Blackstone’s plan to juice BREIT

The crown jewel in Steven Schwarzman’s real estate investment empire — the $70bn Blackstone Real Estate Income Trust — has hit a spot of bother lately. But its executives think they know how to get it back on track.

Nadeem Meghji, head of Americas real estate at Blackstone, this week made an appearance on “BX TV”, the company’s Monday morning global video call for employees. According to details passed to FT Alphaville after the event, Meghji chatted with chief administrative officer Vik Sawhney to rally the troops and explain why BREIT is actually awesome.

What followed was a version of the defence that Blackstone had previously released on BREIT’s website: a surge in withdrawal requests had forced it to limit redemptions that were mainly coming from Asian investors taking profits to meet margin calls elsewhere.

The call did help explain, at least partly, the stark divergence between its returns and the performance of the listed REIT universe. BREIT is more exposed to housing in faster-growing “Sun Belt” states, and a canny interest rate hedge has increased in value by $5bn. As Meghji told his fellow Blackstoners: “We picked the right asset classes, the right geographies, and we made a really good call on interest rates.”

More interesting was when Meghji turned to how Blackstone will ensure a “terrific” future for BREIT as well.

To an extent this is because Blackstone estimates that prevailing market rents are about 20 per cent higher than the rents it is charging today, so as leases expire it should be able to jack up costs by at least that level.

This growth is already pretty much “in the piggy bank”, Meghji told colleagues. And if some tenants can’t pay higher rent, they could expect a visit from the bailiff (our emphasis below):

Today on the ground, we’re seeing 5 per cent rent growth, 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.

Blackstone says on its website that, due to the “extreme hardship” many tenants suffered during the pandemic, it didn’t make a single eviction due to non-payment across its housing portfolio for two years. It seems that any remaining forbearance is now finito.

If you’re a student, or live a Blackstone-owned affordable housing unit, you’re not going to get much succour in 2023 either. Here’s what Meghji said on the call:

We’re a big owner of student housing, and in our student housing portfolio we’re signing leases today for next academic year at 9 per cent higher rents than this year. So we know what this growth will look like.

We also have a big affordable housing portfolio where rent growth is a function of inflation on a lag. Here too we know what growth will be next year. It’s going to be in the high single digits.

To be fair, rents for affordable housing in the US (properties that fall under the Low-Income Housing Tax Credit program) are federally regulated, so Blackstone has less discretion here. Though it could presumably decide to eschew the maximum-allowed rent increases, given it has called the lack of housing supply a “national crisis” and vowed to preserve affordable housing.

Blackstone does enjoy full discretion when it comes to its industrial properties — and oooh boy are they squeezing those tenants! Meghji said that BREIT increased rents by 38 per cent on industrial leases that expired in the third quarter, and leases being renegotiated right now were heading towards an increase of over 40 per cent.

This may all be good news for BREIT; but it is less so for tenants. And there’s a question of how sustainable this really is. In a statement to FTAV, Blackstone said:

BXTV is on every week and was designed to keep our people informed about market dynamics impacting our business. Setting the facts straight when there is misreporting is standard course.

We believe we have the most favourable resident policies among any large landlord in the US For two years, Blackstone chose to not make a single eviction for non-payment across our US rental housing portfolio.