bond vs REIT investment

bumping this one to the fore.

Woodside, I don’t know whether or not replacing bonds with cash or REITs is right for you.

When faced with such a question myself, I think about the expected rate of return and the expected risk / volatility in the different asset classes. I have my own formulations of those numbers, but then I assess them against trusted sources. For example, I personally have a high degree of respect for Vanguard. Some years ago, they started publishing their model’s expectations of 10-year rates of return and expected volatility. This model is based on simulating tens of thousands of scenarios, resulting in a distribution of possible outcomes, and they report the average returns, volatilities, etc. across this distribution on various asset classes. So I look to see what they say. This, for example, is the latest I could find:

https://advisors.vanguard.com/insights/article/marketperspectivesaugust2021

They have US equities at an 2.4-4.4% expected annual rate of return, with 16.8% volatility. I interpret this to mean that their models are roughly saying I should expect the 10-year rate of return to come in as 3.4%, but don’t surprised if it turns out several percentage points lower or higher. They have REITS around the same. Treasuries are at 1.6% with 4.7% volatility (so expect it to be within a couple percent over a decade). Cash is 1.8% with 1.3% volatility (so expect it to be within a percent over a decade).

Let’s say you believe that assessment. Is it right for you to go to cash, with the lower risk, ability to deploy it on a rainy day, etc.? Is the extra return in stocks or REITS or bonds worth the risk you’d be taking? Only you can answer that, not me.

It seems these forecasts are based on probabilities. 3% could easily be 6% next year? Doesn't seem very actionable for the average investor, if they're following Jacks philosophy.

Just out of curiosity, how accurate have their 10-year forecast been, how often are their forecasts revised?

This post takes more than one week to show up, LOL. My post requires a lengthy approval while other spam posts can stay on.

Thanks MCR and inonada for the discussion Due to the huge variations, the vanguard prediction models are very difficult to give the guidance for investment .

@keith, that’s right: it is approximately saying to expect 3.4% +/- 16.8% each year in US equities over the next decade. So +20% or -14% in any given year, while less likely than +4% or +3%, are totally unsurprising outcomes. Over a decade, the variation narrows.

I’m sure they can run their model anytime they want, but they seem to put out public updates every quarter or so. Because of the wide variation, even in the 10-year distribution, accuracy is a tough question to answer. They don’t put out any details on it, but I could gather some tidbits from the web. First, take a look at page 10 in this presentation:

https://www.cfasociety.org/nebraska/Lists/Events%20Calendar/Attachments/237/Donaldson-Vanguard's%20Market%20Outlook%20and%20Implications%20for%20Portfolio.pdf

You can see that as of June 2010, the model thought 9-12% was most likely (~33%) but 12-15% was totally possible too (~16%). It ended up being ~13%. Even after a decade, comparing the level of accuracy in the prediction is difficult against a (say) constant prediction of 10% +/- 10% always for any decades. But if you put together enough decades, you can establish a relationship that has some semblance of better accuracy. For example, page 9 shows the relationship between one of the stronger variables they use (PE/10) and subsequent returns.

One other matter to consider is that they have only been putting out values since ~2014, meaning they only have one “live” prediction working its way through its decade. It might be the case that their model is totally tweaked to have some semblance of accuracy through 2014, but afterwards it’s no better than (say) a constant model at 10% +/- 10%.

@woodside, I understand the difficulty those variations create for your planning. For better or worse, they are a fundamental feature of investment. If there was more certainty, no one would be willing to sell it to you on the cheap (so you could have nice returns) without removing their uncertainty. If anyone tells you they can predict these sorts of things with more certainty, I would take everything they say with a giant grain of salt. Better yet, if they’re willing to put their money where their mouth is w.r.t. certainty, send them my way. I always like easy money.

@keith, I don’t know what Jacks philosophy is, and I don’t know what actions the average investor should take, even if they believe this model.

Investors who tend to take more risk where/when expected returns are higher will tend to outperform average returns. Those who don’t modulate will match average returns. And those who tend to take on more risk when expected returns are lower will tend to underperform average returns. History repeatedly shows that typical investors tend to do the latter, taking on more risk when expected returns are lower. Hence, the mantra from financial advisors.

@woodside, I also want to make sure you are interpreting the variation properly. If something is 10% +/ 30% in any given year, after a decade it becomes 100% +/- ~100%. The mean grows linearly with the number of years, but the variation grows less slowly (square-root-ish, so ~3x not ~10x). Not sure if that helps your difficulties with the variations…

I'm in way over my head on this conversation nada, but thanks for your explanations. I'm not a 'boglehead', but was loosely referencing his philosophy of holding a well diversified ETF for the long haul. Staying away from too much tinkering or what he might call Market timing based on predictive models.

For me holding a couple of ETFs over long periods of time have worked emotionally and financially.

As I've pointed out I now have a team managing most of my portfolio. For the first time in my life I own more individual stocks than ETFs. In one model I'm holding about 25 stocks, the another around 14 ETFs. It's been interesting watching the stock portfolio, as individual stocks have soared when the market was down or flat. There's three or four in there mostly banking stocks that are up over 100%, I never saw that sort of short term gain with my S&P 500 ETF.

I'm simply The humble student here. It just seems to take far too much brain power to pick an individual stock based on fundamentals. Not just a gut feeling that it's going to go up!

Ah, that Jack. Yeah, I like Jack. What made you drift away from the flock, from low-cost index funds into active management?

BTW, I think expectations about investment outlooks can serve purposes beyond market timing. For many people, it’s not a binary situation of invest or not. Should I add more money or less? Should I reconsider my asset allocation (what woodside is asking)? Should I pay down my mortgage or not (as discussed in the other thread)? Should I save more or less in order to meet future needs (as Mouse is trying to figure out)? Should I invest the money now in hopes of having a nicer apt in the future, or blow it all on rent today? That’s why I think Vanguard puts it out, so their clients can be informed, even if the information has huge amounts of uncertainty baked in.

Absolutely agree that this is certainly very useful information that vanguard is putting out. I enjoyed reading it. And you definitely hit the nail right on the head on what I would agree is appropriate use.

Over the years I made a few bad decisions, basically selling when I shouldn't have. Or making one off bets on stocks... I was introduced to a solid team at JP Morgan, five people in total with many years of experience in both the bond and equities markets. So for lack of a better word, I thought I'd see what the pros can do. It's only been about a year, but I'm very happy with the results.

Thanks, Keith.

I had been casually watching REITs and high yield corporate bond funds, (hyt). Both seem to be offering incredibly good yields, and to my untrained brain I thought the risks were relatively minimal, especially for somebody more interested in income versus appreciation. Regarding appreciation I mean over the short to midterm, thinking both would do well or at least hold their own over longer terms.

Then covid-19 hit and I saw the reit world get absolutely rocked! Haven't checked in lately (12 months) will probably do that today out of curiosity.

Regarding blackrocks high yield Bond fund, it just seemed like an absolute no-brainer as a way to generate tax-free income in a sep account. What are and is it even possible for the fund(hyt) to go completely belly up?

@Keith --

Don't forget that 'high yield' is only the modern terminology for what we used to call 'junk bonds'. Yes, the yield is high, but the likelihood of default (and loss of both your income stream and invested principal) is significantly higher (that's why they're paying all that yield!). In a managed fund, the likelihood of them going fully belly up really depends on the fund mandate, the accuracy of the ratings of the bonds they hold, the diversification of the portfolio, and the ability of the managers to replace individual positions before they get into trouble. Much of the details of this can be found in the fund prospectus(*) Lots of people thought investment grade bonds backed by mortgages were bullet proof, but 2008 proved that widespread defaults can quicky eat through many tranches of dubiously rated underlying collateral.

(* Which everybody reads, right?! Most people spend more time looking at the list of options on a new car, a decision which is significantly trivial compared to where to place significant chunks of investment funds. This very thread starts with a mis-categorization and misunderstanding of financial products and asset classes ("..., is REIT a good replacement of the bond")).

One absolute realization I've had is you need to be exceptionally smart to understand many of these financial products. I'm not that smart.

This is one reason I've enlisted a team of very experienced professionals to help me manage my money and counsel me on decisions. Otherwise I just kept it very simple with a couple of broad ETFs.

And further on the HY market, WSJ had an article the other day about the dramatic increase in securitized junk:

https://www.wsj.com/articles/investors-searching-for-yield-pump-up-sales-of-risky-company-debt-11630426565

"Sales of securities backed by bundles of risky corporate loans set a new monthly record in August, powered by improving corporate earnings and investor demand for relatively higher yields.

"Issuance of new collateralized loan obligations, which buy up corporate loans with junk credit ratings and package them into securities, were more than $18.7 billion this month, as of Thursday, according to S&P Global Market Intelligence’s LCD. That is the highest monthly total in data going back to January 2011.

Lots of incontinent kids jumping into the pool. Swimmers beware.

Need to understand the property and tenant status
Too easy to chase yield only to find out that the dividend will get cut in the net quarter

bump up this thread that I started about one year ago.

Looking back, it seemed CASH was the best investment last year. Stock, Bond and REIT all went down. REIT would be a terrible replacement for the bond.

inonada is a genius to suggest putting money in CASH or paying down the 3% interest mortgage. Unfortunately, I didn't take his suggestion. I didn't do anything about it (still maintaining the same asset allocation of the stocks and bonds), so all went down.

LOL, not really genius — just a lucky coincidence in timing between an observation of long-term outlook (Is the 10-year risk/reward of any of this stuff particularly attractive?) and an outcome in that direction shortly thereafter.

If it’s any consolation, Vanguard’s 10-year projections have become much better since the drop:

https://advisors.vanguard.com/insights/article/marketperspectivesdecember2022

US stocks have gone from an 10-year expectation of 3.4% to 5.7%. That’s much better than it was, on an absolute basis. OTOH, cash has gone from 1.8% to 3.9%. So if you buy into all that, excess expected returns from stocks over cash has only improved slightly, from 1.6% to 1.8%, while retaining the extra risk.

I kept most of my money in cash, but it's more "Even a broken clock is right twice a day" than investment strategy. I did shift most of it to CDs though when the rates went to 4+%.

What I don't see much talk of is if you invested in some REITs you can't get your money out. To me that's an issue and potentially a big one.
https://www.reuters.com/business/finance/kkr-blocks-reit-withdrawals-latest-redemption-wave-2023-01-19/

30yrs, why CDs instead of treasuries? I always figured the latter are lower risk, with better tax status.

What do you see as problematic with the private REIT thing? The whole premise of the fund requires restrictions on flows, and so much of the premise of private equity seems to have become pretending private asset values do not change with public ones. I’m skeptical of the wisdom of allowing such products to be marketed & sold alongside normal REITS to regular investors, particularly with the illusion created by daily NAVs and subscription.

It’s interesting that redemption requests were only 8% on a NAV that sure seems overinflated relative to public REIT NAVs. You figure more people would try to take advantage of that mismatch.

The fee structure is also interesting. From what I can tell, it’s 1.25%/yr of NAV, plus 12.5% of portfolio operating income. The latter is touted as aligning to investor interests:

>> Aligned Fee Structure: Flexibility to pay fees in shares. Incentive fees on realized distributable income only, not on capital gains (realized or unrealized)

Which I can sorta understand: you don’t want to incentivize pretend gains. But it also seems to exclude capital losses on real property, per the prospectus. So the cynical fund manager seems incentivized to buy assets that earn fine income on the way to a value of zero. For example, buy building whose land lease is expiring in 10 years for $100M with a 10% cap rate. Then, earn fees on $100M net income over the 10 years, but don’t offset fees against $100M capital loss. Hopefully, that sort of thing is prevented somehow.

"why CDs instead of treasuries? "

Because I'm lazy and when I asked my relationship banker about buying them he said they can't do that anymore from the banking side but could give me no penalty for withdrawal CDs and I just went for that.

I'm no expert on these but it seemed to me they were concerned with potential "bank run" type activity if people saw somewhere "X% of this was redeemed last week" and panicked. You know me - my first thought is that they know people should be panicking.

30, You can open a Fidelity account and buy treasuries on line with zero commission with tight bid-offer. I am sure other online brokers offer the same.

I bought treasuries through my JP Morgan broker. And CIT Banks mma is paying 4.30%.

It's the first time I've moved out of 90% of my savings in stocks in about 12 years. Currently 50/50.

Any thoughts on JEPI?

I personally use BIL, an ETF of T-bills. Keeping 60% of ~5% after-tax rather than 45% of ~5% seems like an easy win for the “work” of moving money into a brokerage account. I also use VYFXX, a triple exempt NY money market fund from Vanguard.

No thoughts on JEPI. What’s the attraction?

30yrs, I don’t think there is an issue with panicked investors. They have packaged an investment fund full of very illiquid assets. They mark NAV to prices higher than where the market would transact today on such assets at such size, as illustrated by the NAVs of the liquid equivalents. And then they give liquid access to transact at that NAV.

Selling the high illiquid NAV to buy low liquid NAV, to hold very similar assets, is not panic. That’s a prudent trade illustrating flaws in the underlying structure. If the NAVs were consistent with liquid NAVs (i.e., lower), I doubt we’d see such large outflows.

I get the private REIT with redemption with montly/quartely/yearly % of fund caps based on NAV. However, I would think that there should be an exit fee of 2-5% on redemptions which is paid to the remaining shareholders. When I checked BREIT a while back, there was an upfront Broker Fee to get in. Not sure about exit fee.

On panic, we had plenty late last year but BREIT stopped the panic by getting Cal Pension Fund money on which Blackstone (not shareholders of BREIT) sold a free put.

This is what BREIT had. So something. But there should be some fee on exit paid to remaning investors perhaps if total redemptions are more than a very small percentage of the fund.

"• Shares not held for at least one year will be repurchased at 95% of that month’s transaction price"

https://www.breit.com/wp-content/uploads/sites/23/2019/12/BREIT-Overview-Brochure.pdf

11% return paid out monthly. But they don't seem to be very tax efficient.

I don’t think a 5% redemption fee on the subset of investors who have been holding <1 year is sufficient to make up for the NAV discrepancy.

Let me put it this way. What was the value of the free put they had to use to sweeten the pot for Calpers to invest in BREIT? That’s how far off-market the NAV must be.

Keith, where is the 11% payout coming from?

And 300, I think characterizing the BREIT redemption requests as “panic” is disingenuous. I put “BREIT panic” into the Google and this is the first link that popped up:

https://seekingalpha.com/article/4563547-blackstone-withdrawals-public-private-nav-discrepancy

The article characterizes the investor behavior as “rational” given the NAV discrepancy.

“Investors in BREIT may be wise to put in a redemption request to avoid the future underperformance. They could put that same money into public REITs and get close to 30% more property per dollar invested.”

It's a covered call ETF

I didn’t ask what it was, I asked where the 11% payout was coming from.

I thought most was from the covered calls? But if you don't know how the hell am I going to know ; )

I don’t need to know because I have no interest in it. But you, on the other hand, seem to be interested. I would hope it should be you, not us, explaining what it holds, how it pays the income, what type of returns & risk one should expect, and why.

Not sure if there is market value for that put as virtually no one will trade it. I am sure you can calculate theoretical value by using historical vol of the fund with some element of REIT vol or SPX vol.

“What was the value of the free put they had to use to sweeten the pot for Calpers to invest in BREIT? “

I do think there should be some redemption fee paid to remaining shareholders for any private asset with unobservable price like real estate. Ideally it should be based on the notice period and size of the redemption. But that would expose the whole game of traded private assets.

Sure, calculate the theoretical value using an equivalent option in a public REIT. That’s probably the right ballpark value.

It is multi-year option in size. I do not remember maturities going out that far in pubic REIT. So Blackstone has make great strides of faith to MTM this.

It’s not that hard, just call it 30% implied volatility. At that, I’m getting ~$600M or so on a $4B investment. That’s 15%. Try to run it yourself, to check my calc?

Actually, that’s off. It’s assuming the current NAV is accurate, which I should correct for. Will run it later…

Really just mildly curious, so I thought I'd pick your brain on it.

Lots of these "let's let Wall St say what the theoretical value of something is and trade on that" have ended badly.

inonada,
When I say panic it seems like you think it's a rational process. It's a heard mentality that gets out of control. First there's 2% withdrawals, then 5%, then 10%, then.... The world runs on FOMO. Very few understand what any of these instruments actually are before purchasing them. (Aside I seen to remember after GFC crash ? President? of Citibank admitting he didn't understand derivatives). Back when I was at Arthur Andersen I led a small team doing audit support at Salomon Brothers pricing Collateralized Mortgage obligations. They used some very complex modeling for prepayments and generated Prospectus many inches thick. But it was all bullshit because mortgage rates go up and no one prepays, mortgage rates go down everyone prepays. Point being many of the investors make emotional rather then business decisions on the way in (and Wall Street knows this because that's how they sell them). So the decisions on the way out are the same. That's how you get stampedes.

You can certainly calculate Theoretical value of any option with added conservativeness but it is not Mark-to-Market if a reasonable market doesn't exist.

"It’s not that hard, just call it 30% implied volatility. At that, I’m getting ~$600M or so on a $4B investment. That’s 15%. Try to run it yourself, to check my calc?"

30yrs, it’s not that I don’t think there can be panic or herd mentality. But what’s causing the sales here? Non-traded REITs had a great year, posting “gains” of ~10% when traded REITs had ~20% losses. Investors are calling BS by redeeming at $4 from the non-traded REIT and buying the same assets for $3 from a traded REIT. Forget 2%, 100% of investors should be asking for redemptions every month so they get their share of this discrepancy. Otherwise, every month they’re subsidizing the extra $1 sent to redeemers from their own assets. The fact that redemptions are at a mere 2.x%/mo shows, to me, that most are not paying attention and/or are probably too enamored by the ~10% performance.

Can this sort of behavior end to panic? Sure. If I had to guess, I think redemptions at a rate of 20%/yr will continue. This will increasingly force the funds to liquidate assets. After a while, they will end up with NAVs that will reflect the market. Will the redemptions all of a sudden stop? Unlikely. Investors will then be looking at how these funds underperform traded REITs and want to get out even more. Even those that are more “rational” will rightly have long realized “Why the hell am I in a fund that is so awfully structured so as to lead to this behavior?” and want to get out. So even more forced liquidation by the fund. At that stage, we can call it full-fledged panic. Eventually, the vultures will step in to pick up the REIT when its NAV is cheap. A high probability the vultures will be ventures funded by those who created those REITs in the first place, in a show of “belief in the REIT”.

But for now, we’re merely at the “rational behavior that precipitates a panic” stage. Hell, it’s amazing that one can still redeem nearly 100% of their investment at a 30% premium to market value across just a few months. For now…

300, I’m not interested in a MTM for accounting purposes. I’m interested in an estimate of the discount to NAV it took to get the backstop of cash. (FTR, I did the options route a few ways and always got several hundred million on the $4B investment.)

Nada, That makes sense.

> Non-traded REITs had a great year, posting “gains” of ~10% when traded REITs had ~20% losses.

I wouldn't conclude from this statement that Non-traded REIT has been overpriced by 30% (maybe 15%?) due to that the Non-traded REIT may have been under priced to begin with (under pricing is designed by purpose) . I believe for some Non-traded REITs, the NAV will move much slower than the traded REIT during the bull markets.

Of course, many people will use the mispricing in the Non-traded REIT to make some money by move-in/move-out in the non-traded REIT.

>The fact that redemptions are at a mere 2.x%/mo shows, to me, that most are not paying attention and/or are probably too enamored by the ~10% performance.

I'm guessing it is the former. It's the same way that the big banks can get away with offering almost 0% for the saving account while it can be very straightforward for most people to buy bills or money markets with 3-5% interest rate.

Woodside, you make a fine point about non-traded REITs allowing inflows at a discount when prices were going up. So yes, some of that 30% differential is probably a closing of the gap between previous undervaluation relative to traded REITs.

But if what you say is true, it seems that relative to traded REITs, the fund sells on the cheap to new subscribers after a run-up and overpays to redeemers after run-down. To the detriment of holders on both transactions. While the 5% fee to sub-1yr holders helps the situation to some degree, it seems inadequate.

Yes, relatively to traded REITs, non-traded REIT has this problem.

Some non-traded fund restricts the money for both directions (buying the fund and redemption the fund) to make sure if there is no disruption of the cash flow.

You can also see it the other point of view, after the run-up, the traded REIT become too expensive (due to too much speculation), it becomes too cheap after the run-down (the market becomes too pessimistic).

In the non-traded REIT, the money transacts between buyer/seller and the fund. The fund wants to make sure the the NAV should be a little bit under priced using the actual property and the expected returns from the renting (etc) to leave margin for errors for redemption.

Which NAV is the correct one? Depending how you want to use the money, if liquidity is required, the NAV of the traded REIT is the right one to use. If it is based on the fundamentals of the actual property, the NAV of the non-traded REIT is the right one to use.

Of course, for non-traded REIT, there is always a risk that fund may mis-price (or lag) too much. While there is never a mis-pricing in traded REIT as it is due to actual transactions.

I agree with your points about a liquid NAV and an illiquid NAV. When it comes to bean-counting, people can use whichever one they want. But when you allow liquid trading on the illiquid NAV, you can get bad consequences.

I think BREIT approximately doubled in size across 2021 from flows, independent of capital gains. So they were probably getting inflows of 5-10% per month. Not small amounts either: ~$20B of inflows over the year. Putting this amount of money to work in illiquid markets pushes prices. That's why they limit redemptions to 2%/month and 5%/quarter. But subscriptions? Nope, bring it on! These inflows were likely given NAVs reflective of the market without the impact of the buying spree they created. The fund as a whole had to buy at the higher prices, reflective of the price impact from the inflow. So the benefit to the buyers (buying without the increased price) comes at the expense of the holders. Same on the way out.

Different non-traded REIT works under different rules. BREIT has the problem that it attracts too much speculative money. This is more problematic if there is no restriction on the subscription. Because there is too much speculative money and no restrictions on the subscription, it will eventually be priced like traded REIT to function.

While the one non-traded REIT I am familiar with is from my work's retirement plan that has less of this problem of BREIT. This non traded REIT is only available to a specific group of people with only the money from the retirement plan. There is also a limit on the amount of money in this REIT when transferring money into and out the fund (so for both directions). So the cash flow is much less a problem.

The NAV of this non-traded REIT is mostly always up except 2007-2008. In 2020, it went down probably less than 5%. If looking at the long term 10 year return, it has similar performance as the traded REIT, but it does have a smoother ride for most of the time.

What are the limitations on subscriptions and redemption in your non-traded REIT? I also have to wonder if returns in traded REITs are predictive of subsequent returns in non-traded REITs. Providing a “smoother ride” in a liquid structure, as BREIT touts, can have an adverse cost.

And from what I can tell, BREIT’s redemption penalty for <1yr holders is 2%, not 5%.

I saw that in the latest info too. The link some posts above is from 2019.

It also appears that BREIT is willing to accept these flows with little notice: 5 days for subscriptions and 2 days for redemptions. This doesn’t seem to give much time to take action in anticipation of the flow. When they were a $15B fund, perhaps a few billion was showing up at the door throughout the quarter. In general, fund managers can take actions to ensure the NAV set for a flow reflects the market impact of a flow. E.g., they start buying between the time the notice arrives and the cash arrives so the portfolio is properly sized & priced at the moment of the transaction. But with a notice of a few days in an illiquid market where it takes months to transact (80% is supposed to be actual RE), it’s hard to see how that could have occurred.

I suppose on the way out, they can now just assume 5% will leave every quarter for the time being and prepare accordingly.

The restrictions on the non-traded REIT that I was talking about are below and also other ways to avoid liquidating/buying properties due to the cash flow.

1. Only one transfer per calendar quarter
2. If a person's accumulated money is more than $150,000, no more transfer is allowed. The automatic salary contribution to this fund is still allowed.
3. The fund has historically held between 15% and 25% of its net assets in liquid, fixed income investments for the cash flow

Even a person can utilize this mis-pricing, one can only make money on whatever the amount of the money he has in the fund. However, when he wants to transfer the money into the fund next quarter or later, he is only allowed to transfer at most $150000.

From what I know the people who invested into the fund, most people will not pay much attention. It's the same way as most people still stay with 0% savings account in the big banks with hundreds of thousands of dollars though it can be very easy to obtain 3-5% else where (online bank or money markets or treasury bills).

If too many people are too smart and the system is abused, then the non-traded REIT is broken and then it will have to be priced like the traded REIT at some time point.

The traded REIT and the non-traded REIT has long-term similar performance. I am not sure for shor term "The traded REITs are predictive of subsequent returns in non-traded REITs".

From what I observed, if the traded REIT goes up, the non-traded REIT also goes up, but with a much smaller pace, when the traded REIT goes down, the non-traded REIT can go down very little or stay flat or even go-up. The short term discrepancy between the two is due to the different pricing mechanism. Long term, the fundamental does play the role and so the two prices converge.

In a way, this is similar to the 2-3% cash back offered by the credit cards or discount coupons offered by the stores. Only a few % of people are going to use these offers. If more than 90% of people are taking the offer of 2% cash back for the credit cards and also pay the balance in full each month, then I don't think the credit card is going to make money and so 2% cash back offer will disappear soon.

Because only a very small % of people are taking advantage of it, the 2-3% cash back can still keep going and the non-traded REIT (the one I am familiar with) will not have a cash-flow problem.

Your fund seems to have managed this issue better than BREIT.

In terms of “which is the right NAV”, that’s a fine philosophical question. However, if traded NAVs are predictive of non-traded NAVs (and I’d guess they are), one should conclude the traded NAV is more “right”. The issue is moot in an illiquid private RE fund. However, once you provide liquid access to the non-traded NAV, the fund becomes structured in a way that is detrimental to long-term investors in favor of the traders. That’s probably not a great way to structure a fund for long-term investment.

RE: if the traded REIT predicts non-traded REIT price.

The fund literature does give the correlation among different assets.
The correlation from the last 10 years between this non-traded REIT with other assets are

-0.18 (stocks), -0.35 (Bonds), -0.38 (Cash), 0.09 (trade REIT).

The computation is probably quarterly return of each asset. I say probably as it mentioned quarterly return for other tables, but not for this table.

Of course this will not able to answer the questions on the prediction problem, which needs to compute time shifted correlation with different time shift (one quarter, one year, two year, etc?). Of course, this will be very easily computed if we have all of the data. I know how to get the S&P 500 quarterly return, but I don't know how to get the quarterly return of the CASH or the BOND. For this non-traded REIT, it can be potentially obtained, but it takes a little bit more effort.

When I get some time, I could use the data from S&P 500 and also obtain the return data from this non-traded REIT and the return from traded REIT (VNQ) to check price prediction problem.

Yep, that’d be the way.

I actually got a little motivated and looked at BREIT. Over their 6 year history, the change in monthly NAV was 34% correlated to the change in VNQ over the prior 6 months. That’s pretty high, unlikely to be a fluke. But you don’t even need to get that fancy. There is also a 33% correlation between the change in one month to the next in BREIT’s NAV by itself.

I guess you motivated me to get the data out and do the computation too.

The correlation for different time shifts
0 quarter, 0.05 (0.09 for the fund's literature)
One quarter, 0.36
Two quarters: 0.43
Three quarters: 0.28
One year: -0.002

It seems the sweet spot for this fund is half of an year.

I’m glad we’re cross-motivating. Half a year was also the sweet spot for BREIT. Unsurprising, since they probably use similar methodologies.

How many years of data did you use?

The last 10 years
2013-2022

It’s also interesting to estimate the cost of allowing trading at this “stale” NAV to long-term holders of non-traded REITs, relative to long-term holders of (say) VNQ. My ballpark is perhaps 0.5%/yr.

But I think that misses the action that may be forthcoming via forced sales. It’s pretty easy to see the case where BREIT and friends will face 20% redemptions over the next year. The players have perhaps $100B or so of capital, which they tend to lever 2x. So $20B of redemptions would require $40B of RE sales. How much CRE will transact over the next year? Perhaps $400B. That’s ~10% of the market volume. Except this isn’t selling ~10% of the volume in AAPL, where all the shares are the same. It’s selling an office park here, a self-storage facility there…

Nada,
BREIT tends to run below their max leverage. They can get some cash by increasing debt, sell a collection of properties as a portfolio or just raise new money with special terms like they did with Cal Pension fund. Not sure about others. At least most of their debt is fixed rate (not sure how much is assignable to the new buyer of a property). That is not the case with many others who have been buildings up portfolio in a fund with eventual exit of a REIT or BREIT type buyer.

300: while all that sounds reasonable, I’m skeptical. I.e., I sure as hell am not a buyer of BREIT at these prices and would rather buy VNQ. You?

Increasing debt at current levels is going to be costly. As a quick calculation, they currently have a 4.5% distribution rate on $67B, which means $3B in operating income. Financing $12.5B for outflows at LIBOR + 2.x% (~7%) would eat half that, dropping the distribution rate to 3.8%. That’s not a great look in a world where T-bills will be paying nearly 5%. And then what are you going to do about the next year’s $10B of outflows?

I am guessing the distribution rate will already be under enough pressure as it is. Somewhere on their website, they touted a 97% occupancy rate. That sounds great, until you realize that the current economics (operating income generating 4.5% yield) has nowhere to go but down. I’m not sure if you’ve heard, but record low unemployment has generated giant demand for rent. Word on the street is that all will be reversing.

Nada,
I have never bought a REIT in my life and unlikely to buy as I have plenty of real estate exposure already.

That said, my opinion is that the redemptions will not be that big for the reason woodsidenyc described. Retail investors may be quick to pull a trigger on traded investments but any thing which has some admin work involved, they tend to be very slow especially when "managed NAV" doesn't show much decline. This fund also has upfront fees making many reluctant to the lose that.

Portfolio sales are indeed a thing, but you have to wonder about the strained interpretations. For example:

https://www.wsj.com/articles/blackstone-stake-sale-values-mgm-grand-mandalay-bay-at-5-5-billion-11669880302

BREIT had paid $2.3B in Jan 2020, taking on $1.5B in debt. So on the face of things, when they sold for $2.75B they had a tidy gain of ~20%. But that came with the sweetener of handing over cheap debt that I’ll value at ~$300M. So if you account for that, the property’s value only increased ~6%.

Now there is no question they made 20% on the deal. The question is how they (and others) consider that data point in setting valuations. Someone like me looks at that and thinks of it as a datapoint for a 6% increase since Jan 2020. I’m not sure that’s how the REITs’ NAV valuations look at it. E.g., BREIT’s NAV is up ~28% since Jan 2020. I’m sure the full accounting is more complicated than that, but there’s an awfully large gap between the two.

I’ll also note that both this deal, and the Cal pension fund deal, seem structured for headline. “Look at the big gain on sale!” (ignoring the ~15% sweetener in the form of cheap debt). “Look at the big vote of confidence from Cal pension buying at NAV!” (ignoring the ~15% sweetener in the form of the fund manager giving a free option).

Appriasers have an incentive to overvalue when appraising for a seller. Latest transaction data can be cherry picked and in a falling market, will always lag.

300, define “redemptions will not be that big”. Do you think this next quarter will see less than the 5% limit? And do you count Blackstone-borne freebies like the one they gave to the Cal pension a bona fide subscription?

I can say about the quarter but I doubt that they will reach more than 10% of the fund per year vs 20% max allowed.

Purely from liquidity and inflows point of view, it is a bona fide and it gives other people in the fund confidence to stay in but the cost to the fund manager was high. I suspect that the put will expire worthless but from Blackstone capital point of view, this business became less profitable as any other large investor would want such backstops in the future.

"I can't say"

I can see that BREIT has a lot of problems. The distribution is going to hurt the fund more during the down market. Yes, a lower distribution rate will incentive more people for the redemption.

The non-traded REIT offered from my work's retirement plan doesn't give any distribution at all. Yes, the price will come down at little bit, but people will be more likely to stay long term.

Never giving distributions at all will keep people more into the fund and less likely to jump ships. Another example is Berkshire Hathaway Stock that never give distributions. Many people keep piling money into the stock and never sell.

Woodside, the distribution represents the income of sorts in a REIT. Unlike a regular company, they are required to distribute 90% of their taxable income each year. So it represents, to a much great extent than a regular company, the yield of the underlying assets. You may have simply elected to receive your distributions in the form of additional stock.

Regardless, I acknowledge that many people may not understand this. They’ll simply be looking at a predictably degrading NAV and appreciate the low volatility engineered by a particular accounting. Until they realize it has all underperformed, at which point they’ll shrug and maybe switch teams.

Here’s some fun tidbits from their filings.

It seems they set RE valuations for the NAV based on a number of factors, including an “exit capitalization rate”. Since 2021, this has moved perhaps 0.7%. They say each 0.25% difference in this exit cap rate would cause a ~3% difference in the RE values they calculate for NAV (they hold RE levered ~2x). Compare a 0.7% increase to the exit cap rate against long-term real rates having increased 2%. I figure those two should converge over time.

On the debt side, it appears that the majority of their debt is floating from what I can gather. But they have this hedged with interest rate derivatives going out several years. I am not certain about their NAV accounting on this, but I would guess that an increase in rates show up as an immediate benefit today on the derivatives side (cash on the books) while the cost of the increase to floating debt is realized over time (slow drain of that cash over years).

inonada

I am 100% sure that there is no distribution for this fund.

Maybe I shouldn't call this fund as the non-traded REIT and so the fund doesn't need to follow the rule of the regular REIT.

The fund does have the name "real estate" as part of the name and it invests elusively into real estate by directly buying office/buildings/etc.

https://therealdeal.com/2023/01/20/blackstone-reits-latest-adversary-tenants/

How is it structured to avoid corporate-level tax, Woodside?

I don't know all of the details.

The fund (the name is actually called "account") is administrated by a non-profit organization. It's interesting to note this non-profit organization has also for-profit subsidiaries.

The fund is also offered to only 403B plan for the employee of some non-profit organizations.

Maybe this non-profit thing and also retirement account thing can avoid corporate-level tax?

As I said, I don't know how it works. Especially how a non-profit organization can have for-profit subsidiaries. How a fund (account) that invests in real estate can still stay non-profit?

Thanks, woodside.

So are you in this REIT-ish investment, or is it just an option you have considered?

300>> Purely from liquidity and inflows point of view, it is a bona fide and it gives other people in the fund confidence to stay in but the cost to the fund manager was high.

I have a more critical viewpoint. I look at this situation, and my confidence in the manager has diminished had I been an investor. Fund managers are supposed to manage liquidity. Here we are in the 2nd inning of a liquidity squeeze that is not horribly unforeseeable, and they “manage” by taking a year’s worth of fees I’ve been paying and handing it over to a new investor. All the while blowing smoke up my ass about how it represents a show of “confidence”. I would have much rather they refunded the fees to me, as a mea culpa, and started managing liquidity properly. The redemption restrictions are there for a reason, and managing to it is a basic job function.

300>> I suspect that the put will expire worthless

I wouldn’t be so sure. They put in $4B. You figure there will be ~$100M/yr in NAV degradation as the ZIRP-era marks catch up with the reality of 3.x% long-term rates. On the distribution / NOI side, they’d get $175M/yr at a the 2022-era 4.5% yield. You figure some of that will degrade due to the economic cycle, but perhaps some of it will improve from inflation. Net, that’s $75M/yr. Over 4 year, it’s $450M, meaning Blackstone would be on the hook for an additional $550M.

How do you see it that makes you think “worthless” is the likely scenario?

This conversation has really opened the eyes of this novice investor. Sometimes what appears to be, or what's marketed to us as a relatively simple investment, is far from it.

> So are you in this REIT-ish investment, or is it just an option you have considered?

I was in this REIT-ish investment with a very low amount before 2008. At around 2008, there were discussions on the mispricing or lagging of this investment, so I got it out.

I always thought about getting back. The problem is always about the timing. If getting back after the crash, the return of the early years in the run-up is always going to be smaller than the VNQ (probably only half), of course the smaller early years of lower return gives some protection during down-market (not going down as much, or only going down as half of the VNQ).

With a lot of discussion in this thread, I think it is a good to have probably 10% of my retirement into this account as a good diversifier.

@woodside: "Especially how a non-profit organization can have for-profit subsidiaries. How a fund (account) that invests in real estate can still stay non-profit?"

It is possible, but non-trivial from an accounting, tax, corporate structure, and management point of view. A super simple example is a non-profit that owns the building they're in, and also rents out space to unaffiliated tenants. They generate rental income from those tenants, and the income goes to fund their not-for-profit activities. But, because the IRS doesn't want tax-advantaged entities like not-for-profits competing with for-profits (because of the differing tax rates), it's complicated to set up and run, and there are heavy penalties if it's not done correctly. The not-so-simple example is something like CalPers, which clearly owns lots of stuff (directly, and through corporate investment vehicles) that generates income, yet they are a not-for-profit.

Woodside, it sounds like you were already on top of the lagging NAV discrepancy in 2008…

In 2008, VNQ went down so much and also for too long, so the writing was on the wall that the price of this REIT-ish fund would go down as well.

In less extreme events, one can not really take a lot of advantage of this price discrepancy for this fund.

e..g., VNQ went down in 2021 Q4 and 2022, Q1 and Q2. However, this REIT-ish fund can still stay flattish or with small increase in 2022 Q2, Q3 and Q4 (using 6 month delay as we previous computed).

I think the REIT-ish fund is a very good diversifier to the stock and bond of my retirement account while VNQ is a terrible choice as it is highly correlated with stock.

I shifted a quarter for VNQ, it should be that VNQ wend down in 2022 Q1, Q2 and Q3. but the message is the same.

How are you determining “highly correlated with stock”?

VNQ and stock have 0.7 correlation using the quarterly returns of the past 10 years. I guess this has something to do with the zero interest rate policy for the past 10 years. I guess REIT was probably lowly correlated with Stock during 1990s and ear 2000s

Even for 2022 with increasing higher FED Fund rate, VNQ and stock suffered the same way. It may take a while for the VNQ and stock to go their own price trajectories.

What percentage of investors do you think fully understand any of this?