“NAV REITs raised a substantial amount of capital, showed some good NAV growth while the Fed was raising rates and traded REITs were declining,” said Kevin Gannon, chairman and CEO of Robert A. Stanger & Co in Shrewsbury, N.J. “The NAV REIT investors and financial advisors responded by slowing the rate of fundraising and increasing the rate of redemptions. It is likely that there will be some decline in [all] NAV REITs to be recorded in the near term.”
Gannon noted that Blackstone's ability to meet $3 billion in redemptions was impressive and said that those NAV REITs focused on multi-family housing and logistics facilities had enjoyed strong performance in recent years. However, he wasn't surprised investors were now looking elsewhere. "Right now, CDs, traded REITs and BDCs relying on variable rate investments may be more appealing," he said.
"It's great that BREIT could meet that $3 billion demand," agreed Meghan Pinchuk, CIO at Morton Wealth in Calabasas, Calif. "But now this means they don't have that cash to make investments as prices come down in real estate."
It's not surprising then that Blackstone appears to be trying to shore up BREIT's internal liquidity. Bloomberg recently reported that Blackstone CEO Jon Gray personally invested $100 million in the fund. And last week, BREIT sold its 49.9% interest in MGM Grand and the Mandalay Bay in Las Vegas for $1.27 billion, according to Reuters.
Private REIT Structures
The Blackstone letter that appeared on BREIT’s website explaining the closing of repurchases was just three paragraphs long, beginning with a summary of the way the repurchase plan worked. It allowed for repurchases of up to 2% of NAV in any single month and up to 5% of NAV in any single quarter. SREIT’s repurchasing limits are the same.
“This structure was designed both to prevent a liquidity mismatch and maximize long-term shareholder value,” the BREIT letter stated.
Back in October, the repurchase requests were 2.7% of NAV, or about $1.8 billion, the letter said, and the board of directors agreed to fulfill 100% of those requests. But then in November, repurchase requests again exceeded 2% of NAV and between those two months the 5% allotment for the fourth quarter was also exceeded, the letter said.
“Accordingly, BREIT repurchased approximately $1.3 billion in November, equal to its 2% or NAV monthly limit and approximately 43% of each investor’s repurchase request,” the letter said. “In December, up to 0.3% of NAV will be eligible for repurchase to total 5% of NAV for the quarter. If BREIT receives elevated repurchase requests in the first quarter of 2023, BREIT intends to fulfill repurchases at the 2% of NAV monthly limit, subject to the 5% of NAV quarterly limit.”
According to Barron’s, SREIT hit its November limit when investors tried to redeem 3.2% of NAV. SREIT fulfilled 63% of those requests.
In some ways, these nontraded REITs seem to be victims of their own success. BREIT is open to investors with $25,000 in investible assets and required a low minimum investment of $2,500. SREIT offered some share classes for investors with a net worth of at least $70,000 and gross annual income of at least $70,000, with a minimum investment of $5,000.
“The teachable moment here is around this kind of structure,” Pinchuk said, adding that she avoids investments that have all the hallmarks of liquidity and yet don’t have a regular valuation mechanism that would support that.
Some are also questioning whether the brokers and advisors who sold these NAV REITs provided investors with sufficient education. “Historically, you had to be a more sophisticated investor, or be associated with a more sophisticated advisor, to access alternatives. But because the Blackstones made it easier to get into, there are a lot of people in the fund who, guaranteed, do not understand it,” she said.
The suspension of repurchases is absolutely the right thing for these funds to do, Pinchuk continued, to protect the investors who intend to stay. “It keeps the price from tanking so they won’t be left holding a bad asset,” she said. “There will be some unhappy investors, but they’re the ones not properly educated by their advisors. This is why the gate is there. It’s not appropriate for BREIT to let out more than the structure can handle.”