Brad’s Note: At Wide Moat Research, I place a lot of emphasis on CEOs. And it’s for a good reason.
If I can feel confident a management team has the experience, track record, and priorities that align with shareholders’, more often than not, that’s a company I want to own.
In today’s essay, my analyst Stephen Hester will tell you about one of these companies.
It recently made headlines for seemingly negative reasons and its share price took a tumble.
But by digging below the surface and laying out its secrets to success, he’ll show you why this reaction is overblown and how a good management team can pull through difficult times.
Here’s Stephen…
From humble beginnings working the cash register in his dad’s Greek diner in Kearney, Nebraska… Today, Stephen Schwarzman runs one of the biggest alternative asset managers in the world.
Schwarzman wasn’t born with a silver spoon in his mouth. Instead, he developed his business acumen the hard way: by putting in the work himself.
And those lessons built the foundation of the company and make his company, Blackstone, the powerhouse it is today.
Today, I’m going to share a key reason why Blackstone has been so successful and how it maintains that success.
It’s connected to recent headlines that are all missing the big picture. This “secret” of the Blackstone empire will change how you look at the markets. And how you invest.
Too Much of a Good Thing
At the doorstep of the Great Recession, The Guardian asked Schwarzman his views on the market.
I want a war, not a series of skirmishes… I always think about what will kill off the other bidder.
That shows me Schwarzman isn’t afraid of competition. Rather, he focuses on the most efficient ways to come out on top. In other words, he’s someone you want on your side.
He’s the current CEO of the company he co-founded in 1985 and still owns 19% of the common stock. If Blackstone goes to zero, Schwarzman loses most of his net worth. He has real skin in the game.
That’s why he’s just as invested in the success of the company’s ventures as regular shareholders. And one of those ventures has been making the headlines recently…
One of Blackstone’s biggest achievements was the launch of Blackstone Real Estate Income Trust (BREIT) in 2017. It’s a lot like a traditional REIT. The main difference is it’s not publicly traded. Private funds like BREIT are common investments for wealthy institutional investors, like pensions.
BREIT has grown to $125 billion in assets. It is a major part of the business, and that helps Blackstone generate about the same revenue as McDonald’s.
The fund’s super-size means it’s still critical for Blackstone’s future. And yet, Blackstone has a problem.
BREIT grants a maximum of 5% of the fund’s value in redemptions each quarter. This is normal for private funds. But more investors than usual are redeeming shares… The media caught wind of this and have been touting it all over the news.
Given BREIT’s importance, Blackstone’s common shares are now feeling the pain, too.
But here’s the thing…
As of October 31, BREIT’s three-year annualized return is 15.5% and 9.3% year-to-date. That’s way better than publicly traded REIT averages. Plus, its properties are generating 13% more cash in 2022 than 2021. So what’s the issue?
Ironically, the strong performance is the problem.
People are suspicious because BREIT is up this year while most REITs are down double digits.
That’s because BREIT uses third-party appraisers to value its assets. And Blackstone uses the best of the best. (I know because I was a due diligence officer for over a decade and covered BREIT since its inception.)
Meanwhile, who decides what a publicly traded stock is worth? You and me. The market.
Remember back in March 2020, stocks fell 40% almost overnight. Publicly traded REITs did, too. And six months later, the S&P 500 was at new highs.
But you know what didn’t fall 40%? Or even 15%? Private real estate funds like BREIT.
Panic caused public REITs to decline in value, not fundamentals. And BREIT doesn’t trade based on panic. Its value is from quarterly appraisals.
So today, everyone is missing the most important thing about this asset manager. It’s a major key to Blackstone’s success and something Schwarzman instilled in the company since launching the fund: its understanding of both public and private markets.
Taking Advantage of Imbalance
Many people in the mainstream news today are saying BREIT is “too expensive” and should be sold. But what they should be doing is understanding the disconnect between sentiment and fundamentals… and buying public REITs at a discount.
These private funds are telling us that the actual value of the properties is a lot higher than the stock market believes.
That’s exactly what happened in 2008/2009 and 2020. And in both cases, public REITs were great buys. They eventually caught up to the performance of the private funds. Just as people like Schwarzman expected.
The Vanguard Real Estate Index Fund (VNQ) is down 23% from this time last year. The S&P 500 Index is down almost 16%.
Meanwhile, BREIT’s appraisers think its properties are performing well. So does its top-tier auditor. Public REITs’ increased Funds from Operations (FFO) by 15% year-over-year in Q3 2022. That’s almost exactly what BREIT achieved. This isn’t a coincidence.
The inconsistency here isn’t BREIT. It’s the public equity markets. And eventually, they’ll wake up and catch up to the reality of REITs’ strength.
Look for our top REIT picks in the Intelligent Income Investor to take advantage of this rare opportunity. Otherwise, the VNQ ETF I mentioned earlier owns a basket of REITs for you to get started today.
Blackstone succeeds by profiting from imbalances between public and private markets. Now you can, too.
Best regards,
Stephen Hester
Analyst, Intelligent Income Daily