NEW YORK, Dec. 2 (Reuters) – Blackstone Inc (BX.N) limited withdrawals of its $69 billion privately held Real Estate Income Trust (REIT) on Thursday following a flurry of redemption requests, an unprecedented blow to a franchise that helped it become a wealth management giant.
The curbs came because redemptions reached pre-set limits, rather than Blackstone setting limits on the day. Nevertheless, they fueled investor concerns about the future of the REIT, which makes up about 17% of Blackstone’s earnings. Blackstone shares ended up 7.1% on the news on Thursday. They fell another 2% Friday morning to $83.45.
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, according to a source close to the fund. Rising interest rates weigh on property values because they make property financing more expensive.
Blackstone reports a 9.3% year-to-date return for its REIT, after fees, as opposed to the publicly traded Dow Jones US Select REIT Total Return Index (.DWRTFT) 22.19% decline over the same period.
That outperformance has left some investors wondering how Blackstone comes to value his REIT, says Alex Snyder, portfolio manager at CenterSquare Investment Management LLC in Philadelphia.
“People take profits at the value Blackstone says for their REIT shares,” Snyder said.
A spokesperson for Blackstone declined to comment on how the New York-based firm calculates its REIT’s valuation, but said its portfolio was concentrated in rental properties and logistics in the southern and western United States with short-term leases and rents. higher than inflation.
The spokesperson added that the REIT relies on a long-term, fixed-rate debt structure, making it resilient.
“Our business is built on performance, not cash flow, and the performance is rock solid,” said the spokesperson.
The REIT is marketed to high net worth 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 redemptions. The majority of investors who redeemed came 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 of more than 2% of its monthly net asset value and 5% of its quarterly net asset value. As a result, the REIT enabled investors to redeem $1.3 billion in November, equivalent to approximately 43% of investor redemption requests.
Barclays analysts downgraded Blackstone’s stock rating from “overweight” to “equal weight” and cut their price target from $98 to $90 on Friday. She and other analysts said Blackstone’s REIT risks being caught in a spiral of selling assets to meet redemptions if it can’t regain the trust of its investors. 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 is forced into a protracted run-down scenario, with significant asset sales and continued arrears in amortization – to our opinion too early to say,” analysts from BMO Capital Markets wrote in a note.
COMPLAIN FOR BLACKSTONE’S 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, riding on the success of his real estate empire, which by then had outgrown its private equity business. The President Jonathan Gray was elevated and became the successor of Chief Executive Stephen Schwarzman as a result of his success in real estate investments.
The REIT also represented an effort to win over high net worth investors clamoring for private market products, which they believe outperform exchange traded products.
Blackstone is seeking to diversify its investor base after decades of targeting institutional investors such as public pension funds, insurance companies and sovereign wealth funds for its products.
Blackstone managed a total of $236 billion in retail assets 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 income and assets under management. “All of this will continue to weigh 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 individual investors away from active equity and fixed income funds.
He added that the REIT had enough cash reserves to weather “virtually any storm.” According to the prospectus, these cash reserves totaled $2.7 billion at the end of October. 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 slowdown in individual investor inflows when you’ve had these kinds of market downturns,” Gray said.
Reporting by Chibuike Oguh and Herb Lash in New York Editing by Rosalba O’Brien and Sam Holmes
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