2022-12-06 What Is Lars Thinking ("WILT")

Submitted by Lars.Toomre on Tue, 12/06/2022 - 23:30
Railroad tracks stretching to infinity on a turbulent snowy winter day

Lars Toomre has been extremely consumed with his Object Management Group ("OMG") technology standards work this week. Lars is the chair of the OMG Government Domain Task Force ("GOVT DTF") that focuses on topics like RegTech, Compliance, Central Bank Digial Currencies ("CBDCs"), Government Statistics, and Secure and Trustworthy Elections. As always, Lars is dealing with a plethora of acronyms and various defined phrases, so OMG even has a working group focused on that topic too, Vocabularies for Community of Interest ("VCOI")! . Hence, Lars has not had much of a chance to respond to quite a pile of emails or direct messages. There are many, great specifications "in-flight" within the OMG standards community and Lars will explain much more very shortly.

There is, however, one critically important item that Lars wants to highlight to people involved with real estate and/or the Capital Markets. Pay avid and intense attention to what is happening with the real estate funds of both Blackstone and Starwood. These firms are perceived as premier asset managers. Blackstone attracted about $70 Billion to their REIT in the last five years approximately, Starwood close to $20 Billion!

Both Blackstone and Starwood have now "gated" their big non-traded real estate investment trusts ("REITs") and/or commercial real estate investment pools. These typically get evaluated based on annual, appraisal-based Net Asset Values ("NAVs"). This is extremely bad news and the eventual losses may well be multiple times worse than the recent FTX cryptocurrency debacle that many are still sorting through. The lack of liquidity in the big private REIT managers makes one wonder what the heck is going on with the lesser-quality asset managers.

Apparently, the REIT management and redemption fees charged to institutional investors for this illiquid crap are absolutely insane (something north of 3.00% per annum when one can buy public REIT ETFs with maybe 0.50% annual fees),. In BRC FinTech's "uninformed" view, such high fees cannot be justified over an entire economic cycle, especially when compounding is considered relative to alternatives. This is probably just an over-crowded trade that resulted from Zero Interest Rate Policy ("ZIRP"). The funny part is that, while institutional investors are so-called "gated", Blackstone and their brethren get to continue to charge their insane fees -- perhaps for years while trying to liquidate these highly illiquid portfolios when it has switched to a buyer's market with virtually no one interested in catching a proverbial falling knife!!

The huge problem in December 2022 is that the reported NAVs are considerably higher than where the actual market transactions are occurring with independent third parties. Most of the annual NAVs were done near the start of 2022 when 10yr yield started at 1.63% or so. The 10yr TSY yield is now about 3.55% and has been as high as 4.45% recently.

Institutional investors -- like state pension plans, college endowments, and life insurance companies -- all are attempting to flee the nontraded REIT sector so that they do not take the very large forthcoming losses. These losses will likely have a bigger effect than the FTX Trading cryptocurrency debacle!! Watch out liquidity is very quickly disappearing and it is only December 6th!! We are in a liquidity crunch that is going to impact most investors shortly.