NEW YORK, December 2 (Reuters) – Blackstone Inc. (BX.N) limited withdrawals from its $69 billion unlisted real estate income trust (REIT) on Thursday after a spike in redemption requests, an unprecedented blow for a franchise that has helped it grow into an asset management giant.
The brakes came because redemptions hit pre-set limits, rather than Blackstone setting the limits on the day. Nonetheless, they have fueled investor concerns about the future of the REIT, which accounts for around 17% of Blackstone’s earnings. Blackstone shares ended down 7.1% on Thursday news. They were still down 2% on Friday morning at $83.45.
Many REIT investors are concerned that Blackstone has been slow to adjust the vehicle’s valuation to that of publicly traded REITs that have been hit by rising interest rates, a source familiar with the fund said. Rising interest rates weigh on real estate values as they make financing properties more expensive.
Blackstone reported a 9.3% year-to-date return for its REIT, net of fees, in contrast to the publicly traded Dow Jones US Select REIT Total Return Index. (.DWRTFT) Decrease of 22.19% over the same period.
That outperformance has some investors wondering how Blackstone is managing to value its REIT, said Alex Snyder, portfolio manager at CenterSquare Investment Management LLC in Philadelphia.
“People are taking profits at the value Blackstone says for their REIT stocks,” Snyder said.
A Blackstone spokesperson declined to comment on how the New York-based firm calculates its REIT’s valuation, but said its portfolio was concentrated in rental housing and logistics in the South and West of the United States. United States, which has short-term leases and rents above inflation.
The spokesperson added that the REIT relies on a long-term fixed rate debt structure, which makes it resilient.
“Our business is based on performance, not cash flow, and performance is rock solid,” the spokesperson said.
The REIT is marketed to high net worth individual investors. Two sources familiar with the matter said turmoil in Asian markets, fueled by worries about China’s economic outlook and political stability, contributed to the buybacks. The majority of redeeming investors were from Asia and needed cash, they said.
Blackstone told investors in a letter that it would limit withdrawals from its REIT after receiving redemption requests in November above 2% of its monthly net asset value and 5% of its quarterly net asset value. As a result, the REIT allowed investors to redeem $1.3 billion in November, equivalent to about 43% of investor redemption requests.
Barclays analysts downgraded their rating of Blackstone shares to “equal weight” from “overweight” and cut their price target to $90 from $98 on Friday. They and other analysts said Blackstone’s REIT ran the risk of being caught in a spiral of asset sales to meet buybacks if it could not regain investor confidence. On Thursday, the company said the REIT had agreed to sell its 49.9% 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 if it is forced into an extended liquidation scenario, with significant asset sales and delayed redemptions. ongoing – too early to tell, in our view,” BMO Capital Markets analysts wrote in a note.
BLOW TO BLACKSTONE PLANS
The REIT turmoil is a setback for two of Blackstone’s strategies that 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, building on the success of its property empire, which had by then outgrown its private equity business. Its chairman Jonathan Gray was elevated to and succeeded chief executive Stephen Schwarzman due to his success in real estate investing.
The REIT also represented an attempt to win over wealthy investors who were clamoring for private market products, which they say perform better than those listed on the exchange.
Blackstone is seeking to diversify its investor base after relying on institutional investors, such as public pension funds, insurance companies and sovereign wealth funds, for its products for decades.
Blackstone managed a total of $236 billion in wealth held by individuals at the end of September, up 43% year-over-year.
Credit Suisse analysts wrote in a note that they expected the REIT’s woes to weigh on Blackstone’s fee-related revenue and assets under management. “All of this will continue to put pressure on Blackstone’s premium valuation,” they wrote.
During Blackstone’s third-quarter earnings call in October, Gray blamed REIT buybacks on market volatility, which he said drove individual investors away from active equity and fixed-income funds. .
He added that the REIT has sufficient cash reserves to “weather just about any storm.” Those cash reserves totaled $2.7 billion at the end of October, according to its prospectus. Blackstone also said in the prospectus that it had access to $9.3 billion in “immediate liquidity.”
“It’s no surprise that you see a deceleration in the flow of individual investors when you’ve been through this type 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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