Investors demanded to withdraw more than $5 billion, according to Bloomberg. of blackstone (BX 1.30%) Non-trading REIT, Blackstone Real Estate Income Trust (or BREIT) last month. This reached four times his redemption limit for the company, forcing him to limit redemptions again.
The continued surge in demand continues to put pressure on Blackstone’s stock price. The company may continue to battle this headwind until it deals with its current backlog. While this may affect growth in the short term, we are confident in our long-term prospects.
What’s Happening at Blackstone?
Blackstone founded BREIT in 2016 to provide high net worth individual investors with access to institutional quality private real estate investments. Private real estate markets tend to offer higher income yields and lower volatility than listed markets. REITs:
A big reason for the low volatility is that these are illiquid investments. This means that investors cannot sell their shares at any time. Instead of trading at market rates that can fluctuate depending on investor sentiment, non-trading REIT shares are sold at the net asset value (NAV) of the underlying real estate.
Managers of non-trading REITs often offer limited liquidity to investors. For example, Blackstone offers the option to buy back shares from his investors once a month. However, buybacks are limited to 2% of NAV per month and he is limited to 5% of NAV in calendar quarters.
Also, the company has no obligation to repurchase, so it can choose to repurchase fewer shares than the limit or none at all. Many non-trading REITs suspended their buyback programs early in the pandemic.
Blackstone started being inundated with redemption requests late last year. According to Bloomberg, that continued in January, with more than $5 billion in requests.
Only about a quarter of these redemptions were fulfilled as the 2% monthly cap was reached. Some investors seek liquidity to cover losses incurred elsewhere.
It is also possible that they are selling at what they believe is a near-term peak in private real estate prices that has not yet seen a price correction similar to that of public REITs.
Should investors worry about the BREIT?
BREIT has been a big growth driver for Blackstone. In 2021, BREIT raised nearly $25 billion from investors. This was almost 70% of all capital raised by non-trading REITs that year.
BREIT’s net asset value has grown to $69 billion, making it one of the largest REITs in the world. Blackstone earns lucrative commissions by managing the BREIT and meeting investor return targets.
Since its inception, BREIT has provided investors with differentiated returns. Blackstone CEO Steve Schwarzman said the company’s recent Fourth Quarter Conference Call “Since its inception six years ago, BREIT has achieved annual net returns of 12.5% in its largest equity class, more than triple the public REIT index.”
or Incredible outperformance continues from last year As Schwarzman pointed out on the conference call, “the stock and bond markets were melting” as BREIT’s net profit margin was over 8%. These returns were driven by the company’s thematic investment approach, which is now focused on rental housing and industrial properties in the south and west of the country. These sectors are benefiting from long-term tailwinds and inflation.
Some investors are looking to take advantage of the profitable BREIT shares and redirect their capital to other investments.
But Blackstone’s success in delivering differentiated returns will eventually attract investors again. The firm believes there is significant untapped opportunity for high net worth investors due to the low percentage of its portfolio currently allocated to alternatives.it is one of Some long-term growth drivers.
The surge in redemptions on BREIT continues to attract a lot of attention. It will be a headwind to Blackstone’s growth in the short term as the company handles its backlog, but not because of its investment vehicle.
Instead, it continues to deliver differentiated performance. These returns will ultimately draw more investors to her BREIT. As such, Blackstone investors should not be upset by this news.
Instead, the BREIT-induced decline in stock prices looks like a great buying opportunity for long-term investors to add to their positions.
Matthew DiLallo has a position at Blackstone and has the following options: A short $60 put in June 2023 at Blackstone. The Motley Fool invests in and recommends Blackstone. The Motley Fool’s U.S. headquarters has a disclosure policy.