Is A Blow Up In The Private REIT Space Coming? What May Be Ahead For Blackstone's BREIT

Armada ETF Advisors HAUS CEO Phil Bak said Tuesday that a blow-up in the private REIT space could be just as impactful to the markets as the FTX meltdown was to cryptocurrency — and according to Bak, it requires three components to make it happen.

What Happened: The Armada CEO took to Twitter to unravel a few interesting facts about Blackstone Inc’s BX, BREIT, a private fund of nontraded REITs, which launched in 2017.

Before we get into what Bak said, it’s important to understand NAVs, and how they work.

The net asset value (NAV) of an investment fund is the net value of its assets less its liabilities divided by the number of shares outstanding.

NAV is the price at which the shares of funds registered with the SEC are exchanged, and it is most typically employed in an ETF, or a mutual fund.

NAV is determined by periodic appraisal, which means it is a trailing indicator that gives lower volatility and smoother returns.

Because the appraisal schedule is normally annual, when the economy changes, the appraisal-based NAVs will be sluggish to adjust to the new environment, thus the lag.

Now, let's take a closer look at Blackstone’s BREIT.

Why It Matters: The private REIT raised almost 70% of all equity capital compiled by private REIT businesses in 2021. Since its start in 2017, the group has raised $59.9 billion, with about $7.3 billion of that amount repurchased through its shareholder liquidity program.

As of Oct. 31, the NAV was reported to be $69 billion, diverging from public REITs such as AGNC Investment Corp. AGNC, Vanguard Real Estate Index Fund ETF VNQ, and Annaly Capital Management Inc. NLY.

Read also: The 3 Best-Performing Mortgage REITs Over The Past 4 Weeks

Housing has since taken a hit, and Barron's reported Wednesday that Blackstone's private credit fund, BCRED, hit its 5% investor redemption limit in the fourth quarter, though it honored all withdrawal requests.

However, if Blackstone's appraisal-based-NAV on its BREIT comes in lower than expected, investors may pile in on redemption requests, putting pressure on the investment bank.

“Lets say investors get nervous and want to sell,” Bak said, talking about the BREIT. “Well, BREIT holds a bunch of MBS that are liquid, they can sell those. But what if there are more redemption requests? No problem, they can use the inflows to offset.”

“And what if the inflows dry up? [Blackstone] can sell properties, no problem,” he continued.

With investors in BREIT already paying 3.62% per year in fees on the outdated appraisal-based NAVs, “let's just say, if the real estate market freezes up, inflows dry up, and redemption requests heat up, all at once — Blackstone gates the fund, investors are trapped, and BX goes to work trying to sell properties,” Bak explained.

Although, he questions if Blackstone would be able to sell those properties at those current appraised levels, while investors wait in line for their redemption requests to get filled.

Now Read: Which Billionaire Owns The Most Land In The U.S.? Hint, It's Not Bill Gates