digging isn’t done yet: BREIT’s funds available for distribution aren’t comparable to most other REITs because the calculation excludes the management fees it pays to Blackstone. To explain: Most REITs are internally managed and have dedicated staff, as well as a series of fixed and variable costs, all of which are expensed on the income statement and generally contemplated in most analysts’ free cash flow calculations; in contrast, BREIT pays Blackstone a 1.25 percent management fee, payable in stock. The logic here is stark: If the management fee is paid in cash, BREIT counts it as an expense in its funds available for distribution calculation, but if it’s paid in BREIT shares, it isn’t. Though it’s permitted under the regulations, the fact that the form the expenses take determines whether they are counted seems inappropriate for a company like Blackstone, which prides itself on transparency and disclosure.

Expensing this $839.2 million management fee would increase BREIT’s distribution payout ratio from 150% to approximately 303%.

A selection of BREIT’s competitors have an average adjusted funds from operation payout ratio of over 69 percent.

                     BREIT Stands Apart (Not In a Good Way)

Regarding the management fee issue, Blackstone stated, “Lastly, and to be clear, management fees paid to Blackstone [are] a non-cash expense that is properly excluded from CFO and FAD but fully captured in BREIT’s NAV and performance calculations.”

Berkshire Hathaway’s Warren Buffett, in his 2015 shareholder letter, had something to say about whether compensation paid in stock is an expense: “It has become common for managers to tell their owners to ignore certain expense items that are all too real. ‘Stock-based compensation’ is the most egregious example. The very name says it all: ‘compensation.’ If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong? Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring ‘earnings’ figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along? Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.”

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The elevator down

The question of what prompted BREIT’s descent from the capital market’s penthouse has the same answer as how it got there so fast in the first place.

Like a fickle god in a Greek tragedy, in early March 2020, the Federal Reserve’s Federal Open Market Committee gave BREIT a nearly perfect operating environment with 150 basis points of emergency rate reductions that brought the Fed Funds rate to almost zero. This kicked off a remarkable real estate boom, and the aftershocks are still felt today. Significantly, tens of thousands of yield-starved investors (and their billions of dollars) were driven into Blackstone’s arms.

But what the Fed made was also destroyed. Two years after its Pandemic-driven rate cuts, in March of 2022, the Fed began the first of 525 basis points of rate hikes.

So, in the fall of 2022, investors finally had yield options—the U.S. Two-Year Note, for example, whose yield was then higher than BREIT’s. After a scorching performance in 2021, where BREIT’s total returns averaged between 24 percent and 30 percent (depending on the class of stock owned), the trust’s monthly returns throughout 2022 had been noticeably cooling down. Everywhere, investors began to reduce their exposure to real estate, and BREIT was no exception.

The trust declined in size between the end of 2022 and 2023. Still, Blackstone’s messaging around the issue was matter-of-fact: Investors’ repurchase requests are being met, the backlog is cleared out, and subscriptions are ticking up, per the April Shareholder Letter.

Tracking BREIT’s capital flows can be complex. (For that matter, so is the language of a private REIT: New investors buy shares in BREIT called subscriptions, and when they seek to exit, BREIT repurchases their shares at the stated net asset value.)

This task is so complex because Blackstone makes it so. Instead, what should be a brief chart in a monthly or quarterly filing becomes a test of endurance, a sort of forensic accounting bloodsport involving multiple document sets, investor call transcripts, and no small amount of deductive inference.

A cynical person might be tempted to think this was done to obscure an unfavorable reality.

Blackstone’s policy is to include shareholder distributions issued as shares alongside new subscriptions; over the past year, this averaged $300 million a quarter. There is a several-week lag between the disclosure of repurchases, filled on the last business day of the month, and subscriptions, disclosed around the middle of the following month. Finally, the University of California’s purchase of $4.5 billion BREIT shares last January, though a life-saving vote of confidence and liquidity, was a one-off transaction.

Here, it’s worth asking how a product designed for retail investors needed an expensive $4.5 billion bailout, one in which Blackstone had to pledge $1 billion of its own BREIT shares as collateral to make the transaction work. In reply, Blackstone noted, “UC’s investment was 57,000 times larger than the median BREIT ticket (~$70,000) and its lockup 72 times longer. In exchange for these terms, Blackstone contributed $1.125 billion of its BREIT holdings to support UC’s return up to a point over the effective 6-year hold period.”

Once those variables are removed, a clearer picture of BREIT’s normalized capital inflows emerges. For Blackstone, it was not a pretty view; it’s uglier in Excel.

From September 30, 2022, to the end of last year, BREIT repurchased $16.13 billion of its shares from investors against only $3.69 billion in new subscriptions. (As noted above, these figures don’t include shareholder distributions or the University of California’s investment to normalize inflows.)

Investors Ankling BREIT Hard

(Source: BREIT and SEC Filings)

A snippet in Blackstone’s first quarter earnings release is a decent example of how the firm obscures the reality of BREIT’s capital flows.

“$807 million of capital raised in BREIT” would strike most readers as good news. The shareholder distribution is approximately $300 million of this amount, making the quarter’s actual amount of investor subscriptions about $500 million, which is congruent with the trend of inflows since last year’s second quarter. The same thing happened in Blackstone’s fourth-quarter earnings release when it touted BREIT’s $813 million in new capital, but per the chart above, new subscriptions amounted to $513 million.

Another factor to consider: Given that BREIT can’t pay its full distribution from free cash flow, shareholder distributions taken in the form of shares are effectively the equivalent of a stock split—there is little economic substance to it, as BREIT is effectively just taking the same net asset value and dividing it by more shares.

During the fourth quarter, BREIT repurchased over $3 billion in shares against that $513 million inflow, so it shouldn’t be surprising if repurchases remain at or above that amount.

In response, Blackstone strongly disagrees with this interpretation.

“The chart you shared references repurchases filled only, not repurchase requests— as such, it excludes context regarding the dramatic decrease in repurchase requests from investors. It also does not show Q1 2024 data. The above chart excludes $4.5 billion in subscriptions from UC Investments in 2023. Subscriptions for March 2024 were $332 million.”

Blackstone included a chart in its comment above showing monthly repurchase requests dropping to $799 million in March.

“We are very encouraged by these trends, particularly as BREIT cleared the backlog of repurchase requests in February 2024. We’re now seeing encouraging signs in terms of new sales, while repurchase requests are continuing their decline in April as well,” the firm added.

Blackstone’s comments warrant some clarification.

The reference to a decline in share repurchase requests should be viewed skeptically. The bulk of repurchase orders happen in the last few days of the month, so drawing inferences from the midpoint of a month isn’t possible.

One big reason the repurchase requests are down is that Blackstone finally worked through the backlog from November 2022.

A simple way to look at monthly share repurchase requests is that they have two steps: In the prior month, a certain amount was requested, but only a portion was repurchased. Thus, the unfilled component of share repurchase requests is carried into the following month and added to any new redemption requests.

The good news for Blackstone is that it filled 100 percent of its share repurchase requests in February and March. The bad news is that the trust has averaged about $800 million in new (incremental) repurchase requests for the last six months, and no data points to anything having changed. Assuming share repurchase volumes stay at this level, BREIT will still be in a net capital outflow of approximately $300 million per quarter, but it’s navigable. However, share repurchase demands were $1.3 billion and $1.8 billion as recently as December and November, leading to $500 million or more in unfilled repurchase requests bleeding into the next month.

Incrementally Growing Smaller

Unmistakably, Blackstone has navigated this crisis—UC’s $4.5 billion proved particularly helpful here—but it is fundamentally still caught between a rock and a hard place: All of its cash flow is used to fund the distribution’s cash component, so repurchases can only be met through a combination of continuing asset sales and increased leverage.

Asked about this scenario, Blackstone argued that its liquidity position is acceptable and wrote: “BREIT has access to ample liquidity across multiple sources, including $8.1 billion of immediate liquidity, $6.8 billion in liquid debt securities, and $119.1 billion of high-quality real estate that can be sold at market prices if we choose to do so. As previously noted, BREIT sold $17 billion of assets at a premium to NAV since 2022.”

Leverage Climbing

BREIT’s problem concerning the volume of share repurchases is that the trust has a great deal of leverage when measured against gross assets. Because the trust has been selling assets to raise the cash necessary to repurchase investors’ shares, its leverage ratio will continually increase.

Where things get strange is that evaluating BREIT’s debt ratios, ordinarily a straightforward exercise, is made more difficult because the trust has an unusual approach: It excludes its $4.38 billion of loans taken out on a portfolio of (primarily) commercial mortgage-backed securities. It does, however, include those securities in its asset tally, thus making the leverage ratio look better than it is.

Blackstone explains that these are “market-standard reverse repurchase arrangements” in which the CMBS are owned by their counterparties.

“These securities are owned by BREIT’s bank counterparties subject to BREIT’s right to purchase them at an agreed price. These are
consolidated under GAAP and presented as gross in BREIT’s financial statements. However, BREIT’s leverage calculation accurately reflects this legal structure on a net basis. This calculation is commonly used across the [non-traded REIT] industry and is clearly defined in BREIT’s SEC filings,” the firm wrote.

BREIT’s disclosure does acknowledge that “Our leverage ratio would be higher” if the loans were held on the balance sheet, but it doesn’t say how much higher. The answer is: A lot.

Using Blackstone’s preferred method of analysis — excluding the unconsolidated loans — the leverage ratio is 49 percent. A more standard calculation that includes its unconsolidated debt is 57 percent.

It’s worth noting how highly leveraged BREIT is. From July to August 2022, leverage jumped to  53 percent from 49 percent as Blackstone reduced assets, using available cash and asset sales to fund BREIT’s share repurchases. Last January, the University of California’s investment provided a cash injection that took leverage down to 52 percent from 55 percent. Still, given the tenor of share repurchase requests, the leverage ratio began climbing again.

Concerning its leverage level, Blackstone questioned whether there was any link between share repurchases and its leverage ratio.

“The link you make between repurchases and leverage is misleading. While satisfying over $13 billion of repurchase requests in 2023, BREIT’s leverage remained consistent. In fact, BREIT repaid $4.0 billion of financings during 2023.”

Why does this matter? As leverage increases, the impact of changes in gross asset value is magnified. Here’s an example: A 10 percent change in gross assets for an unleveraged business is a 10 percent change in equity value. Thus, if gross asset values drop to $90 from $100, the equity is worth $90.

But a 10 percent change in asset value for a business with 50 percent leverage is much higher—$100 in assets goes to $90, but the debt is still $50, so equity goes from $50 to $40, a 20 percent decline. If there are valuation concerns—if the assets are worth $75, not the $100 claimed—then the equity’s value drops dollar-for-dollar. So, in a highly leveraged investment, the remaining shareholders suffer sharp losses if the asset values are impaired, or even credibly questioned.

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Human nature is a constant.

Much of the information in the chart above could have been confidently predicted before BREIT’s 2017 launch, which involved a 30-minute study of basic investor behavior.

Statistically, a measurable percentage of BREIT’s shareholders are procyclical: They absorb risk to pursue returns around a market peak and rush to sell after a correction begins. This behavior goes by many names: A May 2018 Wall Street Journal article refers to it as “The Return Gap,” and a 2016 paper from hedge fund manager Victor Haghani and his then-colleague Samantha McBride described a similar dynamic as “Return Chasing and Trend Following.” It is probably the most well-documented area of personal financial behavior.

When Blackstone committed to offering shareholders monthly liquidity—to sell the shares back to BREIT once a month at the net asset value per share—it appeared to have miscalculated individual investor aversion to short-term losses, even if those are relatively modest. That’s not a slight risk for a business that purchases primarily illiquid, long-term assets.

It’s fair to note that Blackstone’s experience with this investor behavior is not unique. REIT investors are legendarily procyclical: Investors often pile into trusts in search of yield when interest rates are low, only to race for the doors when rates increase. Attractive yields become available in lower-risk investments like Treasury bonds.

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 Blackstone sent a further comment shortly before this article was published. It stated:

“These criticisms are based on a false premise that BREIT could not materially outperform the broader real estate sector despite a portfolio concentrated in the best-performing sectors (data centers, logistics, and student housing) and geographies (virtually no urban exposure). Investors only need to look to the Global Financial Crisis to see how Blackstone Real Estate performs during periods of dislocation—tripling investor capital in major investments like Equity Office and Hilton while competitors struggled or fell away. As always, where you invest matters.”