NEW YORK, Dec 1 (Reuters) – Blackstone Inc (BX.N) 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 make it an asset management giant.
The limits came about because redemptions reached pre-set limits, rather than Blackstone setting the day’s limits. However, they fueled investor concerns about the future of the REIT, which makes up about 17% of Blackstone’s revenue. Blackstone shares ended trading down 7.1% on the news.
Many REIT investors are concerned that Blackstone has been slow to adjust the instrument’s valuation to that of publicly traded REITs, which 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 property financing more expensive.
Blackstone reported a 9.3% year-to-date return for its REIT, net of fees, a contrast to the publicly traded Dow Jones US Select REIT Total Return Index (.DWRFT) 22.19% decline over the same period.
That outperformance has some investors questioning how Blackstone arrives at its REIT’s valuation, said Alex Snyder, portfolio manager at CenterSquare Investment Management LLC in Philadelphia.
“People are gaining on the value of what Blackstone says their REIT shares are,” Snyder said.
A Blackstone spokesman declined to comment on how the New York-based firm calculates its REIT’s valuation, but said its portfolio is concentrated in rental housing and logistics in the southern and western United States, which have short-term leases and rents that are ahead of inflation. .
The spokesperson added that the REIT relies on a long-term, fixed-rate debt structure that makes it sustainable.
“Our business is built on performance, not cash flow, and performance is solid,” the spokesman said.
A REIT is sold to wealthy individual investors. Two sources familiar with the matter said turmoil in Asian markets, fueled by concerns about China’s economic outlook and political stability, contributed to the buyback. Most of the buying investors are from Asia and need liquidity, they said.
Blackstone told investors in a letter that it would limit withdrawals from its REIT after receiving redemption requests in November greater than 2 percent of its monthly net asset value and 5 percent of its quarterly net asset value. As a result, the REIT allowed investors in November to repurchase $1.3 billion, which equates to roughly 43% of investor redemption requests.
Some analysts said Blackstone’s REIT risks being caught in a spiral of selling assets to execute buybacks if it can’t regain the confidence of its investors. On Thursday, the firm said the REIT had agreed to sell its 49.9 percent stake 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 into an extended run-off scenario, with significant asset sales and a continued backlog of buybacks – it’s too soon to say, in our view,” BMO Capital Markets analysts wrote in a note.
A BLOW TO BLACKSTONE’S PLANS
The REIT turmoil is a setback for two of Blackstone’s strategies that have helped it become the world’s largest alternative asset manager with $951 billion in assets: investing in real estate and attracting high net worth individuals.
Blackstone launched the REIT in 2017, banking on the success of its real estate empire, which by then had outgrown its private equity business. Its president, Jonathan Gray, was promoted to succeed CEO Stephen Schwartzman as a result of his success in real estate investing.
REITs also represented an attempt to win over high-net-worth investors clamoring for private-market products that they believed performed better than publicly traded ones.
Blackstone is looking to diversify its investor base after decades of using institutional investors, such as public pension funds, insurance companies and sovereign wealth funds, for its products.
Blackstone managed a total of $236 billion in wealth held by individuals as of the end of September, up 43% year over year.
Analysts at Credit Suisse wrote in a note that they expect the REIT’s woes to weigh on Blackstone’s fee-related earnings and assets under management. “All of these will continue to put pressure on Blackstone’s premium valuation,” they wrote.
On Blackstone’s third-quarter earnings call in October, Gray blamed REIT buybacks for market volatility, which he said has driven individual investors away from active equity and fixed-income funds.
He added that the REIT has enough cash reserves to “weather almost any storm.” Those cash reserves stood at $2.7 billion at the end of October, according to the prospectus.
“It’s not a surprise that you would see a slowdown in individual investor flows when you’ve had this kind of market decline,” Gray said.
Reporting by Chibuike Oguh and Herb Lash in New York; Editing by Rosalba O’Brien and Sam Holmes
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