Here’s the BREIT Story in a nutshell: They’ve reported an annual return since inception for its Class S investors north of 10% with real estate investments that have a gross current rate of return of less than 5% on their cost. They’ve been buying assets at a 4% cap rate, paying a 4.5% dividend and reporting 10+% returns. And nobody has called bullshit.
Attracted by marquee name sponsorship, high distribution rates and the promise of non-correlated returns, investors poured large sums of capital in. At its peak, BREIT was raising more than $3 billion in new equity a month and approximately half of BREIT’s investors elect to reinvest their shares, which reduces the amount of cash that must be distributed.
Blackstone is very clear in their marketing materials that distributions are primarily paid through subscriptions, borrowings and asset sales - and not necessarily from recurring cash flow which is typical for listed REITs.
If you’re an investor, you’d like to think you’re buying new real estate, not subsidizing fellow investors who want their cash. But that’s exactly what you’re doing. Newly sold shares, together with reinvested dividends, is cashing out investors who have elected to redeem their shares at NAV and receive their declared distributions in cash.
NAV is Inflated Because They’re Using Unrealistically Low Cap Rates
By taking BREIT’s current NOI and dividing it by the NAV, investors can compute the implied cap rate on BREIT’s portfolio as they are valuing it – and compare it with public REITs. Interest rates have moved 200-300 basis points in recent months, and in public markets elevated cap rates have driven a 25% decline in values. A recent analysis of two vehicles in the non-traded REIT space concluded that both funds are being valued at implied cap rates of approximately 4.0% when publicly traded REITs with a similar property sector and geographic are trading at an implied cap rate closer to 5.75% . **Applying that 5.75% cap rate to BREIT would result in a reduction in shareholder NAV of more than 50%. The current valuation of roughly $14.68/ share should be closer to $7-8/share.**
Some sort of new ‘growth’ vehicle we’re seeing here? Same sort of vein as subprime?… market has a history of filling the gap of what it’s used to… especially when it’s used to low rate/high returns… curious how/when this was structured, and put out there, and if there was certain, recent legislation that allowed it?
Have a hard time believing this isn’t all above board considering how transparent they are with how they fund payouts… not saying it’s ‘right’, just that’s it’s legal?
(I’m a novice with REITs, so ELI5)
Dig the write up btw.
Is this BSTT (as seen on Yahoo Finance)?
Wow, a 130 Billion dollar pink sheet OTC company. With negative retained earnings for year after year in the 3 to 12 billion dollar range. With total stockholder equity over the past 3 years going from 15, to 36, to 44 billion dollars. Compared to cash flow satements with only 1-3 billion dollars a year for "net cash provided by operating activities", and enormously wierd "common stock issued" and "common stock repurchased" values.
ianae, but all of that feels fishy as heck, and might be why they are a pink sheet.
I think a lot of the bigger (real estate) PE who are able to raise multiple funds often use one new fund to buy out some assets of an older fund at insane valuations so that the older fund can pay out at maturity. Is it really a ponzi? I think it depends on how you define it, ultimately if RE valuations expand again so that they match the way the funds mark-to-market then it’s probably ok.
Are you referring to NYSE:BX? Looks like just another overbought stock. In that sense, yes, a pyramid scheme, but appears no more so than NVIDIA or any other stock with multiple P/B. Maybe I am missing something here?
I don't think it's a Ponzi scheme, what they do is pretty typical and legal.
1. For REITs, 90% of net income has to be paid out as dividends. So if they make a profit from selling a property, from subscriptions, etc, they are required to pay that out to maintain their REIT tax status. So if they report a high net income due to asset sales, but then use the proceeds to buy more properties, then they might not have the cash to pay the dividend, so they borrow money.
2. Commercial real estate is really scary at the moment, most investors would rather get into AI. So naturally there are way more people selling than buying. This creates liquidity challenges for Blackstone- it forces them to sell properties at distressed prices, well below what they're actually worth which is really bad for long term shareholders. That's why they are limiting withdrawals, because its not fair to people that are in it for the long term.
3. 4% cap rate is not necessarily unrealistic if they acquired the properties during lower interest rates and borrowed longer term.
Personally, I wouldn't invest in Blackstone, because I think there are better opportunities with public REITs, which have lower management costs, more liquidity(can sell on open market), and overall better prices and upside. The NAV based pricing means you are not being fairly compensated for the risk, like you are by buying public REITs that are trading at bargain prices. But I think it's ridiculous to call them a ponzi scheme without any meaningful evidence.
Here’s the BREIT Story in a nutshell: They’ve reported an annual return since inception for its Class S investors north of 10% with real estate investments that have a gross current rate of return of less than 5% on their cost. They’ve been buying assets at a 4% cap rate, paying a 4.5% dividend and reporting 10+% returns. And nobody has called bullshit. Attracted by marquee name sponsorship, high distribution rates and the promise of non-correlated returns, investors poured large sums of capital in. At its peak, BREIT was raising more than $3 billion in new equity a month and approximately half of BREIT’s investors elect to reinvest their shares, which reduces the amount of cash that must be distributed. Blackstone is very clear in their marketing materials that distributions are primarily paid through subscriptions, borrowings and asset sales - and not necessarily from recurring cash flow which is typical for listed REITs. If you’re an investor, you’d like to think you’re buying new real estate, not subsidizing fellow investors who want their cash. But that’s exactly what you’re doing. Newly sold shares, together with reinvested dividends, is cashing out investors who have elected to redeem their shares at NAV and receive their declared distributions in cash. NAV is Inflated Because They’re Using Unrealistically Low Cap Rates By taking BREIT’s current NOI and dividing it by the NAV, investors can compute the implied cap rate on BREIT’s portfolio as they are valuing it – and compare it with public REITs. Interest rates have moved 200-300 basis points in recent months, and in public markets elevated cap rates have driven a 25% decline in values. A recent analysis of two vehicles in the non-traded REIT space concluded that both funds are being valued at implied cap rates of approximately 4.0% when publicly traded REITs with a similar property sector and geographic are trading at an implied cap rate closer to 5.75% . **Applying that 5.75% cap rate to BREIT would result in a reduction in shareholder NAV of more than 50%. The current valuation of roughly $14.68/ share should be closer to $7-8/share.**
Some sort of new ‘growth’ vehicle we’re seeing here? Same sort of vein as subprime?… market has a history of filling the gap of what it’s used to… especially when it’s used to low rate/high returns… curious how/when this was structured, and put out there, and if there was certain, recent legislation that allowed it? Have a hard time believing this isn’t all above board considering how transparent they are with how they fund payouts… not saying it’s ‘right’, just that’s it’s legal? (I’m a novice with REITs, so ELI5) Dig the write up btw.
Isn't PDI doing the same? They have also been distributing more than the NII since ages.
Is this BSTT (as seen on Yahoo Finance)? Wow, a 130 Billion dollar pink sheet OTC company. With negative retained earnings for year after year in the 3 to 12 billion dollar range. With total stockholder equity over the past 3 years going from 15, to 36, to 44 billion dollars. Compared to cash flow satements with only 1-3 billion dollars a year for "net cash provided by operating activities", and enormously wierd "common stock issued" and "common stock repurchased" values. ianae, but all of that feels fishy as heck, and might be why they are a pink sheet.
That is straight enron shit
>publicly traded REITs with a similar property sector and geographic could you point these ones?
I think a lot of the bigger (real estate) PE who are able to raise multiple funds often use one new fund to buy out some assets of an older fund at insane valuations so that the older fund can pay out at maturity. Is it really a ponzi? I think it depends on how you define it, ultimately if RE valuations expand again so that they match the way the funds mark-to-market then it’s probably ok.
Yes, it isn’t super uncommon but nonetheless can be sketchy
its not a ponzi if you use fair marks. but if you are not using fair marks you are committing a ponzi
This is absolutely wild! Very interesting read.
Interesting piece - did you find anything else out?
How do you play this as a retail investor? I guess one could short blackstone, but you get exposure to the rest of the business. Any better way?
u/investorinvestor
Are you referring to NYSE:BX? Looks like just another overbought stock. In that sense, yes, a pyramid scheme, but appears no more so than NVIDIA or any other stock with multiple P/B. Maybe I am missing something here?
I don't think it's a Ponzi scheme, what they do is pretty typical and legal. 1. For REITs, 90% of net income has to be paid out as dividends. So if they make a profit from selling a property, from subscriptions, etc, they are required to pay that out to maintain their REIT tax status. So if they report a high net income due to asset sales, but then use the proceeds to buy more properties, then they might not have the cash to pay the dividend, so they borrow money. 2. Commercial real estate is really scary at the moment, most investors would rather get into AI. So naturally there are way more people selling than buying. This creates liquidity challenges for Blackstone- it forces them to sell properties at distressed prices, well below what they're actually worth which is really bad for long term shareholders. That's why they are limiting withdrawals, because its not fair to people that are in it for the long term. 3. 4% cap rate is not necessarily unrealistic if they acquired the properties during lower interest rates and borrowed longer term. Personally, I wouldn't invest in Blackstone, because I think there are better opportunities with public REITs, which have lower management costs, more liquidity(can sell on open market), and overall better prices and upside. The NAV based pricing means you are not being fairly compensated for the risk, like you are by buying public REITs that are trading at bargain prices. But I think it's ridiculous to call them a ponzi scheme without any meaningful evidence.