Don’t Trust This Shadow Bank’s Assessment of Itself

By Rob Spivey, director of research, Altimetry

Our favorite vampire squid believes its own assets are simply better than its peers’…

Regular readers know we’ve been covering Blackstone’s (BX) web of operating entities for more than a year. From real estate to hedge funds, this asset manager has its tentacles wrapped around everything.

As such a massive operator, Blackstone tends to garner a lot of attention no matter what the market is doing. But it’s really standing out today for one reason…

The company’s valuation of its own assets is higher than any other real estate fund.

We’re specifically talking about the Blackstone Real Estate Income Trust (“BREIT”). BREIT’s peers have started taking markdowns on their assets… selling properties at discounts to their peak valuations.

It’s a signal to the rest of the market that real estate values are coming down. High interest rates have been a big contributor.

Of course, Blackstone has an explanation for BREIT’s superior numbers. But as you’ll see, it also has every reason to keep BREIT looking as good as possible…

Blackstone claims to have a better portfolio than everyone else…

Most of its property is in the high-growth Sun Belt area of the U.S. And 85% of its portfolio is in rental housing, industrial, and data center real estate.

What Blackstone isn’t saying is that, unlike other funds, it determines the final value of its own assets. And many of the transactions Blackstone uses to justify its superior marks are actually the firm trading with itself.

High interest rates have been hurting the performances of Blackstone’s assets. But it didn’t have to confront those losses at the time. Since it’s not labeled as a bank, Blackstone has been able to avoid regulatory scrutiny.

But it does act like a bank. And that’s what makes it so risky.

Blackstone deals with private investments, so it chooses when to sell its assets. Until it makes a sale, it doesn’t have to report any type of loss… even if valuations are falling behind the scenes.

Plus, because it’s not a bank, it doesn’t have to give its investors’ money back right away. They know their cash will be locked away for years. It’s up to Blackstone to decide when to pay them back.

That means it hasn’t had to deal with bank runs like several startup-focused banks did last year.

But if investors knew what was happening, they would probably be asking to cash out.

Early last year, BREIT had to pause redemptions because a surge of investors did exactly that…

While the pause helped BREIT remain stable, it also served Blackstone.

BREIT and Blackstone are separate entities. But BREIT still makes up a big chunk of Blackstone’s assets under management… about 8%. And it generated about a 10% return last year.

Blackstone’s other real estate investments make up nearly 40% of total revenue and close to 80% of net profit. So Blackstone is extremely sensitive to real estate valuations.

BREIT slowed redemptions to keep that chunk of the business stable – and to help stabilize the rest of Blackstone’s portfolio. It’s doing what it can to keep Blackstone’s asset values as high as possible.

Blackstone can keep playing ignorant. But it’s clear what’s going on under the surface. Other real estate investors are starting to sell at massive discounts.

We don’t see any way Blackstone’s portfolio could be as valuable as it claims. The firm is closing itself off from the rest of the market… and hoping it can wait out this drop in valuations.

One discounted sale could be enough to send Blackstone’s share price tumbling. We’d keep far away.

Regards,

Rob Spivey
May 30, 2024