The numbers behind a great background
A mystery has been whispered on Wall Street for months: how accurate is the valuation of Blackstone’s flagship real estate fund?
The speculation has arisen because the fund, the $59 billion Blackstone Real Estate Income Trust (better known as BREIT), has managed to maintain an “appraised” value of its assets that far exceeds virtually any other real estate fund. Many rivals have lost value, some quite dramatically, in the face of high interest rates and a sagging property market.
BREIT’s performance has been ahead of its competition and has boasted an annual return of 10.5 percent since its debut in 2017.
Debate over the fund’s impressive performance has taken on greater importanceand criticism has increased, due to as Blackstone determines the appraised value of its assets, DealBook’s Andrew Ross Sorkin and Michael de la Merced report. Many major companies rely on a third-party appraiser to determine the value of a fund’s assets, in part so investors can be confident that the appraised value is accurate and not unduly influenced by the companies. (Those appraisals help determine a company’s management fees: the higher the appraised value, the higher the fees.)
Blackstone seems to do it differently. While it uses a third-party appraiser and an outside auditor, the company has the final say on the appraised value of its own assets.
Blackstone is open about its approach. From a recent prospectus:
“These assumptions are determined by the Advisor and reviewed by our independent valuation advisor.”
While Blackstone reveals how it determines the final valuation, some on Wall Street have questioned how much freedom companies should have in valuing their own assets.
Blackstone says its assets are carefully evaluated. “Our process requires us to use monthly property valuations insured by a third party; We have never overturned them in BREIT’s history,” the company told DealBook in a statement.
He added: “We maintain our rigorous valuation process, which is virtually identical to that we use for our open-ended institutional vehicles and has been validated for $20 billion of assets sold at a premium to NAV since 2022.”
Blackstone has maintained that its appraisal approach is more conservative than that of its competitors. It also argues that its appraisal process is better than that of a third-party appraiser because, as one of the largest real estate owners in the country, Blackstone has better data and can move faster to value assets up or down. (Third party appraisers often use lagged data.)
Blackstone also says its portfolio of real estate assets is higher quality than its competitors and includes high-growth sectors such as data centers and student housing.
Underscoring that point, Blackstone noted that it had sold assets for higher values, including stakes in two Las Vegas casinos, warehouses and, most recently, student housing, all at a profit.
The fund also has not significantly sold assets across most of its portfolio, apartment buildings and industrial facilities, according to Matthew Werner, managing director of REIT strategies at Chilton Capital Management, an asset management firm. (Blackstone has said BREIT’s holdings in those sectors are performing well.)
Wall Street is divided over Blackstone’s approach. Craig McCann, president of financial consulting firm SLCG Economic Consulting, who has written several blogs criticizing the fund, said flatly: “We believe something is wrong.”
Others are more optimistic. Kevin Gannon, chief executive of Robert A. Stanger, an investment bank that tracks REITs, told DealBook that while his firm has periodically noted that BREIT’s valuations have outpaced those of its peers, its calculations appear to be in line. with broader industry trends.
“We didn’t find any defects in the NAV,” Gannon said. “Would I be too worried? No.”
But BREIT may be put to the test next year. The fund has already suffered a severe blow: starting in late 2022, concerned investors began demanding their money back. Because of the structure of the BREIT, Blackstone was able to return that cash gradually, a way to avoid a torrent of outflows that would force the fund to sell assets at discounted prices.
Those responsible for the firm recognize that investors are concerned about the commercial real estate sector. In fact, other REITs also experienced redemptions, according to Gannon.
Blackstone has said BREIT is a big part of its future. The real estate fund has grown the firm’s assets, which now total more than $1 trillion, and contributed $839.9 million in net management and advisory fees last year alone. The fund’s success has been a factor in Blackstone’s rising stock price: Blackstone shares have tripled over the past five years, closing Monday at $121.22.
Analysts and investors are watching with great interest as Blackstone is launching a new fund of similar design that invests in private equity assets. If successful, it could pave the way for even more funds to follow the BREIT formula.
THIS IS WHAT’S HAPPENING
The Israeli army sends tanks to Rafah. Israel also took control of the Gaza side of the city’s border crossing with Egypt, but it was not the long-awaited full-scale invasion the government had threatened. The military operation came after Hamas accepted a ceasefire plan proposed by Egypt and Qatar, but which Israel said it had not supported.
The FAA opens a new investigation into Boeing for inspections of the 787 Dreamliner. The investigation began after the plane’s manufacturer said it may have skipped required inspections on the plane’s wings. It’s the latest bad news for Boeing, which is already under scrutiny for its 737 Max 8 planes. Separately, Boeing postponed the first launch of its Starliner spacecraft, which was to carry two astronauts to and from the International Space Station.
Conservative judges say they will blacklist Columbia students for internships. A group of 13 judges called the university an “incubator of intolerance,” citing the pro-Palestinian protests that have rocked the school for weeks. Columbia canceled its main graduation ceremony, citing security concerns, as police clashed with protesters at MIT and several California schools.
Disney+ becomes profitable sooner than expected. Disney’s streaming service reported a profit of $47 million in the first quarter, after company executives predicted the platform would only stop losing money in the fall. That helped the entertainment giant beat analyst expectations for overall earnings per share by 10 percent.
Musk and media deals in Milken
A mix of celebrities, politicians and financiers were present at the first full day of the Milken Institute Global Conference in Los Angeles.
The hot topic: Elon Musk’s conversation with Michael Milken. The big topics: how private equity can return capital to investors as deals dry up, and the sale of Paramount, DealBook’s Lauren Hirsch reports from the event.
Everyone wanted to hear from Musk. Days after a quick, unexpected trip to China, the Tesla CEO chatted about a variety of topics, including artificial intelligence, space, regulation and what keeps him up at night (“risks to civilization,” such as falling birth rates, he said).
Dozens of attendees lined up to watch the panel, forcing others to make do with an overflow room, which also filled up.
Everyone in private equity talks about “IPR” Short for “distribution to paid-in capital,” which tracks a fund’s returns to its investors, the discussion reflects how industry executives are trying to return money to their investors after raising record amounts of funds. Among the options: sell a partial stake or take out loans against the net asset value of your funds.
But not everyone likes ideas. Anne-Marie Fink, who oversees private equity investments for the Wisconsin State Investment Board, said on a panel that there was no system in place to assess liquidity if part of a company is sold. “What worries me is that we really haven’t developed mechanisms such that if you sell 70 percent of my business, you now own 30 percent,” he said. “How do I get liquidity with those 30?”
There are many rumors about what will happen to Paramount. The media company, whose studio is just a 20-minute drive from the conference venue, is weighing takeover bids, one from David Ellison’s Skydance and another from Sony and private equity giant Apollo Global Management.
One media negotiator who appears not to be in the fight (for now): David Zaslav, CEO of Warner Bros. Discovery, who suggested on a panel that he wasn’t interested in joining the bidding. Zaslav is close to Shari Redstone, Paramount’s majority shareholder, and expressed interest in a merger in December. But on Monday he said only that, however the fight ends, “I hope they are successful.”
Money and the Met Gala
Anna Wintour’s Met Gala once again brought together the biggest names in business, fashion, film, sports, entertainment and technology as companies and celebrities demonstrated the power of their brands.
The event is unofficially the party of the year, held to raise funds for the museum’s fashion unit. Monday’s gala was sponsored in part by TikTok, giving the company’s CEO Shou Chew a starring role as party chairman, a respite from bad headlines for the company after President Biden signed a law that threatened to ban short video. application.
The amount TikTok paid for the role was not disclosed, but DealBook took a look at the gala and its history in numbers to get an idea of the money behind it.
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$350,000: The initial cost for a company to get a table. But paying may not be enough to guarantee a seat: Wintour, the global editorial director of publisher Condé Nast, approves of all guests.
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$75,000: The price of an individual ticket this year, compared to $50,000 in 2023.
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3.3 million dollars: Full pay increases promised to members of the Condé Nast union, who had threatened to disrupt the party before a deal was reached on Monday.
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995 million dollars: The “media impact value” the event generated for Vogue in 2023, according to fashion data firm LaunchMetrics.
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22 million dollars: Amount raised at last year’s Met Gala. The increase in ticket prices this year means a higher turnout is expected.
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Wayve, a maker of artificial intelligence software for autonomous vehicles, raised $1 billion in new financing, led by SoftBank, Microsoft and Nvidia. (NY)
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The board of directors of Sabadell, a Spanish bank, rejected a $13 billion takeover bid from a larger rival, BBVA. (Bloomberg)
Policy
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Online trading app Robinhood said the SEC was preparing to sue its cryptocurrency division for what the agency said were securities law violations. (WSJ)
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“Republicans are doing everything they can to reverse the adoption of electric vehicles” (The Verge)
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