Blackstone Inc limited withdrawals from its $69 billion unlisted real estate income trust (REIT) on Thursday after a surge in redemption requests, an unprecedented blow to a franchise that helped it turn into an asset management behemoth.
The curbs came because redemptions hit pre-set limits, rather than Blackstone (NYSE:BX) setting the limits on the day. Nonetheless, they fueled investor concerns about the future of the REIT, which makes up about 17% of Blackstone’s earnings. Blackstone shares ended trading down 7.1% on the news.
Many investors in the REIT are concerned that Blackstone has been slow to adjust the vehicle’s valuation to that of publicly traded REITs that have taken a hit amid rising interest rates, a source close to the fund said. Rising interest rates weigh on real estate values because they make financing properties more expensive.
Blackstone has reported a 9.3% year-to-date return for its REIT, net of fees, a contrast to the publicly traded Dow Jones U.S. Select REIT Total Return Index 22.19% decline over the same period.
That outperformance has some investors questioning how Blackstone comes up with the valuation of its REIT, said Alex Snyder, a portfolio manager at CenterSquare Investment Management LLC in Philadelphia.
“People are taking profits at the value Blackstone says their REIT shares are at,” said Snyder.
A Blackstone spokesperson declined to comment on how the New York-based firm calculates the valuation of its REIT, but said its portfolio was concentrated in rental housing and logistics in the southern and western United States that have short duration leases and rents outpacing inflation.
The spokesperson added that the REIT relied on a long-term fixed rate debt structure, making it resilient.
“Our business is built on performance, not fund flows, and performance is rock solid,” the spokesperson said.
The REIT is marketed to wealthy individual investors. Two sources familiar with the matter said turmoil in Asian markets, fueled by concerns about China’s economic prospects and political stability, contributed to the redemptions. The majority of investors redeeming were from Asia and needed the liquidity, they said.
Blackstone told investors in a letter it would curb withdrawals from its REIT after it received redemption requests in November greater than 2% of its monthly net asset value and 5% of its quarterly net asset value. As a result, the REIT allowed investors in November to redeem $1.3 billion, equivalent to approximately 43% of investors’ repurchase requests.
Some analysts said Blackstone’s REIT runs the risk of getting caught in a spiral of selling assets to meet redemptions if it cannot regain the trust of its investors. On Thursday, the firm said the REIT had agreed to sell its 49.9% interest in two Las Vegas casinos for $1.27 billion.
“The impact on Blackstone depends on whether the REIT is able to stabilize its net asset value over time, or is forced to enter an extended run-off scenario, with significant asset sales and ongoing redemption backlog — too early to tell, in our view,” BMO Capital Markets analysts wrote in a note.
BLOW TO BLACKSTONE’S PLANS
The REIT turmoil is a setback for two of Blackstone’s strategies that helped it become the world’s biggest alternative asset manager with $951 billion in assets: real estate investing and attracting high net-worth individuals.
Blackstone launched the REIT in 2017, piggybacking off the success of its real estate empire, which had by then outgrown its private equity business. Its president Jonathan Gray was elevated and made successor to Chief Executive Stephen Schwarzman as a result of his success in property investing.
The REIT also represented a bid to win over high net-worth investors clamoring for private market products, which they believe perform better than those that are publicly traded.
Blackstone has been seeking to diversify its investor base after tapping institutional investors, such as public pension funds, insurance firms and sovereign wealth funds, for its products for decades.
Blackstone managed a total of $236 billion of wealth held by individuals as of the end of September, up 43% year-on-year.
Credit Suisse analysts wrote in a note that they expected the REIT’s woes to weigh on Blackstone’s fee-related earnings and assets under management. “These all will continue put pressure on Blackstone’s premium valuation,” they wrote.
On Blackstone’s third-quarter earnings call in October, Gray blamed REIT redemptions on market volatility, which he said had driven away individual investors from active equity and fixed income funds.
He added that the REIT had ample cash reserves to “weather pretty much any storm.” These cash reserves totaled $2.7 billion as of the end of October, according to its prospectus.
“It’s not a surprise that you would see a deceleration in flows from individual investors when you’ve had this kind of market decline,” Gray said.