Last Exit From Blackstone?

(Bloomberg Opinion) -- Sometimes doing what you warned you’d do will still upset your customers. Blackstone Inc. faces a reputational challenge after restricting withdrawals from its flagship retail investment property vehicle due to a recent spike in redemption requests. The unlisted BREIT real estate investment trust is an innovative and high-profile engine of growth for the US private equity firm. Disappointments have consequences for Blackstone and the sector.

Shares in Blackstone fell 7% on Thursday after demands from BREIT investors for their money back exceeded the quarterly limit, prompting Blackstone to temporarily close the exits. BREIT investors should have been fully cognizant of the risks. The snag is that the feeling of being trapped may make them more keen to seize the next opportunity to get out and potentially prompt others to join the queue as a precaution.

Blackstone’s redemption requests came largely from Asian investors, Bloomberg News reported. But whatever the origin, the risk for the company is that withdrawals become self-reinforcing.

You can see why some might want to take profit. The performance of BREIT has been strong (especially compared to real estate stocks). The company attributes this to asset mix and asset quality. Most of the portfolio is in rented housing and industrial facilities such as warehouses and logistics hubs. These are the hottest parts of the real estate industry. Only around 3% is in the office sector slammed by hybrid working.

Underlying net operating income (rents and other income less associated costs) was up 13% year-to-date. Occupancy is running at 95% across BREIT’s 5,206 properties, and interest-rate hedges have helped too. The portfolio’s capacity to generate rental income growth is crucial. With low-risk government debt now offering better rates, property yields are rising, putting downward pressure on capital values. Income growth means assets can hold or grow their worth even as valuation profit multiples fall.

BREIT’s in-built brake on redemptions, existing cash resources and rental income provide some protection if investors continue to exit. About 8% of the portfolio is real estate debt, which could be easy to liquidate. Blackstone announced the sale yesterday of its stake in a hotels venture, raising $1.3 billion. That will help too. But BREIT was structured to prevent the need for any forced selling of underlying assets. 

Of course, the property industry has seen this before. After the UK’s Brexit vote, managers of property funds imposed redemption freezes. Hence the importance of having explicit restrictions on exiting — as here. These are for the collective good of all investors: They prevent the portfolio manager having to launch a fire sale. People who wish to invest in a diversified range of properties while also wanting to be able to cash in their entire holdings quickly have the option of the listed real-estate businesses. These may trade at big discounts to the underlying value of their assets, but the shares are readily tradeable.

Still, Blackstone must manage expectations extremely carefully. The fact that this is only a semi-liquid vehicle should now be well understood. But the other risk on the horizon is that performance disappoints. Blackstone says its portfolio delivered a 9% total return year-to-date for the main class of BREIT shares. This was even as the latest valuations baked in an expansion in property yields from 4.8% at the year-end to 5.4% at the end of September.

“With respect to many non-traded REIT peers, BREIT’s valuations are more conservative,” Blackstone says, adding that the vehicle can “more quickly and accurately reflect current market conditions” with values reviewed by an independent advisor.

The world is watching BREIT. The design features aiming to prevent forced selling may come under scrutiny in the year ahead. And so too will Blackstone’s commitment to timely and conservative valuations.

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Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

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