The $69 billion Blackstone REIT is holding back redemptions in a blow to the real estate empire

NEW YORK, Dec. 2 (Reuters) – Blackstone Inc (BX.N) Limited withdrawals from the $69 billion Unquoted Real Estate Income Income Trust (REIT) on Thursday after a surge in redemption applications, an unprecedented blow to a franchise that helped it transform into an asset management behemoth.

The limitations came about because the recoveries reached predetermined limits, rather than Blackstone setting the limits back in the day. However, they have raised investor concerns about the future of the REIT, which makes up about 17% of Blackstone’s earnings. Blackstone shares closed down 7.1% on the news Thursday. They fell another 2% on Friday morning at $83.45.

A source close to the fund said many REIT investors were concerned that Blackstone was slow to adjust the valuation of the vehicle with valuations of publicly traded REITs taking a hit amid rising interest rates. Higher interest rates weigh on real estate values ​​as it makes real estate financing more expensive.

Blackstone reported a 9.3% year-to-date return for its REITs, net of fees, in contrast to the publicly traded US Dow Jones index. (.DWRTFT) 22.19% decline over the same period.

That outperformance has some investors wondering how Blackstone will value its real estate fund, said Alex Snyder, portfolio manager at CenterSquare Investment Management LLC in Philadelphia.

“People are making a profit at what Blackstone says its REIT shares are,” Snyder said.

A Blackstone spokesperson declined to comment on how the New York-based company calculates the valuation of its REIT, but said its portfolio is concentrated in rental housing and logistics services in the southern and western US that have short-term leases and rents that beat inflation.

The spokesperson added that the REIT relies on a long-term fixed-rate debt structure, which makes it flexible.

“Our business is built on performance, not on cash flows, and performance is very 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 recalls. They said the majority of the investors who redeemed were from Asia and needed liquidity.

Blackstone told investors in a letter that it would limit withdrawals from its REITs 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 to recover $1.3 billion in November, which is approximately 43% of investors’ repurchase orders.

Barclays analysts downgraded Blackstone stock to “equal weight” from “overweight” and cut its price target to $90 from $98 on Friday. They and other analysts said the Blackstone REIT runs the risk of falling into a spiral of selling assets to meet redemptions if it cannot regain the confidence of its investors. On Thursday, the company said the REIT had agreed to sell its 49.9% stake in two casinos in Las Vegas 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 restart scenario, with large asset sales and an ongoing build-up of payback — it is too early to tell, from one point of view. We looked,” BMO Capital Markets analysts wrote in a note.

Blow up Blackstone’s plans

The REIT’s 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: real estate investing and attracting high net worth individuals.

Blackstone launched a REIT in 2017, capitalizing on the success of its real estate empire, which by then had outgrown its private equity business. Its chairman Jonathan Gray was promoted and succeeded to CEO Stephen Schwarzman as a result of his success in real estate investing.

The REIT is also an effort to attract high net worth investors who demand private market products, which they believe perform better than publicly traded ones.

Blackstone is seeking to diversify its investor base after leveraging 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 private wealth as of the end of September, up 43% year-on-year.

Credit Suisse analysts wrote in a note that they expect REIT’s problems to impact Blackstone’s earnings on fees and assets under management. “All of this will continue to put pressure on Blackstone’s premium valuation,” they wrote.

On Blackstone’s third-quarter earnings call in October, Gray blamed the REIT’s recovery on market volatility, which he said kept retail investors away from active equity and fixed-income funds.

He added that the REIT has ample cash reserves to “pretty much weather any storm.” Total cash reserves reached $2.7 billion by the end of October, according to the prospectus. Blackstone also said in the prospectus that it has access to $9.3 billion in “instant liquidity”.

“It’s not surprising that you see a slowdown in inflows from individual investors when you have this kind of market downturn,” Gray said.

Additional reporting by Ugo Shepwick and Herb Lash in New York; Editing by Rosalba O’Brien and Sam Holmes

Our standards: Thomson Reuters Trust Principles.