Blackstone Is 'Loading Up' On REITs (And You Should Too)

seekingalpha08-25

Billionaire investors Jon Gray and Steve Schwartzman-run Blackstone has invested billions in REITs this year.Blackstone bought out two REITs and is now rumored to soon take out a third one.I explain ...

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They first acquired Tricon Residential (TCN) in a $3 billion transaction in January and paid a ~30% premium for it:   YCHARTS Then they doubled down and acquired Apartment Income REIT (AIRC) in a huge $10 billion transaction in April and paid a ~25% premium this time:   YCHARTS And now, they are rumored to be in talks to acquire a third REIT called Retail Opportunity Investments (ROIC) in yet another multi-billion-dollar transaction. The rumor alone caused its share price to surge by 20%, but the premium would likely need to be even larger: Data by YCharts That's about $20 billion in total, which is a lot of money even for these billionaires. If they are loading up on REITs, and willing to pay large premiums, it probably means that now is a great time to buy REITs. These billionaire investors are some of the world's very best investors, and they are now focusing on REITs, even as most others are ignoring them. So why are they loading up on REITs right now? I think that it boils down to three things: 1) Discounted valuations Firstly, even after their recent rally, REITs are still priced at near their lowest valuations in a decade, with many REITs trading at steep discounts relative to the value of the real estate they own. This explains why Blackstone is willing to pay large 20-30% premiums, and it still thinks that it is getting a good deal. Here is what they said on their Q2 conference call: [emphasis added]  \"If you went back to the financial crisis of course, we started deploying in the summer of ‘09. There were still plenty of negative headlines from troubled deals for the next couple of years, and it was a great deployment period for us. There's some similarities we're seeing today. The sentiment, we think, will stay negative because there still will be some troubled assets to work through the system. But on the ground prices have cleared, and some of these headwinds have gone away, and that creates a favorable environment, and what we're doing now is seed planting for the future. So these huge public to privates we've done in the U.S... we think this will pay real dividends for our investors over time.\" Jon Gray  If you can buy a dollar bill at $0.70 cents and then add value to it so that this dollar bill becomes $1.40, you have doubled your money. In the meantime, you also earn rental income while you make the improvements to the property and wait for the market conditions to improve. That's the business they are in. Today, the best opportunities just happen to be in the public market, and that is why they are loading up on REITs instead of private real estate. 2) Lower interest rates But it is fair to say that REITs have been cheap for a while now. They started to drop in 2022 and have been in a bear market ever since. So why are they now in 2024 suddenly closing all these transactions? I think that it is because they can sense the window of opportunity could be closing very soon as interest rates are cut. They make it clear on a recent call: [emphasis added] \"As a result of our convictions, we decided to adopt a more aggressive approach to new investments. I'm pleased to report that in the second quarter we deployed $34 billion, the highest level in two years, and nearly $90 billion in the last three quarters since the 10-year treasury yield peaked. With inflation continuing to recede, we expect the Fed to begin cutting interest rates later this year. This should be very positive for Blackstone's asset values and provide the foundation for a significant realization cycle over time.\" Steve Schwarzman As a reminder, REITs crashed due to the surge in interest rates. It caused a lot of income-seeking investors to sell their REITs, irrespective of their fundamentals, to reallocate their capital into Treasuries, bonds, and money-market funds. The strong flow of capital away from REITs is what caused them to crash, and this is very clear if you look at the chart below: Data by YCharts But now it is opposite. It is widely expected that interest rates will start to decrease in the near term, with a first cut in September and many more in the following month. The debt market is currently pricing 200 basis point lower interest rates within a year from now: FedWatch That's huge for REITs. If they crashed due to the rising interest rates, they should also recover as interest rates return to lower levels. Suddenly, all these income investors will see their expected ~5% yields turn into ~3% yields. This will make the higher yielding REITs seem a lot more appealing to them, and the capital will flow right back to where it used to be. Billionaires like Jon Gray and Steve Schwartzman have seen this play out before, and they are simply acting ahead of the crowd while valuations are still opportunistic. 3) Accelerating rent growth Another reason why the window of opportunity could be closing is that rent growth is expected to strongly accelerate already in a year from now, and this should also improve the market sentiment of REITs. Here is what they said on their Q1 conference call: [emphasis added] \"Right now, obviously, the public markets are focused on this near-term deceleration, particularly in multifamily because of the new supply … from some of the Sun Belt markets. … We look at that long-term structural shortage that's out there, we can buy high-quality real estate in good markets and at favorable prices that makes sense for us...\" And they added this on their Q2 call: [emphasis added] At the same time, new construction starts are falling sharply and are at or near 10-year lows in the U.S. for both warehouses and apartment buildings, our two largest areas of concentration. For a market driven by supply and demand, this is very positive for long-term values. Following the pandemic, we had a boom in new construction activity because interest rates were ultra low. But then we had the spike in inflation and interest rates surged, which put most new construction activity on halt. Therefore, we are today dealing with a lot of supply, which limits rent growth, but this oversupply could turn into undersupply already in 2025, leading to an acceleration in rent growth. The public market is short-term oriented and missing this. But these billionaires have a long time horizon. They have seen these same cycles of supply and demand play out in the past. Next possible targets The combination of low valuations, declining interest rates, and accelerating rent growth is a great mix and that is why these billionaires are loading up on REITs. But what could be their next buyout target? Blackstone and other similar private equity players really like two property sectors right now:  Apartment communities Industrial properties  There are similar REITs in each of these sectors that could be attractive to investors. Here are two examples: BSR REIT (HOM.U:CA / OTCPK:BSRTF) is an apartment REIT that could be an interesting option for Blackstone and other private equity players. It stands out in its peer group in that it is much more concentrated and its valuation is quite a bit lower as well. Typically, sunbelt-focused apartment REITs like Mid-America Apartment Communities (MAA) will invest across the board in lots of different markets. BSR is different in that it focuses almost exclusively on the Texan Triangle of Austin, Dallas, and Houston, which are expected to enjoy some of the fastest job and population growth over the long run. Many of these private equity players would gladly increase their exposure to these markets and acquiring a REIT like BSR would help them achieve that. Even then, its shares are today still priced at a near 30% discount to their net asset value. In comparison, its larger peers only trade at a 10-15% discount right now. The management is taking advantage of this by buying back shares to create value. The downside is that because the company is smaller in size and more concentrated, it is also somewhat riskier than its peers. Texas is expected to do great over the long run and this should benefit BSR, but lacking diversification will also lead to greater volatility.   BSR REIT  Rexford Industrial Realty (REXR) is an industrial REIT and it is similar to BSR in that it is concentrated in one specific region and that is Southern California. It causes it to stand out in its peer group because Southern California is the strongest industrial market in the US. It is supply-constrained, resulting in consistent near-100% occupancy rates, and the demand keeps growing as a result of the growing trends of onshoring and e-commerce. Another thing that differentiates it from its peers is that its rents are currently deeply below market, offering the REIT an opportunity to hike rents by ~40% as its leases gradually expire. Despite that, its share price is still 40% lower than it was at its peak, offering a compelling opportunity for patient, long-term oriented investors like Blackstone. What's the catch? Again, it is focuses on a specific region and that comes with some risks. But as a REIT investor, you can easily build a portfolio and diversify this risk yourself.   Rexford Industrial Realty  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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