NEW YORK, Dec 1 (Reuters) – (This Dec. 1 story has been corrected to correct part of a quote from Snyder referring to arbitration)
Blackstone Inc (BX.N) Thursday’s limited withdrawal from the $69 billion unlisted real estate income trust (REIT), amid a surge in buyback requests, is an unprecedented blow to a franchise that helped transform it into asset management.
The limits came about because payouts hit predetermined limits instead of Blackstone setting daily limits. Still, they raised investor concerns about the future of the REIT, which accounts for about 17% of Blackstone’s earnings. Blackstone shares fell 7.1% on Thursday’s news. They fell another 2% to $83.45 on Friday morning.
A source close to the fund said many investors in the REIT are concerned that Blackstone has been slow to adjust the car’s price to that of publicly traded REITs, which have taken a hit amid rising interest rates. Rising interest rates weigh on real estate values because they make financing property more expensive.
Blackstone reported a return of 9.3% for its REIT, net of fees, versus the publicly traded Dow Jones US Select REIT Total Return Index. (.DWRTFT) In the same period, there was a decrease of 22.19%.
Alex Snyder, a portfolio manager at CenterSquare Investment Management LLC in Philadelphia, said the arbitrage between the value Blackstone assigns to its real estate portfolio and the value of publicly traded REITs is attracting investors’ attention.
“People are taking income at what Blackstone says the REIT stock is worth,” Snyder said.
A Blackstone spokeswoman declined to comment on how the New York-based firm calculates the REIT’s valuation, but said its portfolio is focused on short-term rentals in the southern and western U.S. and in rental housing and logistics, with rents outpacing inflation.
The spokesperson added that the REIT relies on a long-term fixed-rate debt structure, making it sustainable.
“Our business is based on performance, not cash flow, and performance is solid,” the spokesman said.
REITs are marketed to wealthy individual investors. Turmoil in Asian markets, fueled by concerns about China’s economic prospects and political stability, contributed to the purchases, two sources familiar with the matter said. Most of the investors were from Asia and needed liquidity.
Blackstone said in a letter to investors in November that it would limit withdrawals from the REIT after receiving requests to buy back more than 2% of its monthly net asset value and 5% of its quarterly net asset value. As a result, the REIT allowed investors to buy back $1.3 billion in November, which is about 43% of investors’ redemption requests.
Analysts at Barclays downgraded shares of Blackstone from “overweight” to “equal weight” and cut their price target on Friday from $98 to $90. They and other analysts said Blackstone’s REIT risks spiraling into asset sales to meet redemptions if it can’t restore investor confidence. The REIT has agreed to sell its 49.9% stake in two Las Vegas casinos for $1.27 billion, the firm said Thursday.
“The impact on Blackstone depends on whether the REIT is able to stabilize its net asset value over time or is forced to enter a long-term scenario of significant asset sales and ongoing redemptions – which we believe is too early to tell. ,” BMO Capital Markets analysts wrote in a note.
HIT BLACKSTONE’S PLANS
The REIT mess is a setback for two of Blackstone’s strategies that helped make it 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 the success of its real estate empire, which until then had outgrown its private equity business. Its president, Jonathan Gray, was promoted to succeed chief executive Stephen Schwartzman as a result of his success in real estate investing.
The REIT has also launched a bid to win over high-net-worth investors clamoring for private market products they believe outperform publicly traded ones.
Blackstone is trying to diversify its investor base after decades of attracting institutional investors such as public pension funds, insurance companies and sovereign wealth funds for its products.
As of the end of September, Blackstone managed $236 billion in assets, up 43% year over year.
Credit Suisse analysts wrote in a note that they expect the REIT’s woes to weigh on Blackstone’s fee-based revenues and assets under management. “All of this will continue to put pressure on Blackstone’s premium valuation,” they said.
On Blackstone’s third-quarter earnings call in October, Gray blamed REIT buybacks on market volatility, which he said had driven individual investors away from active equity and fixed-income funds.
He added that the REIT has enough cash reserves to “weather any storm.” According to its prospectus, these cash reserves amounted to 2.7 billion dollars by the end of October. Blackstone also said it had access to $9.3 billion in “immediate liquidity” in the prospectus.
“When you have this kind of market decline, it’s not surprising that you see a slowdown in flows from individual investors,” Gray said.
Reporting by Chibuike Oguh and Herb Lash in New York Editing by Rosalba O’Brien and Sam Holmes
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