Investor concerns about Blackstone's big retail real estate fund have weighed on its stock in recent months and comments by management this week didn't appear to help.
Although Blackstone (ticker: BX) reported an earnings beat Thursday, its shares dropped 4.2% after the report before rebounding Friday to finish up 1.7% at $85.43. The stock is off more than 40% from its November 2021 peak of about $150.
Investors may have been reacting Thursday to remarks made in a conference call by President Jonathan Gray about Blackstone Real Estate Income Trust, which is known as Breit.
Gray said it was possible Breit, Blackstone's $70 billion flagship retail product, could go into redemption—meaning the fund would be paying out more to investors who are redeeming shares than it is receiving in new investments.
Breit and Blackstone Private Credit Fund (BCRED), another retail product, have become important sources of asset and fee growth for the firm. This makes the investment community sensitive to flows. Breit generated over $1 billion in fees for Blackstone in the first half of 2022, making it one of the firm's most lucrative investment offerings.
Unlike public REITs like Prologis (PLD) and Equity Residential (EQR), Breit isn't publicly traded.
Blackstone executives fielded several questions on Breit during the company's earnings conference call Thursday, and one analyst asked whether it could "go into redemption in the coming months."
Gray replied: "I would say as it relates to near-term flows, yes, it's possible that we could see negatives over some period of time."
Breit had enjoyed huge inflows in 2021 and the early part of 2022, roughly doubling in size. The fund raised $4.2 billion of capital in the third quarter, down from $6.6 billion in the second quarter, but Blackstone didn't provide a net flow figure based on inflows less redemptions.
Barron's wrote critically on Breit in August, arguing that retail investors should consider public REITS as an alternative.
And while many public REITs are down over 30% this year, Breit has returned a positive 9% through the end of September. Our article also cited as negatives Breit's high fees and higher leverage than many public peers.
In response, Blackstone pointed to Breit's strong performance since its inception in 2017, its exposure to two of the strongest categories in real estate (apartments and warehouses) and its high levels of liquidity. Breit has returned 13% annually since its inception, four times that of REIT benchmarks.
There has been greater investor focus on the gap between Breit's performance and those of public REITs in recent months, as the REIT sector has continued to decline while Breit's net asset value has continued to go up. The selloff in public REITs reflects investor fears about an economic slowdown and the impact on rents, as well as higher rates.
On the call, Gray cited the strong financial performance of Breit this year as warehouse and apartment rents are up sharply. He added that the earnings strength of Breit this year has more than offset the impact of higher rates on real estate valuations.
Oppenheimer analyst Chris Kotowski said that public REITs in the apartment and logistics sectors also are showing good financial results, but their stocks are down 30%. Kotowski contrasted Breit's performance versus public REITs and asked management during the conference call if "they all of a sudden look more attractive relative to your valuations."
Gray responded that public markets are more volatile than private markets, which is the basis for Breit's pricing, and that Breit has "ample liquidity," having met all redemption requests since its inception in 2017.
In a client note Friday, J.P. Morgan analyst Ken Worthington wrote of Breit: "We do see risk to net sales in the near term of intermediaries investing in public real estate funds that have seen prices fall 30% vs. B-Reit (for example) with returns up 8.5% this year."
Morgan Stanley analyst Michael Cyprys wrote that retail flows have slowed, as expected given the economic environment.
"But we have confidence that BX's distribution prowess and brand should continue to attractively position the firm to penetrate a ~$70 trillion retail TAM,"
Blackstone's distributable earnings were $1.06 a share in the third quarter, down 17% from the year-earlier period, but they exceeded the consensus estimate of 98 cents.