The Big Questions Hanging Over Blackstone’s Flagship Real Estate Fund

While Blackstone discloses how it determines the final valuation, some on Wall Street have questioned how much latitude firms should have in appraising their own assets.

Shares in Blackstone have tripled in the past five years, closing on Monday at $121.22.

The NY Times DealBook Newsletter: The speculation has arisen because the fund, the $59 billion Blackstone Real Estate Income Trust — more commonly known as BREIT — has managed to keep an “appraised” value of its assets that far exceeds virtually every other real estate fund. Many rivals have fallen in value, some quite dramatically, in the face of high interest rates and a flagging property market.

BREIT’s performance has floated above its competition, and it has boasted a 10.5 percent annual return since its 2017 debut.

The debate over the fund’s impressive performance has taken on greater significance, and the criticism has grown louder, because of how Blackstone determines the appraised value of its assets, DealBook’s Andrew Ross Sorkin and Michael de la Merced report. Many major firms rely on a third-party appraiser to determine the worth of a fund’s assets, in part so investors can trust that the appraised value is accurate and not unduly influenced by the firms. (Those appraisals help to determine a firm’s management fees: The higher the appraisal value, the higher the fees.)

Blackstone appears to do it differently. While it uses a third-party appraiser and an outside auditor, the firm 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 Adviser, and reviewed by our independent valuation advisor.”

While Blackstone discloses how it determines the final valuation, some on Wall Street have questioned how much latitude firms should have in appraising their own assets.

Blackstone says that its assets are strenuously assessed. “Our process requires us to use monthly property valuations that have been assured by a third-party; we have never overridden these in BREIT’s history,” the firm told DealBook in a statement.

It added, “We stand by our rigorous valuation process, which is virtually identical to the one we use for our open-ended, institutional vehicles and has been validated by $20 billion of assets sold at a premium to N.A.V. since 2022.”

Blackstone has contended that its appraisal approach is more conservative than its competitors’. It also argues that its appraisal process is better than a third-party appraiser because, as one of the nation’s biggest real estate owners, Blackstone has better data and can move faster to mark assets up or down. (Third-party appraisers often use delayed data.)

Blackstone also says that its portfolio of real estate assets is of a higher quality than its competitors, and includes high-growth sectors such as data centers and student housing.

To underscore that point, Blackstone noted that it had sold assets for higher values, including stakes in two Las Vegas casinos, self-storage warehouses and most recently student housing — all at a profit.

The fund also hasn’t meaningfully sold assets in the biggest part of its portfolio, apartment buildings and industrial facilities, according to Matthew Werner, a managing director of REIT strategies at Chilton Capital Management, an asset management firm. (Blackstone has said BREIT’s properties in those sectors are performing well.)

Wall Street is split on Blackstone’s approach. Craig McCann, the president of the financial consulting firm SLCG Economic Consulting who has written several blog posts criticizing the fund, said flatly, “We think there’s something wrong.”

Others are more sanguine. Kevin Gannon, the C.E.O. of Robert A. Stanger, an investment bank that tracks REITs, told DealBook that while his firm has regularly observed that BREIT’s valuations have topped its peers, its calculations appear in line with broader industry trends.

“We don’t find fault with the N.A.V.,” Gannon said. “Would I be overly concerned? No.”

But BREIT may be tested in the next year. The fund has already survived a huge blow: Starting in late 2022, worried investors began to demand their money back. Because of how BREIT is structured, 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 cut-rate prices.

The firm’s leaders acknowledge that investors are worried about the commercial real estate sector. Indeed, other REITs also saw redemptions, according to Gannon.

Blackstone has said that BREIT is a big part of its future. The real estate fund has both added to 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 ascendant stock price: Shares in Blackstone have tripled in the past five years, closing on Monday at $121.22.

Analysts and investors are watching with great interest because Blackstone is rolling out a new, similarly designed fund that invests in private equity assets. If successful, it could pave the way for even more funds to follow the BREIT formula.

Read all of it here.