Banks should be on alert for Russian oligarchs attempting to circumvent U.S. sanctions by investing in commercial real estate, a U.S. Treasury Department watchdog said.
Wealthy Russians with ties to the Kremlin are likely attempting to evade the economic sanctions placed on them in the U.S. by moving money into the commercial-real-estate sector, where complex financing methods and opaque ownership structures can help bad actors hide funds, the Treasury’s Financial Crimes Enforcement Network, better known as FinCEN, said Wednesday.
FinCEN, which serves dual roles as the U.S.’s financial intelligence unit and anti-money-laundering regulator, is the recipient of the suspicious activity reports that financial institutions are required to file if they suspect a transaction may be illicit in nature. Law-enforcement officials can consult the reports when conducting investigations into financial crimes.
The Biden administration has targeted wealthy Russians as part of its response to President
invasion of Ukraine last year, placing those with close ties to the Russian government on blacklists that are intended to prevent them from accessing the U.S. financial system.
The alert issued by FinCEN on Wednesday is the Treasury’s latest effort to prevent sanctioned Russians from finding ways to evade such financial restrictions. In an 11-page report, FinCEN listed a number of potential red flags and typologies it said banks should be on the lookout for.
“Thanks to international pressure and the economic restrictions that more than 30 countries have imposed on Russia for its brutal war against Ukraine, sanctioned Russian elites are increasingly left with fewer options for moving and hiding their ill-gotten wealth,” FinCEN Acting Director
Himamauli Das
said.
Sanctioned individuals may try to use pooled investment vehicles or offshore funds to avoid due-diligence processes, FinCEN said in its alert. Banks aren’t typically required to verify the identities of individuals who own less than 25% of a fund. Sanctioned individuals could keep lowering their stakes to avoid detection, while still maintaining control of the fund, FinCEN said.
Oligarchs also may use shell companies and multiple layers of legal entities or trusts, or transfer their assets to a family member or business associate to conceal their ownership, the Treasury bureau added.
Sanctioned individuals aren’t just investing in high-end or luxury properties, according to the alert. In some cases, they may seek out more inconspicuous investments that provide stable returns without drawing unwanted attention. Such sanction evasion strategies are just as likely to occur in small to midsize U.S. cities as they are in the largest metropolitan areas, FinCEN said.
FinCEN’s latest alert builds on a similar warning issued last year, in which the watchdog advised banks to pay close attention to transactions involving high-value assets such as artwork, luxury yachts and jewelry.
Federal prosecutors have warned that lawyers, consultants and other service providers who work for sanctioned individuals could run afoul of the law.
An indictment unsealed earlier this week charged a former high-level FBI agent and a former Russian diplomat with sanctions violations in connection with work they did for
Oleg Deripaska,
a raw-materials magnate who was placed on a sanctions blacklist in 2018.
Write to Dylan Tokar at dylan.tokar@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
A duplex apartment in one of the most prestigious co-op has sold for $19 million.
JACOB ELLIOTT
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A duplex in one of the most prestigious co-op buildings in San Francisco has sold for $19 million, the highest price paid for an apartment in the city so far this year, according to the Multiple Listing Service.
The four-bedroom residence was listed in January for $30 million, and the price dropped to $19 million in August. It went into contract in early November and closed last week, according to listing records and Sotheby’s International Realty–San Francisco Brokerage, whose agent Gregg Lynn represented the seller, while Mary Lou Castellanos represented the buyer.
“At over 7,000 square feet, the apartment is one of the largest in San Francisco and is located in its most revered cooperative building,” Mr. Lynn said in an email.
The sales price reflected the market condition in 2022, whereas fewer buyers are competing for large apartments and able to find opportunity, Mr. Lynn said.
The was designed by architect Conrad Alfred Meussdorffer in 1924 in his signature Beaux-Arts genre, featuring a grand entrance and a porte cochere.
JACOB ELLIOTT
“If they are to sell, other listings will be—or have already been—reduced to their right price for today’s market,” he said. “San Francisco remains a desirable location for full- or part-time residence, and there hasn’t been in recent memory a better time to purchase.”
FROM PENTA: Billionaire Businessman Ronald O. Perelman’s Design Collection Heads to Auction
The cooperative building, located in the tony Pacific Heights neighborhood, was designed by architect Conrad Alfred Meussdorffer in 1924 in his signature Beaux-Arts genre. It has 10 full-floor apartments and features a grand entrance, a porte cochére, private gardens and an attended lobby.
The apartment has a central foyer with Versailles-patterned hardwood floors, a circular floor plan for entertaining, a large living room with a fireplace and large windows framing panoramic views of the Golden Gate Bridge, Alcatraz and Russian Hill, a great room with a fireplace and views of the Bay, a library and a conservatory that opens to one of the terraces, the listing said.
The primary bedroom suite occupies the second floor and comes with dual marble baths and two private dressing wings, according to the listing.
William Oberndorf, founder of the investment firm SPO Partners and a local philanthropist, and his wife, Susan, purchased the home in 2018 for $25 million, property records show.
The buyer was listed in the property records as a limited liability company.
Both parties could not be reached for comment.
This article originally appeared on Mansion Global.
If someone promises you the “deal of a lifetime,” it’s probably not a good investment.
That’s what finance guru Matthew Onofrio, who sold a program claiming to have cracked the code on commercial real estate, promised inexperienced investors looking to strike it rich. But prosecutors say it was all a fraud aimed at lining Onofrio’s pockets.
The 31-year-old native of Eau Claire, Wis., appeared on investing podcasts and at conferences with a compelling tale. He said he had walked away from a promising career as a nurse anesthetist when he discovered a real estate strategy known as triple net investing, through which he had amassed a portfolio worth over $150 million in just three years.
But between 2020 and August of this year, federal prosecutors in Minnesota say, Onofrio had ripped off numerous banks to the tune of $35 million by roping investors into a complex web of quick-flip real estate sales, fraudulent mortgage applications and doctored appraisals.
In a statement, Onofrio’s attorney, Marsh Halberg, said none of his client’s investors had been hurt financially by their investments.
“The defense is aware of very few, if any, transactions where the investors have suffered actual losses at his time. We believe most of the transactions with Mr. Onofrio still maintain a positive cash flow and /or an increase in the value of the property that was purchased,” Halberg wrote in an email.
A civil suit filed this year involving a radiologist from Puerto Rico named Matthew Hermann, who wanted to get involved in real estate investing with his wife, laid out how Onofrio operated.
The suit said the pair met at a networking conference in Colorado in 2020 and hit it off while discussing real estate opportunities. Hermann said he was hoping to build up a real estate portfolio that would provide him with enough income that he could stop working.
Hermann said in court papers that Onofrio offered to bring him into “the deal of a lifetime,” involving a commercial property for sale for $6.3 million in Minneapolis. All Hermann had to do was come up with $1.5 million for the down payment.
“Onofrio told Hermann that he won’t get to his goal of leaving his job by buying duplexes. Onofrio told him that ‘this will light gas on the fire of where you need to go’. He told Hermann that this is all about mindset’,” the court documents read.
When Hermann said he didn’t have that kind of money available, Onofrio offered to lend it to him so he could secure a bank loan for the purchase and Hermann agreed, the court filings said. What Onofrio didn’t say was that he had already reached a deal with the owners to buy the building for $4.75 million, not $6.3 million, and that the difference was going into his pocket, the suit claimed.
Hermann was then stuck paying nearly $6,000 a month in loan payments to Onofrio in addition to his bank loan.
“Onofrio pushed Hermann—a novice with real estate—into this purchase with grand promises of the deal of lifetime. The reality, though, was that Onofrio was the one assured to make money on the deal, not Hermann,” the papers read.
Hermann later tried to sell the property and said he found a buyer willing to pay $6.3 million for it, but the deal fell through due to litigation surrounding Onofrio’s loan.
Hermann’s attorney didn’t respond to a message seeking comment.
Federal prosecutors described a similar pattern, with Onofrio allegedly placing his own money into investors’ accounts to make their finances look better to lenders, and also fabricating appraisal documents to inflate the value of properties.
In one deal in 2021, a Minneapolis commercial property was sold three times in just five months, passing through more than one business entity Onofrio controlled. By the end of the string of transactions, the price had jumped by nearly $4 million, business publication Finance & Commerce reported.
Onofrio is charged with three counts of bank fraud and prosecutors say they are seeking the forfeiture of $35 million seized during the course of the investigation.
Investor concerns about Blackstone’s big retail real estate fund have weighed on its stock in recent months and comments by management last week didn’t appear to help.
Although Blackstone reported an earnings beat on 20 October, its shares dropped 4.2% after the report before rebounding on 21 October to finish up 1.7% at $85.43. The stock is off more than 40% from its November 2021 peak of about $150.
Investors may have been reacting on 20 October to remarks made in a conference call by president Jonathan Gray about Blackstone Real Estate Income Trust, which is known as Breit.
Gray said it was possible Breit, Blackstone’s $70bn flagship retail product, could go into redemption — meaning the fund would be paying out more to investors who are redeeming shares than it is receiving in new investments.
Breit and Blackstone Private Credit Fund, another retail product, have become important sources of asset and fee growth for the firm. This makes the investment community sensitive to flows. Breit generated over $1bn in fees for Blackstone in the first half of 2022, making it one of the firm’s most lucrative investment offerings.
Unlike public REITs like Prologis and Equity Residential, Breit isn’t publicly traded.
Blackstone executives fielded several questions on Breit during the company’s earnings conference call on 20 October, and one analyst asked whether it could “go into redemption in the coming months.”
Gray replied: “I would say as it relates to near-term flows, yes, it’s possible that we could see negatives over some period of time.”
Breit had enjoyed huge inflows in 2021 and the early part of 2022, roughly doubling in size. The fund raised $4.2 billion of capital in the third quarter, down from $6.6 billion in the second quarter, but Blackstone didn’t provide a net flow figure based on inflows less redemptions.
READ L&G, Abrdn reassure over property funds after Columbia Threadneedle suspension
Financial News sister title Barron’s wrote critically on Breit in August, arguing that retail investors should consider public REITS as an alternative.
And while many public REITs are down over 30% this year, Breit has returned a positive 9% through the end of September. Our article also cited as negatives Breit’s high fees and higher leverage than many public peers.
In response, Blackstone pointed to Breit’s strong performance since its inception in 2017, its exposure to two of the strongest categories in real estate (apartments and warehouses) and its high levels of liquidity. Breit has returned 13% annually since its inception, four times that of REIT benchmarks.
There has been greater investor focus on the gap between Breit’s performance and those of public REITs in recent months, as the REIT sector has continued to decline while Breit’s net asset value has continued to go up. The selloff in public REITs reflects investor fears about an economic slowdown and the impact on rents, as well as higher rates.
On the call, Gray cited the strong financial performance of Breit this year as warehouse and apartment rents are up sharply. He added that the earnings strength of Breit this year has more than offset the impact of higher rates on real estate valuations.
READ Goodbye Londongrad: Property market hit by pressure on Russian oligarchs
Oppenheimer analyst Chris Kotowski said that public REITs in the apartment and logistics sectors also are showing good financial results, but their stocks are down 30%. Kotowski contrasted Breit’s performance versus public REITs and asked management during the conference call if “they all of a sudden look more attractive relative to your valuations.”
Gray responded that public markets are more volatile than private markets, which is the basis for Breit’s pricing, and that Breit has “ample liquidity,” having met all redemption requests since its inception in 2017.
In a client note on 21 October, JPMorgan analyst Ken Worthington wrote of Breit: “We do see risk to net sales in the near term of intermediaries investing in public real estate funds that have seen prices fall 30% vs. B-Reit (for example) with returns up 8.5% this year.”
Morgan Stanley analyst Michael Cyprys wrote that retail flows have slowed, as expected given the economic environment.
“But we have confidence that BX’s distribution prowess and brand should continue to attractively position the firm to penetrate a ~$70tn retail TAM.”
Blackstone’s distributable earnings were $1.06 a share in the third quarter, down 17% from the year-earlier period, but they exceeded the consensus estimate of 98 cents.
Write to Andrew Bary at andrew.bary@barrons.com
This article was published by Barron’s, a fellow Dow Jones Group brand
The U.S. office property outlook has grown increasingly dark in recent months as big companies make plans to formalize a roll back of more than two 1/2 years of mostly remote work.
Early results, following a post-Labor Day burst of office visits, indicate that U.S. commercial real estate landlords and investors should brace for a tough road ahead, given the embrace of flexible work arrangements, maturing property debt and higher borrowing costs.
New York City, the largest U.S. office market, saw only 9% of Manhattan office workers reporting to jobs in-person five days a week (see chart), according to a survey of major employers conducted by The Partnership for New York City, a group of the city’s key real-estate developers and business leaders.
The survey was conducted over two weeks, ending in mid-September, and found that while half of workers showed up in the office in an average week, only 37% were in three days a week, the largest category among returning workers.
Only half of Manhattan office workers reporting to the office in a typical week in September. Now Meta is joining Twitter in downsizing.
Fitch Ratings, The Partnership of New York City
Head count in offices matter for property owners and tenants alike, because it helps gauge actual office use, potential future office-space needs and rent levels.
While the office utilization has been improving, it isn’t expected to “return to pre-pandemic conditions,” according to a new Fitch Ratings report, which pegged utilization near 70% before the pandemic.
Tracking office building access swipes also has become a popular gauge of office use during the pandemic.
On that front, the Kastle Systems’ weekly 10-city index last pegged occupancy near 47%, up from a pandemic low of under 20%, but still far below full occupancy levels preferred by lenders to refinance property debt.
Office ‘apocalypse’
Meta Platform Inc.
META,
on Tuesday became the latest big technology player to announce plans to shrink its office space, while putting roughly $2.4 billion in property debt exposure in the spotlight, according to Barclays analysts.
Twitter Inc.
TWTR,
announced a similar move in July.
But office buildings have yet to flash the sort of warning signs that became a hallmark of the pandemic’s early months, as tourists and business travelers abandoned hotels and shopping malls stayed dark.
That’s partially been due to record corporate earnings, which only lately have been pegged to retreat, but also to the prevalence of long, 10-year office leases taken out by many big companies.
Those factors helped keep delinquencies on office loans low during the pandemic, even though Deutsche Bank researchers expect to potentially see lower payoff rates in the next few years as some $21.5 billion of office debt in bond deals comes due through 2024, in a higher rate environment.
“It hasn’t hit a point yet where there’s clarity on where deals are going to get done,” said Shlomo Chopp, a specialist in distressed commercial real estate restructurings and a managing partner at CPS, by phone.
Still, Chopp said property borrowers and lenders both worry about office buildings that might now be leased up, but still sit largely empty. “If you have a 20,000 square foot office floor plate in Manhattan that’s empty, you can’t put a bedroom in the middle of a trading floor,” he said.
A working paper released by the National Bureau of Economic Research in September warned of an office property “apocalypse,” with New York City office buildings expected to tumble a 39.2% in value due to remote work, or a $49.6 billion loss over the long-run.
The paper, which has yet to be peer reviewed, pegged the national toll for office buildings over time as likely near $453.6 billion.
The damage already done to households and financial markets has been sharp this year as the Federal Reserve has aggressively raised interest rates to fight inflation at a 40-year high. The Dow Jones Industrial Average
DJIA,
joined the S&P 500 index
SPX,
in a bear market in September, while the benchmark 10-year Treasury rate
TMUBMUSD10Y,
briefly topped 4% last week before pulling back to 3.6%.
Higher borrowing costs for landlords, plus potentially slower cash flow growth, led BofA Global strategists in September to suggest that commercial property values could fall by as much as 20%-30% over the next few years.
The cloudy backdrop has meant slower loan originations, particularly in the office sector, “for a lot of the obvious reasons,” said D.J. Lucey, senior portfolio manager, fixed income at SLC Management, by phone.
Lucey also said investors in commercial mortgage bonds now benefit from higher yields, roughly approaching 10% on debt with BBB- ratings, when looking at pools of different property loan types, but also that deals have more conservative underwriting standards than in the run-up to the global financial crisis.
The question is whether that will be enough if an office apocalypse comes to Wall Street.
Izmir, Turkey, has seen home prices grow 150.9% in the second quarter of this year, according to Knight Frank.
GETTY IMAGES/EYEEM
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The global housing market registered a double-digit price growth in the second quarter, instead of a slowdown as many forecasted in light of global recession and inflation concerns.
In the three months from April to June,
Knight Frank’s
Global House Price Index, which tracks the average residential prices across 56 countries and territories, increased 10% year over year, just slightly down from 10.9% recorded in the previous quarter.
Plus, 51 out of the 56 countries and territories tracked saw an annual increase in house prices, compared to 49 in the first quarter.
“We expected a notable slowdown in the second quarter, both in terms of the index’s overall performance and in relation to the number of countries seeing house price declines in annual terms. Neither materialized,”
Kate Everett-Allen,
head of international residential research at Knight Frank, said in the report released on Wednesday.
“Perhaps we’re premature with our doom mongering and the inflection point will be next quarter,” she added.
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Rising inflation and mortgage rates will certainly pose some challenges. In fact, when taking inflation into account, the global house prices just edged up 1.6% in real terms in the second quarter, compared to a 6.2% increase in the second quarter of 2021.
For example, Turkey led the index with an annual price growth rate of 161%, but it “can largely be ignored with inflation at a 24-year high of almost 80%,” Ms. Everett-Allen said.
The U.S. housing market, which ranked sixth on the list with 21% annual price growth, is expected to see a slowdown, as higher mortgage rates already led to a 26% decline in existing home sales in July from their peak in January, the report said.
Also notably, three out of the five countries and territories that registered a price decline in the second quarter are in Asia, including Malaysia (-0.1%), China’s mainland (-1.3%) and the Hong Kong Special Administrative Region (-2.4%).
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At the urban level, of the 150 cities tracked by Knight Frank’s Global Residential Cities Index, 138 saw prices increase in the second quarter and 66 cities recorded double-digit price growth.
Istanbul, the largest city in Turkey, topped the list with an annual price growth of 184.9%, followed by the country’s capital, Ankara (165.4%) and its third most populous city, Izmir (150.9%).
Four U.S. cities were listed in the top 10, including Miami, which ranked fourth with an annual price appreciation of 34%; Dallas (30.8%), Phoenix (29.7%) and Atlanta (26.3%) ranked sixth, seventh and ninth respectively.
This article originally appeared on Mansion Global.
By Clarence Leong
Chinese property manager Onewo Inc., which is majority-owned by China Vanke Co., is preparing to launch an initial public offering in Hong Kong, despite continued turmoil in the real-estate sector and tepid investor sentiment.
The company hasn’t yet disclosed how much it intends to raise from the IPO but a filing on Thursday showed it has cleared its listing hearing with the Hong Kong stock exchange, meaning it can now start marketing the offering.
Last year, Onewo increased its net profit 14% to 1.67 billion yuan ($241.8 million) and grew revenue 31% to CNY23.70 billion, it said in the filing.
Vanke and its subsidiaries hold a combined 62.89% stake in Onewo, the filing showed.
The planned listing comes as China’s property market remains mired in a prolonged downturn, with developers’ contracted sales still down by double-digit percentages from the previous year. Despite the slump, Vanke, one of China’s leading developers, grew its net profit 11% in the first half from a year earlier and increased revenue 24%.
The sector turmoil, including delayed housing project deliveries, corporate governance issues and shaky liquidity, has hit shares of property managers.
Shares of Country Garden Services Holdings Co., Shimao Services Holdings Ltd. and Sunac Services Holdings Ltd. have slid 61%-71% so far this year.
Onewo, which serves corporate and government clients beyond offering property-management services like home sales and renovation, also has a technology offerings segment.
The planned listing follows that of Longfor Group Holdings Ltd.’s property-management unit, which filed for a Hong Kong IPO in July. A number of other property managers have also listed this year, including Jinmao Property Services Co., Redco Healthy Living Co. and Lushang Life Services Co.
Write to Clarence Leong at clarence.leong@wsj.com
The housing market isn’t crashing, but it’s definitely feeling the burn.
After two frenzied years, home buying is cooling off as mortgage rates rise. Some experts in the field are calling it a “housing recession.”
U.S. home values fell in July by 0.1%, compared to the month before, a new Zillow report said.
While deceleration in home-price growth is typical for this time of the year, Zillow noted, the small decline is the first monthly dip since 2012.
The typical U.S. home value fell by $366 in July, and is now $357,107, as measured by the Zillow Home Value Index.
“The typical U.S. home value fell by $366 in July, and is now $357,170, as measured by the Zillow Home Value Index.”
Given the dip in July, Zillow revised its forecast for the growth in home values to 2.4% through the end of July 2023. The current rate of growth is 16%.
But this hardly counts as a crash in prices, because the typical home value is also up 44.5% from July 2019 before the COVID-19 pandemic.
At this point, sellers are finding themselves with fewer offers, and are having to offer more concessions themselves to entice buyers.
“ Sellers are finding themselves with fewer offers, and are having to offer more concessions themselves to entice buyers.”
Buyers in turn are gaining more options, seeing inventory gradually rise, as the pendulum slowly swings into their direction.
The dip in July is a “badly needed rebalancing that gives home buyers more options, more time to shop and more negotiating power,” Skylar Olsen, chief economist at Zillow
Z,
said in a statement.
Homes have become unaffordable for many, given the high prices and mortgage rates. “As prices soften, many will renew their interest, and we will continue our progress back to ‘normal’,” Olsen added.
Home value declines were largest in San Jose, Calif., San Francisco, Calif., Phoenix, Ariz., and Austin, Texas. In these markets, the time listings spend on the market is rising fast.
“‘Our prices have come off of their irrational highs of the last 18 months. It’s kind of a rebalancing.’”
“Our prices have come off of their irrational highs of the last 18 months. It’s kind of a rebalancing,” Dave Walsh, vice president and manager of Compass Realty San Jose, told MarketWatch.
Instead of homes listed on the market getting multiple offers, there are maybe one or two offers per home. “From your buyer’s point of view, there’s a much better opportunity for them to get something at a much more affordable price,” he added.
At open houses in the Bay Area, multiple buyers are turning up — but the lines are nowhere near as long as they were during the pandemic years. “That was just off the tracks,” Walsh, a four-decade housing-industry veteran, said. “We’ve never had a year like 2020 in many of my years in being in the business.”
Home values rose the most in Miami, Fla., Richmond, Va., and Memphis, Tenn. But monthly growth has decelerated as well in these markets, Zillow noted.
Here’s the top 10 market movers:
| City | July Zillow Home Value Index | Zillow Index change from June to July | Share of listings with a price cut |
| San Jose, Calif. | $1.56 million | -4.5% | 19.5% |
| Phoenix, Ariz. | $470,800 | -2.8% | 28.8% |
| San Francisco, Calif. | $1.44 million | -2.8% | 17.5% |
| Austin, Texas | $566,533 | -2.7% | 25.2% |
| Raleigh, N.C. | $457,006 | -2.5% | 19.7% |
| Sacramento, Calif. | $611,287 | -2.5% | 23.6% |
| Riverside, Calif. | $580,593 | -2.4% | 23% |
| Denver, Colo. | $630,141 | -1.8% | 26.3% |
| Portland, Ore. | $573,768 | -1.7% | 23.5% |
| Las Vegas, Nev. | $450,931 | -1.4% | 28.6% |
Got thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com
Blackstone Group
is the world’s largest manager of alternative assets such as private equity and real estate. It is also a leader in one of the industry’s biggest initiatives—attracting retail investors.
By many measures, the company’s flagship retail product, Blackstone Real Estate Income Trust, is a success. Known as Breit, it has mushroomed in value to $116 billion since its inception in 2017 and become one of the largest buyers of real estate in the country.
Blackstone (ticker: BX) describes Breit as an “institutional-quality real estate platform that brings private real estate to income-focused investors.” Now one of the largest U.S. real estate investment trusts, Breit owns nearly 5,000 properties, mostly multifamily dwellings and warehouses, as well as the real estate assets of Las Vegas hotels/casinos including the Bellagio and MGM Grand.
Though not publicly traded, it’s sold by major brokerage firms and financial advisors, with a relatively low minimum investment of $2,500. In just five years, Breit has become a lucrative part of Blackstone’s industry-leading real estate franchise, generating $1.8 billion in fees last year and $1 billion in the first six months of 2022.
That rapid growth could have a downside. There has been concern recently about Breit’s outlook, including how it is valued and whether investor redemptions will increase from low levels. BofA Securities analyst Craig Siegenthaler estimated in July that net flows, or sales less redemptions, have essentially moved to “break-even” after inflows averaging $2 billion a month for the past 18 months.
In response to analysts’ questions about Breit on Blackstone’s earnings conference call in July, CEO Stephen Schwarzman said that Breit and other Blackstone offerings provide “enormous value” to investors, “who remember it and they appreciate the firm. That builds our brand. That helps us raise money.”
Recently, however, a cloudier outlook for Breit and other Blackstone retail products such as the Blackstone Private Credit Fund appears to be weighing on Blackstone stock, which at about $102, is down 30% from its November peak.
A Barron’s analysis of Breit suggests that investors should be cautious and instead consider publicly traded real estate investment trusts, or REITs, that look more attractive. Breit has gone up in price this year while public REITs have moved lower. Breit has relatively high fees, offers limited liquidity, and is more leveraged than comparable public companies.
| Company / Ticker | Total YTD | Return 52-Week | Since Breit Inception in 2017 |
|---|---|---|---|
| Blackstone Real Estate Income Trust / BREIT | 7.2% | 24.5% | 13.5% |
| Vanguard Real Estate / VNQ | -15.5 | -6.1 | 6.7 |
| Prologis / PLD | -22.2 | 2.8 | 20.4 |
| Mid-America Apartment Communities / MAA | -20.6 | -6.2 | 15.1 |
| Camden Property Trust / CPT | -22.3 | -6.6 | 12.5 |
Note: Returns since 2017 are annualized. Breit returns are for the Class I shares and through June 30.
Sources: Bloomberg; company reports
Blackstone says Breit has appreciated this year because strong financial performance has more than offset the impact of higher interest rates. It says Breit has “delivered exceptional performance” for investors and is “exceptionally well positioned,” given its focus on apartments and warehouses.
Apartments are benefiting from double-digit rent increases, and warehouse demand has been strong. “These are the best fundamentals that I have seen in these two sectors in my entire career,” said Blackstone President Jonathan Gray on a recent webinar.
Breit’s fees are comparable to its private institutional real estate funds, and Blackstone says Breit’s leverage is modest relative to many private real estate funds.
One of Breit’s big selling points, a distribution yield of roughly 4%, is above the REIT average of about 3%. But the distribution isn’t fully earned based on a key REIT cash-flow measure. The distribution yields differ somewhat among its four share classes.
| Total Value Including Debt | $116 B |
|---|---|
| Net Asset Value | $68 B |
| Share Price | $14.98 |
| Distribution Yield | 4.5% |
| 2021 Net Income | -$805 M |
| 2021 FAD | $1,290 M |
| 2021 Blackstone Management and Incentive Fees | $1,824 M |
| Shares outstanding | 4.6 billion |
FAD=funds available for distribution
Sources: Bloomberg; company reports
Breit differs from public REIT peers like
Prologis
(PLD),
Mid-America Apartment Communities
(
MAA
), and
AvalonBay Communities
(AVB), which can be bought and sold on public markets. Breit is the only buyer of its shares, and caps monthly redemptions at 2% of the fund’s net asset value and quarterly redemptions at 5%.
Breit says its shares should be considered to have “limited liquidity and at times may be illiquid.” Breit has met all redemption requests since its inception. With inflows that have totaled about $35 billion in the 18 months ending on June 30, the fund has been on a buying spree. For instance, Breit and another Blackstone fund have a $13 billion deal to acquire one of the largest owners of housing for college students,
American Campus Communities
(ACC), which is expected to close in the next few days.
Breit’s growth has been driven by excellent portfolio selection and ample returns. Nearly 80% of its assets are in rental apartments and industrial properties, including warehouses geared toward e-commerce, which have been the two strongest real estate sectors in recent years.
Breit’s total return has averaged 13.5% a year since inception, compared with 7% for the Vanguard Real Estate (VNQ) an exchange-traded fund whose holdings are dominated by the largest public REITs. “It has done a terrific job picking sectors,” says Dave Bragg, an analyst at Green Street, an independent real estate research firm.
Breit’s value has held up amid the fallout in financial markets and in the public REIT sector this year. Breit’s total return this year through June has been about 7%.
On the other hand, the Vanguard ETF had a negative 13% total return through the end of July, while comparable public REITs like Prologis, AvalonBay, and
Camden Property Trust
(CPT) are off 15% or more based on total return. Breit has suffered just three down months since its inception in January 2017.
Breit can rise while comparable public companies are falling because it tracks private real estate markets, which can move more slowly than more volatile public markets. Blackstone prices the fund monthly based on its financial performance and other factors, including interest-rate changes.
Blackstone points to the strong performance of Breit’s portfolio—net operating income was up 16% in the first half of 2022—for the positive returns this year. Public REITs also have reported good results, but their stocks have dropped due to higher interest rates and concerns about a recession.
“When public REITs trade at discounts to underlying value of their assets, it’s a great buying opportunity,” says Bragg of Green Street. “We don’t think investors should be buying in the private markets when the public market opportunities are so great.”
He calculated that the big public REITs on average were trading recently at about a 15% discount to their net asset values.
As an alternative to Breit, investors could consider well-run public alternatives such as Prologis, a leading owner of warehouses, or multifamily REITs such as AvalonBay or Mid-America Apartment Communities. Barron’s wrote favorably on the apartment REIT sector recently.
Redemption requests by Breit investors appear to be picking up. Siegenthaler’s analysis showed that sales were roughly matching redemptions. “Given that Breit generated $9.8 billion in inflows in first-quarter 2022 ($3 billion plus per month), the fact that its flows may have slowed to break-even was surprising and occurred earlier than we expected,” he wrote. He nonetheless has a Buy rating on Blackstone and expects retail flows to Breit and other vehicles to reaccelerate in a recovery.
Blackstone noted on its recent earnings conference call that investors requested $2.9 billion of redemptions from its retail funds including Breit during the second quarter.
Blackstone says it isn’t worried. “In this period of extreme market volatility, a deceleration in fund-raising is unsurprising, but Breit net flows are still positive on the back of strong performance,” the company tells Barron’s.
Asked on the July conference call how it would handle a period of redemptions beyond redemption limits, Gray, who built the firm’s real estate empire, pointed to a “significant amount of a liquidity” at Breit. Gray himself recently invested $50 million in the fund.
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.”
Breit levies a base annual fee of 1.25% of net assets and has an incentive fee of 12.5% of the annual total return if it achieves at least a 5% return. Bragg estimates that Breit’s fees are two to three times those of public REITs and funds, depending on the vehicle chosen by the investor.
Breit had a net asset value of $68 billion—equivalent to an equity market value—and a total value including debt of $116 billion at the end of June. Breit calculates its leverage ratio at 42%—debt divided by total value. Comparable public REITs are about half that level. The fund had $46 billion of debt outstanding at the end of the first quarter while a comparably sized Prologis had $18 billion.
No public REIT analysts follow Breit. It doesn’t issue earnings news releases or hold quarterly conference calls. It files quarterly 10-Qs and annual 10-Ks, but its financial statements, like those of public REITs, are complex.
REIT investors look at net income, but focus more on other measures such as funds from operations and funds available for distribution, which add back sizable depreciation expenses. The idea is that most of the depreciation is a phantom noncash expense since the underlying real estate isn’t falling in value.
Breit, unlike most big public REITs, has operated in the red based on net income. It lost more than $800 million in each of the past two years based on generally accepted accounting principles, or GAAP, and about $650 million in the first six months of 2022.
For 2021, it calculated its funds available for distribution at $1.3 billion, but that did not cover its distributions to shareholders of $1.6 billion. About half of Breit holders reinvested their distributions last year, reducing cash outlays.
Breit’s calculation of its funds available for distribution, a non-GAAP financial measure, excluded $1.8 billion of management and incentive fees paid to Blackstone in 2021. The reason is that the payments were made in Breit shares rather than in cash. But fees are fees regardless of whether they’re paid in stock or cash. Breit buys back stock paid to Blackstone, meaning Blackstone effectively gets cash. Breit includes management and incentive fees as an expense in its calculation of its GAAP net income.
The Breit distribution is nearly all a return of capital due to its losses. In contrast, most big REITs pay dividends at least partly from net income.
Blackstone says Breit’s net income is depressed by greater depreciation expense relative to public REITs. That high depreciation results in a tax-advantaged distribution, benefiting investors, it says. Breit says it has fully funded the distribution from cash flow from operations, a GAAP metric that excludes the management and incentive fees, since its inception.
Over its first five years, Breit has scored, thanks to smart sector allocations and a real estate bull market. But with a lofty price and high fees, it could be hard-pressed to repeat its historical returns and beat the public REITs. And it has yet to be tested in a sustained economic downturn or a period of net redemptions.
Write to Andrew Bary at andrew.bary@barrons.com
Redfin CEO predicts 'terrible consolidation’ in the real-estate sector, but says it will ultimately be good for the industry
The real-estate sector is in crisis amid the housing downturn. Expect more pain to come before things start to normalize, one housing chief says.
But he added a caveat: “I do think it’ll be good for the industry.”
During the pandemic years of 2020 and 2021, many Americans jumped into the real-estate industry, Kelman recounted, so many that “we had more real-estate agents than listings by 2021.”
At this point, there are about million-and-a-half realtors trying to sell roughly over five million homes, meaning that they’re only doing five or six deals a year, which “isn’t a productive, fulfilling life,” Kelman said.
Some of the excess capacity in the sector has been released. In 2022, Redfin went through layoffs twice, responding to market conditions. Compass, another brokerage, announced a third round of layoffs on Thursday, to reduce expenses.
“I hope the industry is close to [becoming] right-sized and that things can get better from here,” Kelman said on Wednesday. “I don’t think that’s happened yet.”
‘It’s just a roommate generation now’
But for many Americans, high housing prices and mortgage rates make homeownership unaffordable. The Redfin chief executive sympathized with younger Americans priced out of the market.
“It’s just a roommate generation now, where people are staying with their parents, living in the basement or just shacking up with friends longer because home prices and rents have both gotten so far out of hand,” Kelman said.
There is some relief for those renters, as rents have fallen over the past few months.
Rents dropped for the fourth month in a row in December, Apartment List said in its monthly national rent report on Wednesday.
“Rents decreased in December in 90 of the nation’s largest 100 cities,’ the report stated, “with prices down by 3% month-over-month.”
And more homes are coming online to help with rental pressure.
But that’s also limiting the number of homes that go on sale, Kelman noted. He said that some of that supply came from home sellers who are withdrawing their listings from the market, and renting them out instead.
Investors still on the prowl for deals
Investor buying was a big topic of conversation during the pandemic, as many prospective buyers got beat out by companies and landlords with big pockets.
Kelman said that investors are still on the prowl, and are scouring disaster zones for deals.
In 2021, investors bought 24% of all single-family homes sold nationwide, a Pew Trusts report said last year.
Kelman said that some out-of-town investors today are tracking damaged homes, such as in Florida, to find deals.
When he recently visited a local office in Florida, Kelman said Redfin employees in areas affected by Hurricane Ian told him that investors were calling as the hurricane made landfall.
“We were trying to tour properties that the National Guard had closed …that were literally submerged. We would have had to visit the property by boat,” Kelman recounted.
“And these investors still wanted us to do a virtual tour where we’re using our phone to guide them through the property,” he continued.
“Even as the regular residents of Florida are calling us, almost in tears, because they’re standing on their second-floor balcony and they’re up to their knees and water …there’s another group of people coming from all over the world who see this as an investment opportunity,” he said.
While insurers and lenders are becoming wary of coastal properties that come with risks associated with climate change, such as flooding, “what was crazy to me is that investors were stepping in to fill that gap,” Kelman said.
Canada banning foreign homebuyers was ‘a bold move’
In response to investors’ buying frenzy, Canada, which is also dealing with an unaffordable housing market, decided to take a hard stance. Kelman said he was impressed.
At the start of 2023, the Canadian government enacted a ban on foreigners buying homes in Canada for two years. The law provides exceptions for purchases made by immigrants and permanent residents of Canada, CNN reported.
“I was impressed and shocked at what Canada did,” Kelman said.
“At one level, it’s just a massive self-inflicted wound to the economy,” he said. But on another level it’s “a real commitment to making housing more affordable for Canadians,” he added.
While the United States frets over a shortage in the supply of homes available for eager buyers, “Canada just said screw it. They pulled the cord,” Kelman said.
“And now that housing market is having a real correction and it’ll be terrible for the real-estate industry [and] for people who are about to sell their home,” he added.
“But it will mean that a new generation of Canadians is going to be able to afford a place, and so that was a pretty bold move,” he added.
Got thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com
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