WSR - Billionaire Investor Says 'Buy REITs'

Summary

• Steve Schwarzman and John Gray from Blackstone are seeing the best opportunities in REITs.
• That's because REITs are down sharply even as private real estate values have remained stable for the most part.
• We can expect more M&A in the near term, and now is a great time to accumulate REITs at large discounts to fair value.

Blackstone ( BX ) just recently held its second-quarter earnings call , and in it, we got to hear their thoughts on the best investment opportunities in today's marketplace.

In case you aren't familiar with Blackstone, it is the biggest and most successful private equity investment firm in the world with nearly $1 trillion under management.

They invest across a wide variety of asset classes and have a fantastic track record of earning above-average returns. This includes private equity, real estate, credit, hedge fund solutions, infrastructure, and venture capital among many other things.

Some of the top executives of the company are also self-made billionaires. This includes Steve Schwarzman, CEO, and John Gray, COO of the company.

It is hard to find people who are more experienced and successful at investing, and this is why I listen to every Blackstone conference call.

And the most recent one was especially interesting for me since it heavily focused on real estate investment trusts ("REITs"), which are my favorite investment vehicles.

The CEO and COO appear to both believe that REITs are among the most opportunistic investments in the current marketplace.

Here's what Blackstone CEO Steve Schwarzman said about their real estate investment strategies:

In real estate, while the public REIT index fell 17% in the quarter, our Core+ funds were up 2.3% . I'll do that again for you. The index is down 17%, we were up 2.3%. And our opportunistic funds protected capital, down only 1%, so we only performed by 16% for our customers over the index.

For the first six months of the year, our real estate strategies appreciated 9% to 10% versus a 20% decline in the REIT index , equaling an outperformance of roughly 3,000 basis points. I don't know many asset classes that perform -- outperform indexes by 3,000 basis points. [added emphasis]

And keep in mind that the 20% decline is just the average of the REIT sector ( VNQ ). Many individual names are down closer to 30% or more even as private real estate values have held up and even continued to grow in some cases. UMH Properties ( UMH ), Alexandria ( ARE ), and Simon Property ( SPG ) are high quality REITs and they are all down by ~30%:

Blackstone's COO John Gray explains that this clearly signals that REITs are now cheap and opportunistic:

The best opportunities today are clearly in the public markets on the screen and that's where we're spending a lot of time.

So the world's biggest and most successful private equity investment firm is telling us that some of the best opportunities in today's market are in publicly-listed REITs.

And these are not just empty words.

Blackstone has invested 10s of billions into REITs over the past years. This year alone, they have bought out 4 different REITs for a total of ~$30 billion:

• Preferred Apartment Communities for $5.8 billion
• American Campus Communities for $12.8 billion
• PS Business Parks for $7.6 billion
• Resource REIT (non-traded) for $3.7 billion

Last year, they also took private a data center REIT called QTS Realty for $10 billion.

So they are not just telling us that REITs are cheap, they are also taking action and putting their money where their mouth is.

And to repeat myself: this is coming from arguably the most knowledgeable real estate investment group in the world.

What are they seeing in REITs that others aren't?

As I explain in a recent article , I think that REITs offer a once-in-a-decade chance to win big. This is because:

1) They are heavily discounted: Many REITs are currently priced at 20, 30, 40, or even 50% discounts to the underlying value of their properties. According to GreenStreetAdvisors, the discounts are today some of the largest in years. To give you a few examples: BSR REIT ( BSRTF ) is currently priced at 25% discount to NAV, and yet, it owns apartment communities in Texas that enjoy rapid rent growth. An even more extreme example would be Vonovia ([[VNNVF]], [[VONOY]]), the leading apartment landlord in Germany. It is priced at a 50% discount to its net asset value at the moment, which is the biggest discount in the company's history.

2) They actually benefit from inflation: Today, rents are growing some of the fastest in history. BSR REIT, as an example, is hiking rents by 15% at the moment and since its rents remain below market averages, it has further growth ahead of it. The same is true for most industrial REITs. STAG Industrial ( STAG ) is hiking rents by 17% on expiring leases at the moment. Meanwhile, inflation is also causing the mortgages of REITs to be inflated away, which only increases the value of their equity.

3) Rising rates are not a big issue: REIT are today discounted because of fears of rising interest rates. But what investors appear to have missed is that REIT balance sheets are the strongest in their history with LTVs at just ~35% and maturities are also historically long. Therefore, the impact of rising rates will be limited and far lower than the positive impact of inflation. Blackstone understands this.

4) Valuations always eventually recover: Historically, REITs have always recovered from every single sell-off and returned to trading at small premiums to NAV. This time, valuations are low, despite enjoying strong fundamentals, and therefore, we think that it is only a question of time before valuations recover. The likely catalyst will be when inflation cools off and puts an end to interest rate hikes.

5) Blackstone and others will keep buying REITs: As long as prices remain opportunistic, we can expect Blackstone and other large players like Brookfield ( BAM ) to keep buying REITs left and right. Their purchases are typically made at 15-20% premiums, giving us a quick path to upside while we wait and earn dividends.

But which REIT should you buy?

There are over 200 REITs out there and some are far more opportunistic than others.

At High Yield Landlord, we invest heavily in those REITs that are likely buyout targets for private equity players like Blackstone. The interesting thing is that because most private equity companies closely listen to Blackstone and follow their moves, we think that we are likely to see another way wave of M&A in the near future if prices remain this low.

We target mainly highly demanded properties like apartment communities in Texas (BSR REIT) that are temporarily mispriced by the public REIT market.

Another good example would be grocery-anchored service-oriented shopping centers in high-growth sunbelt markets. Whitestone REIT ( WSR ) owns such properties and it is priced at a 30% discount to NAV.

By owning a portfolio of such REITs, we are able to earn a near-10% cash flow yield while we wait for their value to be unlocked. On average, our portfolio is currently priced at a 30% discount to NAV:

Bottom Line

Real estate values are stable or up in 2022, but REIT share prices are down sharply, and as a result, many now trade at large discounts to their net asset value.

Historically, it has almost always been a great time to accumulate REITs when they were priced at large discounts.

Will this time be different?

Blackstone is telling us that it won't be, and they know real estate better than anyone else.

For further details see: