NEW YORK, Dec 1 (Reuters) - Blackstone Inc
limited withdrawals from its $69 billion unlisted real estate
income trust (REIT) on Thursday after a surge in redemption
requests, an unprecedented blow to a franchise that helped it
turn into an asset management behemoth.
The curbs came because redemptions hit pre-set limits,
rather than Blackstone setting the limits on the day.
Nonetheless, they fueled investor concerns about the future of
the REIT, which makes up about 17% of Blackstone's earnings.
Blackstone shares ended down 7.1% on the news on Thursday. They
were down a further 2% on Friday morning at $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, a
source close to the fund said. Rising interest rates weigh on
real estate values because they make financing properties more
Blackstone has reported a 9.3% year-to-date return for its
REIT, net of fees, a contrast to the publicly traded Dow Jones
U.S. Select REIT Total Return Index 22.19% decline
over the same period.
Alex Snyder, a portfolio manager at CenterSquare Investment
Management LLC in Philadelphia, said the arbitrage between the
value Blackstone has assigned to its real estate portfolio and
the value of publicly traded REITs caught the eye of investors.
"People are taking profits at the value Blackstone says
their REIT shares are at," said Snyder.
A Blackstone spokesperson declined to comment on how the New
York-based firm calculates the valuation of its REIT, but said
its portfolio was concentrated in rental housing and logistics
in the southern and western United States that have short
duration leases and rents outpacing inflation.
The spokesperson added that the REIT relied on a long-term
fixed rate debt structure, making it resilient.
"Our business is built on performance, not fund flows, and
performance is rock 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 redemptions. The
majority of investors redeeming were 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 greater than 2% of its monthly net asset value and
5% of its quarterly net asset value. As a result, the REIT
allowed investors in November to redeem $1.3 billion, equivalent
to approximately 43% of investors' repurchase requests.
Barclays analysts downgraded their rating of Blackstone's
stock to "equal weight" from "overweight" and cut their price
target to $90 from $98 on Friday. They and other analysts said
Blackstone's REIT runs the risk of getting caught in a spiral of
selling assets to meet redemptions if it cannot regain the trust
of its investors. On Thursday, the firm said the REIT had agreed
to sell its 49.9% interest in two Las Vegas casinos for $1.27
"The impact on Blackstone depends on whether the REIT is
able to stabilize its net asset value over time, or is forced to
enter an extended run-off scenario, with significant asset sales
and ongoing redemption backlog too early to tell, in our
view," BMO Capital Markets analysts wrote in a note.
BLOW TO BLACKSTONE'S PLANS
The REIT turmoil is a setback for two of Blackstone's
strategies that helped it become the world's biggest alternative
asset manager with $951 billion in assets: real estate investing
and attracting high net-worth individuals.
Blackstone launched the REIT in 2017, piggybacking off the
success of its real estate empire, which had by then outgrown
its private equity business. Its president Jonathan Gray was
elevated and made successor to Chief Executive Stephen
Schwarzman as a result of his success in property investing.
The REIT also represented a bid to win over high net-worth
investors clamoring for private market products, which they
believe perform better than those that are publicly traded.
Blackstone has been seeking to diversify its investor base
after tapping institutional investors, such as public pension
funds, insurance firms and sovereign wealth funds, for its
products for decades.
Blackstone managed a total of $236 billion of wealth held by
individuals as of the end of September, up 43% year-on-year.
Credit Suisse analysts wrote in a note that they expected
the REIT's woes to weigh on Blackstone's fee-related earnings
and assets under management. "These all will continue put
pressure 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 away individual investors from active equity and fixed
He added that the REIT had ample cash reserves to "weather
pretty much any storm." These cash reserves totaled $2.7 billion
as of the end of October, according to its prospectus.
Blackstone also said in the prospectus it had access to $9.3
billion in "immediate liquidity."
"It's not a surprise that you would see a deceleration in
flows from individual investors when you've had this kind of
market decline," Gray said.
(Reporting by Chibuike Oguh and Herb Lash in New York
Editing by Rosalba O'Brien and Sam Holmes)