REITs Limiting Redemption

David Goldsmith

All Powerful Moderator
Staff member
I personally think this is a big deal. Ownership of publicly traded REITs is supposed to be extremely liquid. But now multiple large REITs have limited redemption.

Starwood, Like Blackstone, Limits Investor Redemptions from Big Real Estate Fund​


Starwood Real Estate Income Trust, which owns apartment buildings and other commercial real estate, has moved to limited withdrawals from the fund.​

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Another big nontraded real estate fund is limiting investor redemptions.
Starwood Real Estate Income Trust, a nontraded real estate investment trust, is curbing redemptions after investor withdrawal requests exceeded the REIT’s monthly limit in November.

Known as SREIT, the $14.6 billion REIT is chaired by Barry Sternlicht, the founder and CEO of Starwood Capital, a private investment firm focused on real estate with over $125 billion in assets under management. Starwood Capital manages the REIT. Sternlicht also is CEO of Starwood Property Trust (STWD), a publicly traded real estate lending company.
SREIT is the second-largest nontraded REIT behind Blackstone Real Estate Income Trust, which has about $69 billion of net assets. The Blackstone (ticker: BX) vehicle, known as BREIT, moved to limit redemptions in November after elevated investor withdrawal requests exceeded its 5% quarterly limit.
Like BREIT, SREIT allows for monthly redemptions of 2% of net asset value, or NAV, and 5% of NAV quarterly.
The elevated redemption request shows that many retail investors are moving to the exits on nontraded REITs, which aren’t traded on an exchange, after their performance has vastly exceeded that of publicly traded peers this year. The huge performance gap between the nonpublic and public REITs has created an incentive for investors in the nontraded REITs to cash out.

Rather than trading on the exchanges like the NYSE, these REITs are like mutual funds because investors can buy or sell shares monthly based on their NAV subject to redemption limits.
In a letter to financial advisors that was forwarded to Barron’s, SREIT said it received repurchase requests equal to 3.2% of NAV in November. Based on the 2% monthly limit, it fulfilled 63% of investor redemption requests (0.63 times 3.2 equals 2). Any requests that weren’t filled will have to be made again in December, the letter said.
Nontraded REITS have monthly and quarterly redemption limits to protect them from having to liquidate sizable amounts of real estate or materially boost leverage in response to high redemption requests from investors.

“These limits are designed to protect existing investors and the long-term health of the vehicle, and ultimately to maximize shareholder value,” SREIT wrote in its letter.
SREIT has a similar asset mix and fee structure to BREIT and has had comparable performance. SREIT, like BREIT, has the bulk of its assets in multifamily apartment complexes, followed by warehouses. These have been two of the strongest-performing sectors in the REIT industry in recent years.
SREIT’s year-to-date return through October was 10.2% on one of its share classes, comparable to the return of about 9% for BREIT.
Leading public apartment REITs like Equity Residential EQR –0.84% (EQR) and Mid-America Apartment Communities MAA +0.02% ( MAA 1198 +3.95% ) are off by about 30% in 2022. SREIT’s annual base fee is 1.25% of net assets and a performance fee of 12.5% subject to a 5% hurdle rate. It has returned about 15% annually in the past three years.

The SREIT and BREIT asset bases are dominated by commercial real estate investments, which are less liquid than publicly traded securities. In its 10-Q, SREIT said it had $2.5 billion of immediate liquidity at the end of September, consisting of $1.7 billion of borrowing power and $800 million of cash.
Like BREIT, SREIT has grown rapidly in the past year as total assets rose to $30 billion in October from about $20 billion at year-end 2021. With around $15 billion of debt outstanding at the end of September, SREIT has a higher leverage ratio than comparable public REITs like Mid-America Apartment Communities, AvalonBay Communities AVB –0.92% (AVB), and Prologis PLD –0.14% (PLD), the biggest warehouse REIT. AvalonBay, for instance, has a similar enterprise value—market value plus net debt—as SREIT but has $8 billion of outstanding debt.
Still, retail investors have liked the performance of the nontraded REITs and ample dividend yields of about 4%. But putting limits on redemptions, or imposing a gate, can rattle investors and potentially prompt more withdrawal requests while making it difficult for the nontraded REIT to sell new shares to investors.
Keefe, Bruyette & Woods analyst Robert Lee wrote earlier this year that alternative managers are eager to attract “locked-up capital” from individual investors. While that is not an issue when times are good, he said, “there is a risk that in times of stress, individual investors may realize they aren’t so happy with the lack of access to their capital.”
While the liquidity limits are clearly disclosed in nontraded REIT literature, they haven’t been an issue until recently. This is how SREIT describes its redemption, or repurchase, plan:

“While you should view your investment as long term with limited liquidity, we have adopted a share repurchase plan, whereby on a monthly basis, stockholders may request that we repurchase all or any portion of their shares. Due to the illiquid nature of investments in real estate, we may not have sufficient liquid resources to fund repurchase requests. In addition, we have established limitations on the amount of funds we may use for repurchases during any calendar month and quarter.”
 

David Goldsmith

All Powerful Moderator
Staff member

Blackstone’s US$69b real estate giant hits redemption limit​

Blackstone Real Estate Income Trust has been facing withdrawal requests exceeding its quarterly limit, a major test for the one of the private equity firm’s most ambitious efforts to reach individual investors.

BLACKSTONE’S US$69 billion real estate fund for wealthy individuals said it will limit redemption requests, one of the most dramatic signs of a pullback at a top profit driver for the firm and a chilling indicator for the property industry.
Blackstone Real Estate Income Trust has been facing withdrawal requests exceeding its quarterly limit, a major test for the one of the private equity firm’s most ambitious efforts to reach individual investors.
The news, in a letter on Thursday, sent Blackstone stock falling as much as 10 per cent, the biggest drop since March.

“Our business is built on performance, not fund flows, and performance is rock solid,” a Blackstone spokesperson said, adding that BREIT’s concentration in rental housing and logistics in the Sun Belt leaves it well positioned going forward.
This year, the fund has piled into more than US$20 billion worth of swaps contracts through November to counteract rising rates.
The fund became a behemoth in the real estate industry since its start in 2017, snapping up apartments, suburban homes and dorms and growing rapidly in an era of ultra-low interest rates as investors chased yield.

Now, soaring borrowing costs and a cooling economy are rapidly changing the landscape for the fund, causing BREIT to caution that it could limit or suspend repurchase requests going forward.
Blackstone’s creation of BREIT cast a spotlight on the space for nontraded real estate investment trusts.
Unlike many real estate investment trusts, BREIT’s shares don’t trade on exchanges. It has thresholds on how much money investors can take out to avoid forced selling. This means if too many people head for the exits, its fund board can opt to restrict withdrawals or raise its limits.
BREIT said requests have exceeded the 2 per cent of the net asset value monthly limit and 5 per cent of the quarterly threshold.
“If BREIT receives elevated repurchase requests in the first quarter of 2023, BREIT intends to fulfill repurchases at the 2 per cent of NAV monthly limit, subject to the 5% of NAV quarterly limit,” BREIT said in a letter Thursday.
Blackstone’s top executives have bet big on the fund.
Bloomberg reported last month that President Jon Gray had put US$100 million more of his own money in BREIT since July, as had chief executive officer Steve Schwarzman, a person familiar with the matter said at the time.
In the past year, rich individuals, family offices and financial advisers have become more cautious about tying up money in assets that are hard to trade and value.
At UBS Group AG, some advisers have been reducing exposure to BREIT. A major chunk of redemptions for the fund has come out of Asia this year, said a person familiar with the matter who asked not to be identified citing private information.
“The BREIT outflow bear case is playing out, impacting shares this morning, and we expect it to remain an overhang on shares in the coming quarters,” Michael Brown, an analyst at Keefe Bruyette & Woods, said in a note on Thursday titled “The Gates are Going Up.”
“Growth of the retail channel has been a key driver of BX’s success in recent years and the growth challenges facing the company on the retail side could continue to weigh on BX’s valuation,” Brown said.
Real estate chill
The Blackstone move is the latest sign of a slowdown for the real estate industry. Soaring borrowing costs have caused many landlords to struggle with refinancing and even led banks to explore potential sales of US office loans.
On the residential side, the housing market has slowed extensively. Higher costs of debt have forced Blackstone to readjust valuations on some BREIT holdings and are thinning returns for the fund.
For this year through October, a major share class of the fund delivered 9.3 per cent net returns. That compares to 13.3 per cent one-year returns.
Still, BREIT’s returns are outperforming those of the S&P 500 Index.
The fund is heavily concentrated in urban warehouses and rental housing, areas Blackstone dealmakers believes will provide strong cash flows in a downturn. Separately on Thursday, the firm announced it is offloading its stake in two Las Vegas hotels in a deal that frees up cash for BREIT.
The Las Vegas deal values the properties at US$5.5 billion and is expected to generate roughly US$730 million in profit to BREIT shareholders, according to a person familiar with the matter who asked not to be identified citing private information.
 

inonada

Well-known member
I personally think this is a big deal. Ownership of publicly traded REITs is supposed to be extremely liquid. But now multiple large REITs have limited redemption.
It seems like a potential spiral. From what I can tell:

1. Most traded REITs buy/sell RE using profits and capital raised/returned. When people buy/sell the traded REIT, the stock price goes up & down to reflect the future prospects of the underlying RE and management. But management need not respond by buying/selling or leveraging/deleveraging the underlying RE.

2. These non-traded REITs buy RE using profits and fund flows. When people subscribe/redeem, they must buy/sell or leverage/deleverage the underlying RE. How do they price such transactions? At a NAV reflecting the current price of the RE assets.

Because of high transaction costs and illiquidity, underlying RE is notoriously predictable. Unlike stocks, you can tell where prices are headed with a degree of reliability but cannot necessarily profit from it. So the NAV the non-traded REITs publish & transact at right now (current RE prices based on thin liquidity, stickiness) is higher than the traded REITs that reflect future prices. Shareholders responded accordingly: the non-treaded REIT industry has given a path to profit on the predictable nature of the underlying RE by allowing monthly liquidity at the NAV, with none of the frictions of underlying RE.

Of course there is some friction: they limit redemptions. But is 5% per quarter enough? Maybe. But from the smell of it, it seems not enough. If redemptions at this rate continue, they gotta sell down 20% of assets each year into an illiquid market, to replace funds that flowed out and a backward-looking inflated NAV. This, of course, hits the NAV and triggers further outflows.
 

David Goldsmith

All Powerful Moderator
Staff member

Asian investor selloff led to Blackstone raising the gates​

“The BREIT outflow bear case is playing out"​

Blackstone’s giant real estate fund started limiting withdrawals last week, but the events that led to the decision were set in motion nearly six months ago.
Investors withdrew more than 2 percent of the Blackstone Real Estate Income Trust’s net assets in July, the Financial Times reported. The crossing of that threshold gave Blackstone the power to limit investor withdrawals, but, wary of alarming investors, it took no action at the time.

Instead, Blackstone’s top executives shored up BREIT with their own money. Chief executive Stephen Schwarzman and president Jon Gray added more than $100 million to their investments in the real estate investment trust.

Others’ withdrawals began in earnest during the spring and summer when Asian investors started pulling out as their own property markets declined. More than 70 percent of redemptions from BREIT this year have come from Asia.
Soon, the turmoil spread beyond the continent.
“The BREIT outflow bear case is playing out,” analyst Michael Brown told FT. “[We] expect it to remain an overhang on shares in the coming quarters.”

Last week, BREIT tightened redemption requests for the remainder of the year after withdrawal demand exceeded 2 percent of the net asset value monthly limit and 5 percent of the quarterly threshold. Repurchase requests may continue to be limited or suspended in the first quarter.

BREIT had been an area of strength for Blackstone, responsible for acquisitions such as student housing company American Campus Communities and data center firm QTS Realty Trust. In the first three quarters of the year, BREIT recorded a 9.3 percent net return, while publicly traded REITs dropped 30 percent in value.
Last month, however, inflows were slowing and redemptions were on their way up. Rising interest rates limited the fund’s ability to make acquisitions and wealth advisers started warning clients against illiquid investments.

Last week, the trust struck a deal to sell its stake in two Las Vegas properties, the MGM Grand Las Vegas and Mandalay Bay, in an agreement valuing the properties at $5.5 billion. Closing the deal would bring Blackstone a $1.3 billion infusion.
Blackstone’s stock declined precipitously Thursday morning after the BREIT withdrawal limits were reported, but stabilized in the afternoon. The stock is down 37 percent year-to-date but up more than 154 percent over five years.
 

David Goldsmith

All Powerful Moderator
Staff member
The newest from my friends at Rockstar Games is going to be REIT Redemption Dead III
Schwarzman brushes off BREIT fears as “a bit baffling”

Blackstone boss defended real estate fund restricting investor redemptions​

After pumping the brakes on redemptions from Blackstone’s real estate investment trust, the firm’s chairman is attempting to do the same for investor fears.
Blackstone chairman Stephen Schwarzman spoke publicly on Wednesday for the first time since the Blackstone Real Estate Income Trust restricted investor withdrawals last week. In comments at an industry conference reported by the Financial Times, Schwarzman said the fears were “a bit baffling,” calling REIT “some of our best work.”

“The idea that there is something going wrong with this product because people are redeeming is conflating completely incorrect assumptions,” Schwarzman said of the $69 billion real estate fund. “This was not meant to be a mutual fund with daily liquidity. These are pieces of real estate.”

Blackstone made the monumental decision last week to tighten redemption requests after withdrawal demand exceeded 2 percent of the net asset value monthly limit and 5 percent of the quarterly threshold. BREIT fulfilled 43 percent of redemption requests in November, but will only fulfill 0.3 percent this month.
“I look at this and say this is just a pause — an expected pause — of people pulling money out,” Schwarzman added.
The turmoil started when Asian investors began making withdrawal requests over the summer as the property markets in the region soured and posed “excruciating financial pressure,” Schwarzman said.

While Schwarzman acknowledged slower inflows in a volatile market, he also hailed the REIT’s performance, noting income from its properties has risen 13 percent this year. In the first nine months of the year, BREIT recorded a 9.3 percent net return, standing in contrast to publicly traded REITs.
His comments echo public votes of confidence by Starwood Capital Group chairman Barry Sternlicht, who said this week limits on withdrawals from the two non-traded REITs shouldn’t be confused with a major crisis.

Rising interest rates have hampered acquisitions, though, and the REIT appears to be shoring its cash reserves. The trust agreed last week to sell its stake in the MGM Grand Las Vegas and Mandalay Bay in a deal valuing the properties at $5.5 billion. When it closes, Blackstone will get $1.3 billion in cash.
 

David Goldsmith

All Powerful Moderator
Staff member

Blackstone, Starwood REITs draw SEC’s attention after limiting withdrawals​

Regulators looking into recent moves to slow investors’ redemptions​

Moves by Steve Schwarzman’s Blackstone Group and Barry Sternlicht’s Starwood Capital to limit investor withdrawals from their respective real estate investment trusts amid an uptick in requests has caught the attention of federal regulators.
The Securities and Exchange Commission has reached out to both firms to understand the market impact and circumstances of the decisions, Bloomberg reported, citing anonymous sources. The SEC has reportedly inquired about how Blackstone and Starwood met redemptions and whether any of the companies’ affiliates had sold before clients.

The outreach by federal regulators doesn’t mean either firm is under investigation or suspected of any wrongdoing.
The increase in withdrawal requests has drawn attention to the packaging of assets like real estate into funds that offer cash back when investors want. However, limits are put on how much an investor can withdraw in order to prevent a quick selloff of assets.

But those limits can also force funds to restrict withdrawals, which can hamper investor confidence at a time when higher interest rates have slowed commercial real estate markets.
The increased scrutiny comes as private equity firms have welcomed an influx of new capital from smaller investors into their respective retail funds. It’s now drawn a closer look from investors, regulators and the public about the mechanics of a real estate investment trust.

A Blackstone spokesperson told Bloomberg that “our business is built on business, not fund flows, and performance is rock solid.”
Blackstone, Starwood and the SEC declined to comment to the publication about the inquiries.
 

David Goldsmith

All Powerful Moderator
Staff member

Blackstone REIT’s latest adversary: tenants​

Renters rallied in Los Angeles about roaches, rent, repairs and eviction fears​

Blackstone’s real estate investment trust is under pressure on multiple fronts.
As it works through an investor scare triggered by withdrawal restrictions, Blackstone Real Estate Income Trust is now getting unwanted publicity at a San Diego apartment complex it owns, Insider reported. Tenants traveled to Los Angeles for a Tuesday rally at which they complained about cockroaches, maintenance problems and eviction fears.
The residents demanded that UC Investments — BREIT’s $4 billion savior — pull out of the fund if Blackstone does not meet their demands, which include capping rent increases and holding off on evictions for those behind on payments.
Blackstone took the unusual step of sending executives to the rally to defend BREIT. They included Blackstone’s head of real estate for the Americas, Nadeem Meghji, and Kathleen McCarthy, global co-head of Blackstone Real Estate.

A spokesperson said Blackstone has completed 20,000 work orders in the San Diego buildings it acquired and is implementing $100 million in improvements, adding that zero residents in those homes have been evicted for non-payment.
Fears of eviction seem valid, though, given Meghji’s comment in an internal company call days after BREIT closed the gates on redemptions last month, according to a transcript viewed by Insider.

“We’re also seeing a meaningful increase in economic occupancy as we move past what were voluntary eviction restrictions that had been in place for the last couple of years,” he said.
But he also said on the call that rents at BREIT’s properties were growing at a modest 5 percent, which is below the rate of inflation. He predicted rent growth in the high single digits across the $68 billion fund’s affordable housing portfolio, and that in its student housing portfolio, it was “signing leases today for the next academic year at 9 percent higher rents than this year.”
Meghji previously credited UC Investments with changing the narrative around BREIT, which appeared to be on its heels after Blackstone restricted investor withdrawals.

The rallying tenants might have been unaware that UC Investments’ commitment for common equity in BREIT is effectively locked in for six years.
 

David Goldsmith

All Powerful Moderator
Staff member

Blackstone’s Big New Idea Leaves It Bruised​

The private-equity giant built a new customer pool of small investors with its Breit real-estate fund, but the market downturn caused many to try to sell​

Breit’s portfolio includes New York City’s One Manhattan West, lit in colored lights.

Breit’s portfolio includes New York City’s One Manhattan West, lit in colored lights. GARY HERSHORN/GETTY IMAGES
By Miriam Gottfried
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, Peter Grant
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and Rebecca Feng
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Feb. 12, 2023 8:59 am ET

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Blackstone Inc. BX 0.34%increase; green up pointing triangle became one of the world’s most powerful financial firms by investing on behalf of large institutional investors. To boost growth, it decided to offer its products to individuals. Its new fund was a huge success, becoming the biggest Blackstone had ever raised.
Then it became a crisis.
 

David Goldsmith

All Powerful Moderator
Staff member
Blackstone blocked investor withdrawals from $71 billion REIT in February
By Chibuike Oguh
Signage is seen outside the Blackstone Group headquarters in New York City

Signage is seen outside the Blackstone Group headquarters in New York City, U.S., January 18, 2023.

NEW YORK, March 1 (Reuters) - Blackstone Inc (BX.N) said on Wednesday it had blocked investors from cashing out their investments at its $71 billion real estate income trust (BREIT) as the private equity firm continues to grapple with a flurry of redemption requests.
BREIT said it fulfilled redemption requests of $1.4 billion in February, which represents only 35% of the approximately $3.9 billion in total withdrawal requests for the month, the firm said in a letter to investors.

The total BREIT redemption requests in February were 26% lower than the approximately $5.3 billion reached in January, the firm said.

"While gross redemptions for February are consistent with prior management commentary, the overarching data continue to align with our view around decelerating retail-oriented product organic growth broadly," Credit Suisse analysts, led by Bill Katz, said in a note to investors.

Credit Suisse downgraded its rating of Blackstone's stock to underperform in November partly because of the rise in investor redemptions from BREIT. Blackstone's shares were down 0.25% at $90.57 per share in afternoon trading on Wednesday. The stock lost 43% of its value last year.
Blackstone has been exercising its right to block investors' withdrawals since November last year after requests hit a preset 5% net asset value of BREIT, which is marketed to mostly high net worth individuals.
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Blackstone expects to continue dealing with investor redemptions because some BREIT investors are making larger withdrawal requests in anticipation of a reduction in its size, its President Jonathan Gray told an earnings call last month.
But the firm expects to work through the backlog of unfulfilled requests over time, he added.
BREIT generated returns of 8.4% in 2022 compared with a 26% decline to the publicly traded Dow Jones U.S. Select REIT Total Return Index (.DWRTFT).
 

David Goldsmith

All Powerful Moderator
Staff member

Blackstone blocked investor withdrawals from $71 billion REIT in February​

By Chibuike Oguh


NEW YORK, March 1 (Reuters) - Blackstone Inc (BX.N) said on Wednesday it had blocked investors from cashing out their investments at its $71 billion real estate income trust (BREIT) as the private equity firm continues to grapple with a flurry of redemption requests.
BREIT said it fulfilled redemption requests of $1.4 billion in February, which represents only 35% of the approximately $3.9 billion in total withdrawal requests for the month, the firm said in a letter to investors.

The total BREIT redemption requests in February were 26% lower than the approximately $5.3 billion reached in January, the firm said.

"While gross redemptions for February are consistent with prior management commentary, the overarching data continue to align with our view around decelerating retail-oriented product organic growth broadly," Credit Suisse analysts, led by Bill Katz, said in a note to investors.

Credit Suisse downgraded its rating of Blackstone's stock to underperform in November partly because of the rise in investor redemptions from BREIT. Blackstone's shares were down 0.25% at $90.57 per share in afternoon trading on Wednesday. The stock lost 43% of its value last year.
Blackstone has been exercising its right to block investors' withdrawals since November last year after requests hit a preset 5% net asset value of BREIT, which is marketed to mostly high net worth individuals.

Blackstone expects to continue dealing with investor redemptions because some BREIT investors are making larger withdrawal requests in anticipation of a reduction in its size, its President Jonathan Gray told an earnings call last month.
But the firm expects to work through the backlog of unfulfilled requests over time, he added.
BREIT generated returns of 8.4% in 2022 compared with a 26% decline to the publicly traded Dow Jones U.S. Select REIT Total Return Index (.DWRTFT).
 

David Goldsmith

All Powerful Moderator
Staff member
In other Blackstone news:

Cash flow from Blackstone portfolio no longer covers debt payments: Moody’s​

Ratings agency downgrades debt, citing 11 properties’ “declining performance”

Two months after a $271 million Blackstone loan secured by 11 Manhattan multifamily buildings went to special servicing, Moody’s downgraded the CMBS debt, citing cash flow that wouldn’t cover the debt service.
The loan is still current, but the portfolio’s “declining performance” has driven up the loan-to-value ratio, putting the CMBS bondholders at risk. The Moody’s report found that the debt is now far greater than the apartment buildings are worth.

As of March, the mortgage’s loan-to-value ratio hit 147 percent, which a Blackstone spokesperson said was calculated at 127 percent using the same methodology when the loan was issued. Morningstar data shows an LTV at origination of 50 percent.
Typically, lenders originate debt at a ratio of 65 to 80 percent. Commercial Observer reported in 2019 that the LTV ratio on the total financing package of $364 million (including the $271 million in senior debt) was 67 percent, based on a $542 million appraised value of the portfolio.

By far the largest building of the 11 was 250 West 19th Street, a rental property known as the Grove. It was part of the 24-building Caiola portfolio that Blackstone and Fairstead Capital bought in 2015 for $690 million and began selling in pieces.
As of last month, according to Morningstar, the 11 properties’ appraised value hovered at $214 million, about 60.5 percent below what it was when their debt was underwritten in 2019. The Real Deal is attempting to verify that Morningstar intended the $214 million figure to apply to all 11 buildings, not just 250 West 19th Street.
A spokesperson for Blackstone said that figure represented the appraised value of a single property in the portfolio in 2019. A Morningstar spokesperson said the firm was “skeptical” of the lower appraisal value listed and is still awaiting clarification from the servicer.
The remaining Blackstone portfolio should have benefited from the booming rental market in Manhattan for the past two years. The 637 units in the portfolio, which spans Chelsea, Midtown South and the Upper East Side, are 96 percent market rate.
Though occupancy dipped to 69 percent in December 2020 from 99 percent in 2019, it recovered to 97 percent in 2021, Morningstar data shows.

But it’s possible that rent collection didn’t fare as well.

During the pandemic, the landlord voluntarily extended eviction protections to residents for longer than federal or state moratoriums required.
Blackstone began winding down those protections at the beginning of 2023, a year after New York allowed its moratorium to expire.
Those measures allowed tenants to remain in place despite nonpayment. Growing arrears might have delivered a hit to the portfolio’s value. Building valuations are tied to net operating income, which fell for many buildings when rent collection dropped during the pandemic eviction pause.

Net cash flow — operating income minus expenditures such as debt service — was $12 million for the 12 months ending in September 2022, up from $7 million reported in 2021 but down from $15.3 million when the loan was underwritten, according to Moody’s.
The loan’s floating rate exacerbated the problem. The mortgage was underwritten at 3.8 percent in 2019. Interest rates have surged more than 4 percentage points since.
The firm has already extended the loan twice under a modification agreement. When the debt matures in August 2023, Blackstone has one final option to push the due date back a year.
A Blackstone spokesperson attributed the challenges the portfolio has faced to higher capital expenditures than anticipated and the loan’s floating rate debt.
“The transfer to special servicing for this non-recourse loan was an integral part of the process as we work in good faith with our lenders to get the best outcome possible for both the debt and equity investors,” the spokesperson said in a statement.
 

David Goldsmith

All Powerful Moderator
Staff member

Vornado warning: REIT slipping toward debt breach​

Climbing interest expenses, tenant moveouts could squeeze debt buffer to dangerous level, analysts say

As Vornado Realty Trust enters what chairman Steve Roth described as “the eye of the economic storm,” Goldman Sachs is issuing a warning.
The real estate investment trust could come to the brink of default on $2.6 billion worth of loans, analysts at the investment bank warned, as rising interest costs and other expenses squeeze its debt buffer to a razor-thin margin.

A whirlwind of rising interest costs, tenant departures and half a billion dollars in expenses tied to its massive redevelopment project surrounding Penn Station could bring the REIT’s debt coverage ratio dangerously close to its limit, the analysts wrote in a May 1 note.
If the coverage ratio were to drop below that limit, Vornado would breach its covenants and trigger a technical default on its corporate-level loans and line of credit.

“Coverage has declined significantly over the past year,” the Goldman analysts wrote.
Coverage ratios on two of Vornado’s debt covenants declined by more than 70 basis points over the past year, according to Goldman. The main culprit was rising interest rates: The REIT’s weighted average rate went from 2.45 percent to 4.23 percent after the Federal Reserve began hiking rates last spring.
That leaves a buffer of just 79 basis points before the company hits the limit on those coverage ratios. Goldman’s analysts calculate that those buffers could narrow to a mere 10 and 20 basis points, respectively, if things continue the way they’re headed.
In addition to rising interest payments, Vornado must contend with a significant amount of interest rate swaps and rate caps that are set to expire through 2024. The company has hedges on $2.4 billion worth of expiring mortgage debt, which could add an additional $73 million in interest rate expenses, the analysts calculated.

The loss of two large office tenants will cost it another $68 million in revenue, according to the analysts, and Vornado still has to spend $500 million to complete its current Penn Station area projects, primarily the redevelopments of its Penn 1 and Penn 2 buildings.

A spokesperson for Vornado said the company disagreed with Goldman Sachs’ analysis but declined to comment further.
The Goldman analysts questioned whether Vornado’s declining coverage ratios were pressuring the firm to sell properties.
Vornado said last week that it plans to sell assets to pay down its debts and address other capital needs, like funding a stock buyback program.

In May, Vornado made a surprising move to suspend its dividend for the rest of the year — leaving many to wonder if there was more trouble under the surface than seemed apparent when the REIT cut its dividend by almost 30 percent earlier this year.

Vornado’s stock, which has fallen from a pre-pandemic level of nearly $68 a share to below $14 as of Thursday, was removed from the S&P 500 in January. The index said the company’s shares have become “more representative of the midcap market space.”

 

David Goldsmith

All Powerful Moderator
Staff member

BREIT forges ahead on comeback trail​

Blackstone fund posted strongest return in 10 months after limiting withdrawals
Blackstone’s real estate investment trust continued its climb out from under a mass of redemption requests that landed in recent months, with June posting its strongest returns in nearly a year.
Blackstone Real Estate Income Trust recorded a 0.96 percent return last month, the Commercial Observer reported. It was the third straight month of positive returns for BREIT, which is posting a 1.3 percent return year-to-date.

BREIT is a non-traded entity, but the $68 billion net asset value fund is rising along with the rest of the REIT market, a sign of adjusting investment strategies and an increased focus on deal activity after the Federal Reserve’s interest rate hikes all but froze transaction activity.
The Blackstone fund brushed up against trouble starting last year when investors made a plethora of redemption requests, leading BREIT to limit withdrawals for several straight months. The origins of the investor pullback emerged a year ago when there was a selloff in Asia.

In January, however, BREIT’s fortunes started to turn when the University of California provided a $4 billion endowment, a common equity commitment locked in for six years in connection to a $1 billion commitment from Blackstone itself. The university later added $500 million to the pot.
Another helpful push for BREIT came from a shift in its holdings. It has continued to double down on the multifamily market, industrial real estate and data centers in the Sun Belt, combining to represent a large majority of the REIT’s portfolio. It has no exposure to commodity offices and malls — two property sectors struggling in the post-Covid world.

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“Where you invest matters,” a Blackstone spokesperson said in a statement to Commercial Observer.

While BREIT seems to have taken a turn for the better, there is still a heavy amount of redemption requests coming in, even if it’s not as many as the peak. In an investor letter released earlier this month, Blackstone revealed BREIT received $3.8 billion in redemption requests in June, down 29 percent from a high in January.

BREIT fulfilled approximately $628 million in redemption requests, equal to 1 percent of the fund’s net asset value and 17 percent of the shares requested for redemption.
 
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