A recent opinion piece in Investment News raises questions about the valuation practices of Blackstone Real Estate Income Trust Inc. (BREIT). Nontraded REITs often rely on internally determined valuations, leading to opacity and potential discrepancies in value. Despite concerns about the broader commercial real estate market, BREIT’s net asset value (NAV) has remained high, raising eyebrows in the industry.
Media outlets like The New York Times and Business Insider have published critiques of BREIT’s valuation and long-term sustainability. The skepticism stems from the discrepancy between BREIT’s seemingly resilient valuation and the challenges faced by other real estate funds in the post-pandemic economic landscape. Questions have been raised about BREIT’s ability to maintain such high valuations, especially given the market conditions and the timing of its property acquisitions.
BREIT Tender Offer Price is 38% Below NAV
Blackstone Real Estate Income Trust (BREIT) is a public non-listed REIT associated with the prominent private equity firm, The Blackstone Group. BREIT is designed to provide individual investors with access to Blackstone’s leading institutional real estate investment platform.
Last October, MacKenzie Capital Management LP extended a mini-tender offer to shareholders of BREIT to purchase Class S common stock shares for $9.27 per share. In a letter addressed to BREIT shareholders, MacKenzie Capital stated, “The share repurchase program is oversubscribed. If you submitted each and every month over the past 6 months, you would have redeemed about 90% of your shares, and about 97% over the past year, which leaves thousands of investors like you trapped in an investment they cannot liquidate completely or quickly.”
For the first time in its six-year history, BREIT began imposing restrictions on fulfilling redemption requests in November 2022. This decision came after an influx of redemption requests from investors surpassed the 5% quarterly limit based on the company’s net asset value. Although redemption requests continued to exceed this limit in subsequent months, they have gradually decreased in recent times. MacKenzie’s offer is to acquire up to 1.5 million shares, amounting to $13.9 million, and is set to expire on December 11, 2023.
Tender Offer Price May Indicate Losses for BREIT Shareholders
The offered purchase price represents a substantial 38% discount when compared to BREIT’s estimated net asset value of $14.88 per Class S Share as of August 31, 2023. Notably, BREIT shares have recently traded at a 4% discount to NAV on LODAS Markets, an online secondary market specializing in non-traded alternative investments.
The Risks of Investing in Non-traded REITs
If you invest in non-traded Real Estate Investment Trusts (REITs), such as BREIT, it’s essential to be aware of the potential risks, especially when certain economic and market factors are in play. Consider the impact of high-interest rates. Non-traded REITs often rely on borrowing to finance property acquisitions and improvements. When interest rates rise, borrowing costs increase, potentially squeezing the REIT’s profitability and its ability to distribute dividends to investors.
Non-traded REITs often focus on specific geographic regions or property types, such as suburban office buildings or certain markets. This limited diversification can make these REITs more vulnerable to local economic conditions and trends. If a particular market or property type experiences a downturn, the overall performance of the REIT might suffer.
Also, keep in mind the issue of liquidity. Non-traded REITs typically have less liquidity compared to publicly traded REITs. If you invest in non-traded REITs, you might find it challenging to sell your shares quickly, and you could face restrictions on when and how you can exit your investment. In uncertain market conditions or when the investment outlook is less favorable, this lack of liquidity can become a risk, as you may not be able to access your capital easily.
Non-traded REITs are known for their opaque valuation practices. Unlike publicly traded REITs with readily available market prices, non-traded REITs typically provide periodic valuations that may not accurately reflect current market conditions. As an investor, it can be challenging to assess the true value of your investment, particularly during turbulent times.
With the collapse of the housing markets and real estate sector, REIT fraud has become more apparent. Investors are bringing claims against their brokerage firm or financial advisors that recommended unsuitable, for fraudulent REITS that were Ponzi schemes or for failing to disclose the high fees and commissions associated with the sale of REIT investments.
If you are an investor that lost more than $100,000, you should consider all legal options.