The Blackstone Fund BREIT Faces Big Questions

The numbers behind a big fund

On Wall Street, one mystery has been whispered about 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 — 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.

HERE’S WHAT’S HAPPENING

The Israeli military sends tanks into Rafah. Israel also took control of the Gaza side of the city’s border crossing with Egypt, but it wasn’t the long-awaited full-scale invasion that the government had threatened. The military operation came after Hamas agreed to a cease-fire plan proposed by Egypt and Qatar, but one that Israel said it hadn’t supported.

The F.A.A. opens a new investigation of Boeing over 787 Dreamliner inspections. The inquiry began after the plane maker said that it might have skipped required inspections for the wings of the aircraft. It’s the latest bad news for Boeing, already under scrutiny on its 737 Max 8 planes. Separately, Boeing postponed the first launch of its Starliner spacecraft, which was supposed to carry two astronauts to and from the International Space Station.

Conservative judges say they’ll blacklist Columbia students from clerkships. A group of 13 judges called the university an “incubator of bigotry,” citing the pro-Palestinian protests that have rocked the school for weeks. Columbia canceled its main commencement ceremony, citing security concerns, while the police clashed with protesters at M.I.T. and several California schools.

Disney+ becomes profitable ahead of schedule. Disney’s streaming service reported a $47 million profit for the first quarter, after company executives had predicted the platform would only stop losing money in the fall. That helped the entertainment giant beat analysts’ expectations for overall earnings per share by 10 percent.

Musk and media deals at Milken

A mix of celebrities, politicians and financiers were out in force on the first full day of the Milken Institute Global Conference in Los Angeles.

The hot ticket: Elon Musk’s conversation with Michael Milken. The big topics: how private equity can return capital to investors as deal making dries up, and the sale of Paramount, DealBook’s Lauren Hirsch reports from the event.

Everyone wanted to hear from Musk. Days after a quick and unexpected trip to China, Tesla’s C.E.O. chatted about a range of topics, including artificial intelligence, space, regulation and what keeps him up at night (“Civilizational risks” like falling birthrates, he said).

Dozens of attendees lined up to see the panel, forcing others to settle for an overflow room — which also filled up.

Everyone in private equity is talking about “D.P.I.” 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 get money back to their investors, after raising record amounts of funds. Among the options: selling a partial stake or taking out loans against their funds’ net asset value.

But not everyone is keen on the ideas. Anne-Marie Fink, who oversees private equity investments for the State of Wisconsin Investment Board, said on a panel that there was no system for assessing liquidity if part of a business gets sold. “What worries me is that we haven’t really developed the mechanisms such that if you sell off 70 percent of my business, now you’re 30 percent owner,” she said. “How do I get liquidity on that 30?”

There’s lots of buzz about what happens to Paramount. The media company, whose studio is only a 20-minute drive from the conference site, is weighing takeover bids, one from David Ellison’s Skydance and another from Sony and the private equity giant Apollo Global Management.

One media deal maker who appears to be sitting out the fight (for now): David Zaslav, the C.E.O. 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 controlling shareholder, and expressed interest in a merger in December. But on Monday he said only that however the fight ends, “I hope that they’re 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 tech as companies and celebrities flexed the power of their brands.

The event is, unofficially, the party of the year held to raise money for the museum’s fashion unit. The gala on Monday was partly sponsored by TikTok, giving the embattled company’s C.E.O., Shou Chew, a starring role as chair of the party — a reprieve from the bad headlines for the company after President Biden signed a law threatening to ban the short-video app.

The amount TikTok paid for the role wasn’t disclosed, but DealBook took a look at the gala and its history by the numbers to get a sense of the money behind it.

• $350,000: The starting cost for a company to snag a table. But paying up might not be enough to guarantee a seat: Wintour, the global editorial director of the publisher Condé Nast, approves all guests.

• $75,000: The price of an individual ticket this year, up from $50,000 in 2023.

• $3.3 million: Total wage increases promised to members of the Condé Nast union, who had threatened to disrupt the party before a deal was reached on Monday.

• $995 million: The “media impact value” the event generated for Vogue in 2023, per the fashion data firm LaunchMetrics.

• $22 million: Amount raised at the Met Gala last year. The spike in ticket prices this year means a bigger intake is expected.

THE SPEED READ

Deals

• Wayve, a maker of artificial intelligence software for autonomous vehicles, raised $1 billion in new funding, led by SoftBank, Microsoft and Nvidia. (NYT)

• The board of Sabadell, a Spanish bank, rejected a $13 billion takeover bid by a larger rival, BBVA. (Bloomberg)

Policy

• The online trading app Robinhood said that the S.E.C. was preparing to sue its crypto division over what the agency said were securities law violations. (WSJ)

• “Republicans are pulling out all the stops to reverse EV adoption” (The Verge)

Best of the rest

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