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Blackstone's $69 Billion REIT Bans Redemptions, Harming Business

Aria Thomas

Dec 02, 2022 11:57

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Blackstone Inc halted withdrawals from its $69 billion unlisted real estate income trust (REIT) on Thursday due to an increase in redemption demands, a first-of-its-kind blow to a franchise that helped it become an asset management giant.


The constraints for the day were not imposed by Blackstone (NYSE:BX), but rather because redemptions had reached specified limits. However, they heightened investor worry over the future of the REIT, which accounts for around 17% of Blackstone's revenue. The announcement resulted in a 7.1% decline in the closing price of Blackstone shares.


According to a source close to the fund, investors in the REIT are dissatisfied with Blackstone's reluctance to adjust the vehicle's valuation to that of publicly traded REITs that have been negatively affected by rising interest rates. Increasing interest rates have a negative effect on property values since they increase the cost of financing.


Blackstone has reported a net return of 9.3% for its REIT year-to-date, compared to a decline of 22.19% for the Dow Jones U.S. Select REIT Total Return Index for the same period.


Alex Snyder, portfolio manager at CenterSquare Investment Management LLC in Philadelphia, commented that some investors are wondering how Blackstone evaluates the REIT's valuation in light of this outperformance.


Snyder added, "People are selling their Blackstone REIT shares at the price at which Blackstone feels they are trading."


A spokesperson for Blackstone declined to comment on how the business evaluates the value of its REIT, but did highlight that its portfolio consists mostly of rental housing and logistics and is underpinned by a long-term fixed-rate debt structure, making it resilient.


Our business is based on performance, not cash flow, and performance is rock-solid.


The REIT's target market is wealthy individual investors. According to two individuals with knowledge of the issue, the redemptions were the result of market turmoil in Asia, which was fueled by concerns about China's economic outlook and political stability. The majority of redeeming investors, they said, were from Asia and demanded cash.


After receiving more than 2% of its monthly net asset value and 5% of its quarterly net asset value in November redemption requests, Blackstone warned investors in a letter that it will limit withdrawals from its REIT. Consequently, the REIT allowed investors to redeem $1.3 billion in November, which corresponds to around 43% of investor repurchase demands.


According to some analysts, if Blackstone's REIT cannot regain investor confidence, it risks entering into a loop of selling assets to fund redemptions. The REIT has struck a deal to sell its 49.9% ownership in two Las Vegas casinos for $1.27 billion, the firm reported on Thursday.


In a report, analysts at BMO Capital Markets stated, "The impact on Blackstone will depend on whether the REIT is able to stabilize its net asset value over time or is forced to enter a protracted run-off position, with substantial asset sales and a continuous redemption backlog — it's too early to tell."

BLOW TO BLACKSTONE'S PLANS

The REIT disruption 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: real estate investing and targeting high net worth individuals.


Blackstone established the REIT in 2017, riding the success of its real estate business, which had by then surpassed its private equity firm. As a result of his success in real estate investing, the company's president, Jonathan Gray, was appointed to the position of CEO and succeeded Stephen Schwarzman.


The REIT was also an attempt to attract rich investors who believe that private market items perform better than public market ones.


Blackstone has pushed to expand its investor base after decades of marketing its products to institutional investors such as public pension funds, insurance corporations, and sovereign wealth funds.


Credit Suisse analysts projected in a study that Blackstone's fee-related income and managed assets would be negatively impacted by the REIT's troubles. They noted, "These issues will continue to impose downward pressure on the premium valuation of Blackstone."

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