Blackstone Shareholder Redemptions Slow, But Analysts Point to Risks

March 2, 2023

Investors’ share redemption requests are still exceeding permitted amounts for Blackstone Real Estate Income Trust and other private nontraded real estate investment trusts as property values and fundraising decline amid high interest rates and recession concerns.

While the share redemptions are coming at a reduced pace compared to late last year, the excessive volume indicates investors are looking to move their money out of nontraded REITs that could start producing diminishing returns after having performed well during a three-year runup in prices.

Blackstone REIT received repurchase requests of $3.9 billion in February, which is 26% lower than January, the REIT said Wednesday in a letter to shareholders. The REIT only fulfilled about $1.4 billion of the requests, which is equal to 2% of its net asset value and represents about 35% of the shares submitted for repurchase.

Through January, four major nontraded REITs — Blackstone REIT, Starwood Real Estate Income Trust, KKR Real Estate Select Trust and RREEF Property Trust — reported 2023 redemption requests exceeding monthly or quarterly limits, according to investment banking firm Robert A. Stanger & Co.

Separately, RREEF said this week that it had reached its redemption limit for the quarter and would no longer accept additional redemption requests until April 1.

The investor share redemptions are also hurting nontraded REIT fundraising.

While total incoming funds hit $4.6 billion in January, it was largely because of one investment. Blackstone REIT received $4 billion from the Regents of the University of California, through a joint venture with its parent, the private equity giant Blackstone Group. Without this commitment, January nontraded REIT fundraising would have totaled only $596 million, the lowest monthly level since December 2009, according to the latest numbers from Stanger.

Kevin Gannon, chairman of Stanger, expects that the redemption overhang will continue to drag on fundraising.

“The industry has successfully met redemptions up to the 2% monthly and 5% quarterly caps to date, with sufficient liquidity sleeves on the balance sheets to fund redemptions without tapping real estate asset sales, and we expect to see the same in 2023,” Gannon said in a statement.

Of Blackstone REIT specifically, Gannon told CoStar News in an email that it has a cash runway of at least a year before it would have to sell real estate assets.

Blackstone REIT’s “real estate growth profile remains strong, and Blackstone has actively managed its cost of debt, securing relatively low interests rates for several years,” Gannon said.

Blackstone REIT has emerged as one of the world’s largest real estate investors since launching in 2017. Its massive property portfolio, valued at $148 billion, is concentrated in rental housing and industrial properties, and supplemented by data center, hospitality, self-storage, office and retail assets.

Most of those holdings — about 70% — are in Sun Belt markets, which are growing faster than the rest of the country, Blackstone REIT noted in its shareholder letter. In addition, about 90% were bought with fixed-rate debt that Blackstone REIT said is locked in at low rates for the next 6.5 years, minimizing interest rate risk.

Blackstone REIT has generated a robust performance during the pandemic, posting a 14.4% annual return over the past three years, the company said Wednesday. Its 2022 return of 8.4% was supported by 13% estimated cash flow growth from its real estate assets.

“Performance remains our primary focus,” Blackstone REIT said in an email to CoStar News. “BREIT has delivered a 12.3% annualized net return since inception in 2017, outperforming publicly traded REITs by more than 2x.”

The REIT declined further comment.

Strong past performance does not mean Blackstone REIT and other nontraded REITs are immune to rising interest rates and falling property values, according to Gannon and other analysts.

Gannon said Blackstone REIT’s net asset value is strong but likely to see some downward pressure this year.

David Auerbach, managing director at Armada ETF Advisors, issuer of the Residential REIT Income ETF, agreed.

Upward pressure on capitalization rates could eventually be reflected in downward revisions to Blackstone REIT’s net asset value, Auerbach noted. Cap rates represent the yield on a real estate investment property based on the income it’s expected to generate. Generally, a higher cap rate means the investment holds a greater risk. When cap rates go up, returns for investors in nontraded REITs are at a greater risk of receding.

Interest rates have moved from a zero-percent environment during the first two years of the pandemic and surpassed 5.5% in the past year.

“Commercial real estate across the board has felt the brunt of the impact of interest rate hikes, which have led to cap rates going in the opposite direction,” Auerbach told CoStar News in an email. “By our calculation, BREIT's wholly owned portfolio of mainly residential (55%) and industrial (23%) assets are trading at an implied cap rate under 4% and do not necessarily reflect the market repricing which has occurred over the past several quarters.”

Auerbach estimated that investors in publicly traded residential REITs, by contrast, have already accepted slowing rent growth and the potential for a recession.

He said nontraded REITs “are using stale valuations” for their properties that do not reflect the current market. “Investors are going to be in for a rude wake-up call in the next several months when the private vehicles catch up to where the publicly traded REITs stand in the operating environment and may wake up seeing declining [net asset value] over the next few quarters.”

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