2023-05-06 09:00:00 ET
Summary
- Steve Schwartzman and John Gray are self-made billionaires.
- They are buying REITs through Blackstone Inc.
- They appear to think that REITs present a historic opportunity.
Steve Schwartzman and John Gray are two of the most influential investors of all time. They are both self-made billionaires and they run the world's biggest private equity group: Blackstone Inc. ( BX ).
Steve Schwartzman is its CEO and John Gray is its COO. Their track record bests even that of Warren Buffett's Berkshire Hathaway Inc. ( BRK.B ):
So, needless to say, it is worth following what they are doing!
Fortunately for us, Blackstone happens to be a public company and so they need to regularly release results, disclose their latest moves, and also hold quarterly conference calls to discuss them.
The last one was just 2 weeks ago, and it once again reaffirmed what we already knew:
Today, Blackstone is seeing the best opportunities in the publicly-listed REIT ( VNQ ) sector right now. These are listed real estate investment trust ("REIT") firms that allow investors to invest in real estate by buying their stock.
REIT share prices collapsed last year following the surge in interest rates, and Blackstone has been buying them hand over fist ever since.
In 2022 alone, it bought an estimated ~$30 billion worth of REITs.
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American Campus Communities ((ACC)) for $12.8 billion (which profited members of High Yield Landlord)
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PS Business Parks (PSB) for $7.6 billion (which also profited our members)
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Preferred Apartment Communities ((APTS)) for $5.8 billion
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Resource REIT for $3.7 billion.
And last quarter, they bought yet another REIT, this time in the UK. Here is what John Gray said on the recent conference call (emphasis added):
"We have nearly $200 billion of dry powder to take advantage of dislocation. With stock markets under pressure , we did agree to privatize two public companies in an otherwise muted deployment quarter, including a leading provider of events management software and a logistics REIT in the UK. "
Later in the call, he also said that:
"We hold $16 billion of public stock in our private equity and real estate drawdown funds. When markets ultimately stabilize, we are well positioned for an acceleration in realizations."
I think that this sends a strong signal.
There is a dislocation between the valuations of the stock market and the private market and Blackstone is taking advantage of this dislocation by buying shares of listed REITs.
When asked about where they see opportunities for further capital deployment, John Gray answered the following (emphasis added):
"It can also be in liquid real estate securities , debt securities where people are just cautious and trying to reduce exposure. We talked here at the beginning of the call about the massive differentiation across real estate. And now at times you see people just pulling back regardless of the sector they're exposed to."
Here, he once again points to the opportunity in REITs and other listed real estate securities. The last sentence is especially interesting because it refers to the fact that all REITs are discounted, even those that invest in strong sectors like industrial properties.
Coincidentally (or not!), Blackstone just announced that it would acquire another industrial REIT for nearly $1 billion and they paid a 42% premium above its latest closing price - which clearly suggests that these companies are undervalued.
Why are these highly-successful and sophisticated investors going after REITs...
Right as most investors appear to be running away from them?
I think that it really comes down to one thing and it is valuation.
Blackstone is opportunistic.
They like to invest in all sorts of alternative assets, but they like it even more if they can get them at a low price.
And today, REITs happen to be heavily discounted relative to the value of the real estate they own. According to a recent study, REITs are currently priced at an estimated 28% discount relative to their net asset value, on average. These valuations are reminiscent of the great financial crisis:
Janus Henderson
What this essentially means is that Blackstone can buy real estate through REITs at 72 cents on the dollar.
And that's just the average discount.
There are a number of REITs that are even cheaper. To give you a few examples, we estimate that Alexandria Real Estate ( ARE ), BSR REIT ( BSRTF ), and Whitestone REIT ( WSR ) are priced at ~40% discounts to their net asset values.
That's the equivalent of buying real estate at 60 cents on the dollar.
Of course, if the real estate is bad, then this may not be such a great deal.
But in most cases, that isn't the case. These REITs typically own very desirable assets that enjoy growing rents.
So why is the market pricing REITs at such low valuations?
There are two main reasons - both of which are unjust in our opinion - and that of Blackstone:
Reason #1: Fears of Rising Interest Rates:
REITs are perceived to be highly sensitive to interest rates and so when rates surged, REITs crashed.
But here's the reality: REIT balance sheets are today the strongest they have ever been with an average loan-to-value of just 35%. This is the equivalent of buying your home with a 65% down payment, which would be perceived as overly conservative by most home buyers.
Moreover, most of this debt has a fixed rate and long debt maturities. Many REITs like Alexandria have no major maturities for years to come.
Finally, and perhaps most importantly, interest rates only surged because inflation is so high. This inflation benefits REITs because it results in rent growth and increases the replacement cost of their assets. BSR REIT ( BSRTF ) has been growing the rents of its apartments by 10-20% annually in recent years. The high interest rates and inflation has also put new development projects on halt, reducing new supply growth, just as increasingly many turn to rent since ownership is becoming unaffordable. This positions REITs for further rent growth in the coming years.
So higher interest rates have an impact, but it is not nearly as significant as the market is today pricing. In most cases, REIT cash flows have kept on rising because the positive impact of high inflation has been a lot greater than the negative impact of rising interest rates.
Reason #2: Fears of the Office Property Sector:
This one makes even less sense.
There are a lot of fears surrounding the office property sector at the moment and this is well-justified when you consider that it is facing a perfect storm.
The combination of work-from-home, a recession, rising rates, and tighter borrowing conditions are leading to more and more defaults.
But here's the thing: offices only make up about 5% of the REIT sector.
Today, the vast majority of REITs invest in defensive property sectors such as warehouses, distribution centers, apartment communities, single-family homes, manufactured housing communities, timberland, farmland, cell towers, data centers, storage facilities, etc.
Most of the REITs that own these properties are today doing very well with growing rents and high occupancy rates, but they have all seen their share prices drop in association with the office property sector.
Talking heads on TV will often refer to offices as "commercial real estate" and associate REITs with offices - leading to lots of confusion and irrational fear.
That's precisely what John Gray was referring to on Blackstone's latest conference call (emphasis added):
"It can also be in liquid real estate securities , debt securities where people are just cautious and trying to reduce exposure. We talked here at the beginning of the call about the massive differentiation across real estate. And now at times you see people just pulling back regardless of the sector they're exposed to."
That's The Opportunity!
You now get to buy good real estate that's conservatively financed, professionally managed, liquid, and diversified at a steep discount to its fair value.
REITs are rarely this cheap, and the last two times REITs were so cheap they rapidly recovered thereafter as private equity players like Blackstone stepped up to buy them out.
Following the crash of the great financial crisis, they nearly tripled in value in the next two years:
And then following the crash of the pandemic, they also more than doubled investors’ money in the next two years:
So that's why Blackstone is buying REITs hand over fist today.
Ask yourself this: if you were offered to buy an equity stake in a portfolio of rental properties with growing rents in attractive markets at 60 cents on the dollar, would you buy it?
Well... BSR REIT owns a portfolio of apartment communities in rapidly growing Texan markets and its latest NAV per share is $22, but it trades at $13 - representing a 40% discount.
Blackstone is taking advantage of these opportunities and so am I.
For further details see:
Billionaire Investors Buying REITs With Both Hands