According to Bloomberg, investors requested to pull more than $5 billion out of Blackstone's (BX +1.18%) non-traded REIT, the Blackstone Real Estate Income Trust (or BREIT) last month. That was four times more than the company's redemption limit, forcing it to restrict redemptions once again.
The continued surge in such requests has kept the pressure on Blackstone's stock price. The company will likely continue to battle this headwind until it works through its current backlog. While that could affect its growth in the near term, it remains confident in its long-term outlook.
What's going on at Blackstone?
Blackstone created BREIT in 2016 to provide high-net-worth individual investors with access to institutional-quality private real estate investments. The private real estate market tends to deliver higher income yields and less volatility than publicly traded REITs:
Image source: Blackstone.
A big reason for the lower volatility is that these are illiquid investments, meaning investors can't sell their shares whenever they want. Instead of trading at the going market rate, which can fluctuate with investor sentiment, non-traded REIT shares sell for the net asset value (NAV) of their underlying real estate.
Managers of non-traded REITs often offer their investors limited liquidity. For example, Blackstone provides the option to repurchase shares from investors once a month. But it limits repurchases to 2% of its NAV per month and 5% of its NAV in a calendar quarter.
And the company isn't obligated to make any repurchases, so it could choose to buy back even fewer shares than the limit or none at all. Many non-traded REITs suspended their repurchase programs during the early days of the pandemic.
Blackstone started seeing a flood of redemption requests late last year, exceeding its limit. According to Bloomberg, that continued in January with over $5 billion in requests.
It only fulfilled about a quarter of those redemptions because it hit its 2% monthly limit. Some investors are seeking liquidity to cover losses incurred elsewhere.
And others could be selling at what they believe is a near-term peak in pricing for private real estate values, which have yet to see the same pricing correction as publicly traded REITs.
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Key Data Points
Should investors be worried about BREIT?
BREIT had been a big growth driver for Blackstone. In 2021, BREIT raised nearly $25 billion from investors. That was almost 70% of all the capital raised by non-traded 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 fees for managing BREIT and delivering on its return objectives for investors.
BREIT has delivered differentiated returns for its investors since its formation. Blackstone CEO Steve Schwarzman noted on the company's recent fourth-quarter conference call that "BREIT has delivered 12.5% net returns annually since inception six years ago for its largest share class, earning over three times the public REIT index."
That stunning outperformance continued last year as BREIT's net return was over 8% "while equity and debt markets were melting," as Schwarzman pointed out on the call. Driving those returns was the company's thematic investment approach, currently focused on rental housing and industrial real estate in the Southern and Western parts of the country. Those sectors are benefiting from long-term tailwinds and inflation.
Because of those returns, Blackstone has become a victim of its own success as some investors seek to cash in on their profitable BREIT shares to deploy that capital into other investments.
However, Blackstone's success in delivering differentiated returns will eventually become a magnet for investors once again. The company sees a massive untapped opportunity for high-net-worth investors since they have a low percentage of their portfolios currently allocated to alternatives. That's one of several long-term growth drivers.
Much ado about nothing
The surge in redemptions at BREIT continues to get a lot of attention. While they will be a headwind for Blackstone's growth in the near term as the company works through its backlog, they aren't due to any issues with that investment vehicle.
Instead, it continues to deliver differentiated performance. Those returns will eventually draw more investors to BREIT. Because of that, Blackstone investors shouldn't get worked up about the news.
Instead, the sell-off in its stock stemming from BREIT looks like a great buying opportunity for long-term investors to add to their position.
