Publicly-traded companies have been a frequent target, including Preferred Apartment Communities Inc. and university-housing landlord American Campus Communities Inc. The student-dorm deal accounted for almost $13 billion of the $21 billion of announced REIT take-private transactions in the first half of 2022, according to Jones Lang LaSalle Inc.
BREIT parked some 20% of its money into warehouses and logistics centers, in a bet that e-commerce would buoy rents. Even more money went to residential property, which now accounts for about half of its portfolio. Executives have a thesis that a housing shortage would give property owners leverage to constantly reset rents. This way, the fund could squeeze enough cash to offset inflation, which Gray had predicted in early 2021 would be persistent and stubborn.
BREIT last year took over Home Partners of America, which now owns 30,000 homes. It was a platform through which Blackstone could say it was giving renters a chance to to become homeowners. The REIT expanded further into affordable housing with a roughly $5.1 billion purchase of properties from American International Group Inc. last year.
Blackstone executives concede that going forward, landlords across the board will find it harder to raise rents for apartments and single-family homes at the same pace as before, said people close to the firm. But rental rates for warehouses, especially those in urban areas, are poised to continue to show strong growth as companies look to shore up inventory with supply chains snarled, the people said.
Rising interest rates have led BREIT to lower expectations on what it could earn from exiting its bets, though rising cash flows from rents have supported property values for now.
With markets churning, some deals that BREIT was chasing earlier this year don’t make sense. BREIT and others had been looking at a sizable block of affordable housing apartments this year but recently lost interest, according to a person familiar with the matter.
BREIT ramped up swap trades to counter the effect of rising interest rates across the fund’s portfolio. The swaps will generate cash for BREIT as long as interest rates are above certain levels.
A floating-rate mortgage on the Cosmopolitan of Las Vegas, a 3,000-room hotel BREIT acquired alongside partners for $5.65 billion, has risen to about 7%, up almost two percentage points from the loan’s initiation in June. Another adjustable-rate loan on a slice of debt on its takeover of American Campus Communities has also climbed to about 7%. Those increases have been canceled out with interest rate swaps, according to people familiar with the matter.
Those swaps, combined with cash flows from BREIT’s properties, have helped bolster the fund’s value. Meghji said the firm has locked in or hedged 87% of BREIT’s debt for the next six and a half years.
Blackstone representatives told one wealth management group recently that BREIT plans to consider doing more deals as a debt investor than it has before. That’s in contrast to buying equity, in an effort to protect money better in a downturn.
BREIT’s 9.3% net return in its most popular share class in the nine months ended September stand in stark contrast with publicly traded REITs, which tumbled about 30% in value this year through September. Meanwhile, BREIT's returns are narrowing compared with the same period last year, when that share class delivered 21.5% returns.
“Before interest rates were so low and BREIT always had growth,” said Gannon of Robert A. Stanger. “Now it’s a bit more difficult.”
--With assistance from Patrick Clark and Noah Buhayar.
This article was provided by Bloomberg News.