The current low interest rate environment, and investors’ search for yield, will continue to support the appreciation of real estate, says Frank Cohen, Blackstone’s global head of Core+ Real Estate and chairman and CEO of Blackstone Real Estate Investment Trust (BREIT).
The entry of Blackstone into public non-listed REITs (PNLRs) in 2017 via BREIT provided a significant boost to the sector, especially for net asset value (NAV) products. As of Oct. 31, BREIT had a total asset value of $37.2 billion, with 39% of its portfolio allocated to multifamily and 37% to industrial.
Cohen spoke with Nareit on issues including BREIT’s investment thesis, the appeal of private real estate, and where BREIT sees opportunity emerging today.
Q: Has the pandemic changed the investment thesis of BREIT?
Our goal is to bring institutional sponsorship to income-focused investors. Whether you are a $5,000 investor or $500 million investor, we provide all our investors with access to Blackstone’s leading real estate platform that has been investing in many aspects of the real estate markets for nearly 30 years.
While the pandemic has shifted many things in the world, it has not impacted BREIT’s investment thesis. We remain focused on acquiring a diversified portfolio of high quality, stable, income-producing real estate assets concentrated in our highest conviction investment themes.
To that end, our BREIT portfolio is over 90% concentrated in logistics, rental housing, and net lease. These sectors have resilient cash flows and some of the best fundamentals, making them the type of assets that tend to perform well in an uncertain but low rate environment.
Q: Why is private real estate an attractive place to invest today?
Private real estate is certainly an attractive investment alternative today, although especially in this type of environment where sector and asset selection are extremely important. We’ve been very focused on investing in the logistics sector, as e-commerce tailwinds are propelling industrial demand.
By overweighting sectors like logistics, investors can receive a solid dividend, as well as upside through the appreciation of the real estate. To date, BREIT has paid 44 straight monthly dividends at roughly a 5% annual yield, much of which is tax deferred and classified as return of capital.
In addition, we believe real estate is well positioned to appreciate as investors continue to search for yield in a low rate environment. Corporate equities and bonds have recovered strongly, yet real estate still trades at a historically elevated spread relative to the 10-year U.S. Treasury yield. Should this spread follow other asset classes and narrow, cap rates for resilient and stable properties will decline, leading to valuation increases.
Q: What sectors were outperforming in your portfolio prior to March 2020 and have you had to implement any changes to maintain value in those investments?
At Blackstone, and within BREIT, we are thematic investors, meaning we invest in scale in areas where we have high conviction. In BREIT specifically, we have focused heavily on a few major themes, such as logistics and rental housing.
In certain cases, we’ve also pursued acquisitions of a select few high-quality assets with net lease structures, which we think offer stable income and strong credit support. Each of these sectors have been resilient and continued to perform well.
Of course, a number of sectors have been more impacted by COVID-19, namely retail and hotels, but these sectors represent a very small portion of our portfolio.
Q: BREIT tends to allocate about 5% of its portfolio to hotel assets. Do you see a change in that allocation going forward?
In today’s environment, the hospitality sector has been hit hard and will take time to recover, but we do believe that travel will resume and that there could be compelling opportunities in the future. We always focus on investing in high quality assets that we believe will provide strong returns for our investors. That belief holds true for any asset class, including hospitality.
Q: BREIT recently purchased interests in Las Vegas properties Bellagio, MGM Grand, and Mandalay Bay. How do you view those deals as compared to more traditional triple net lease deals?
In the case of our Bellagio, MGM Grand, and Mandalay Bay net lease transactions, BREIT had the opportunity to buy iconic assets on the Las Vegas strip at attractive prices, with the added benefit of long-term leases backed by both the real estate and full corporate parent guaranties.
At a high-level, what this means is that, rather than operating the actual hotels, BREIT simply owns the physical properties and receives fixed rent payments with contractual annual growth. MGM Resorts International, which operates the properties, is responsible for all operations and capital expenditures at the property, regardless of the broader operating environment.
Q: BREIT is still investing in the office sector, most recently with the purchase of an office complex in Silicon Valley. What is the logic behind these types of investments?
Office is a small portion of the BREIT portfolio. BREIT owns approximately 1,200 properties, of which just two are office buildings, illustrating the selective nature of our office investments. Certainly, office activity has slowed as a result of the pandemic; however, this trend has not materially impacted BREIT given our small exposure.
The recent deal is an attractive piece of real estate in a high-quality northern California submarket, adjacent to a large mixed-use development. What’s more, the property is long-term leased to a solid company, so we expect to generate stable cash flows to BREIT. Like always, we’re attracted to great real estate located in areas with solid fundamentals.
Q: What do you see ahead for traditional office space?
There’s no doubt that the sector faces headwinds as tenants reassess their office needs post COVID-19. There’s a case to be made for less space, given the role of technology, and more space, given a desire for less density. In any event, the office will continue to be a place where businesses look to create corporate culture and train talent—it may just look a little different. Ultimately, we continue to believe that people will want to live and work in dynamic cities like New York and San Francisco.
Q: BREIT recently purchased Simply Self Storage from Brookfield Asset Management for $1.2 billion. What’s the future hold for self-storage?
We have significant liquidity available for new acquisitions, and we currently have a $3.3 billion pipeline of identified investments. One of these investments is Simply Self Storage, which complements BREIT’s portfolio given the sector’s historically low tenant turnover, minimal maintenance costs, and stable cash flows. It was also a strategic investment for BREIT with a branded platform and seasoned management team. As the self-storage sector is a highly fragmented industry, we see an attractive opportunity to accretively grow the portfolio over time.
Q: Which geographic areas are currently attractive to BREIT?
As investors, we want to follow growth and innovation. We’ve focused BREIT’s investments in “emerging cities,” or cities with high levels of population and job growth and increasing levels of business and economic activity. Many of these locations, such as Atlanta, Charlotte, Phoenix, Nashville, and parts of Florida, are increasingly attractive, especially given their relatively low cost of living, temperate climates, and access to recreational activities. These locations should continue to grow, and we want to grow with them.