Blackstone's big retail real estate fund experienced sizable net redemptions for the first time, in a potentially worrisome development for what has become one of the firm's most important products and a focus of investor concerns.
Barron's estimates that net redemptions totaled about $700 million in October for Blackstone Real Estate Income Trust, based on a disclosure in the fund's monthly report, dated Monday, that lists its shares outstanding.
Blackstone stock (ticker: BX) was down 2.4% to $87.66 Tuesday after Credit Suisse analyst Bill Katz put an Underperform rating on the stock. In a research report, Katz focused on the real estate investment trust, known as Breit, which had $69 billion of net assets and $125 billion of total assets including debt at the end of October.
Blackstone shares are down more than 30% this year.
"Our work points to BX's flagship BREIT fund inflecting into elevated third-party net redemptions," Katz wrote in the report, in which he set a 12-month price target of $67.50 on the stock. "We expect near-term net outflows into '23," Katz wrote.
Katz has the only rating equivalent to a Sell among 21 Wall Street analysts that cover the stock, according to Bloomberg. He argued that consensus estimates for Blackstone's distributable earnings, a key financial metric, are roughly 5% and 12% too high for 2023 and 2024, respectively. He lowered his estimate for 2023 distributable earnings to $5.06 a share from $5.24 and his 2024 estimate to $5.86 a share from $6.52.
Breit is a nontraded real estate investment trust whose assets have mushroomed in recent years. It has become one of the largest buyers of real estate in the country and is a significant source of growth for Blackstone. Investors are concerned that this big growth engine may be going into reverse.
Sold primarily to retail investors through major brokerage firms and financial advisors, it offers limited monthly liquidity to investors. It stands willing to repurchase 2% of its shares monthly at its net asset value and 5% quarterly. During the third quarter, repurchases totaled nearly 5% of the shares outstanding. The fund has met all redemption requests since inception. The fund shares are sold to investors at net asset value.
During October, Breit's share count declined by 47 million to 4.622 billion from the total outstanding in September, according to its monthly 424b3 filing with the Securities and Exchange Commission. Barron's estimates the net redemptions of about $700 million based on Breit's share price of around $15.
"The vast majority of redemptions have come from investors based in Asia," Blackstone said. "Offshore investors currently represent ~20% of our capital base but have accounted for ~70% of repurchases year to date."
Breit experienced net inflows of $1.1 billion in the third quarter, down from $4 billion of net inflows in the second quarter.
Breit has ample liquidity of $9.3 billion to meet potential redemptions, according to its 10-Q. But cash and equivalents total $1.4 billion, with $7.9 billion of liquidity consisting of revolving credit facilities and other borrowing power.
If redemption requests escalate, Breit might have to draw on those credit facilities and increase its already ample debt. It had about $68 billion of debt outstanding at the end of the third quarter.
"BREIT is operated with moderate leverage and substantial liquidity from a variety of sources." Blackstone said. "It is structured to never be a forced seller of assets which enables us to maximize long-term value for our shareholders."
Comparable public REITs such as Prologis (PLD) and Mid-America Apartment Communities (MAA) have considerably lower ratios of debt to equity market value. Breit is focused on investments in apartment and warehouses, Prologis is one of the largest public owners of warehouses, and Mid-America is a sizable apartment REIT.
There was considerable attention on Breit on Blackstone's earnings conference call in October. In response to an analyst question about potential Breit redemptions, Blackstone President Jon Gray said "it's possible that we could see negatives over some period of time." He emphasized the fund's strong performance since its inception in 2017 and said: "we feel really good about BREIT and its ability to weather pretty much any storm."
Breit has returned 13.5% annually over the past five years, handily topping public REIT benchmarks. "Our business is built on performance, not fund flows," the company said Tuesday. "BREIT's performance is rock solid."
Breit and the Blackstone Secured Lending Fund, a companion retail-oriented product known as Bcred, have become among the biggest sources of growth at Blackstone, the leading alternative asset manager with about $1 trillion under management. Bcred has about $22 billion of net assets.
During the first nine months of 2022, Breit generated $1.4 billion of fees for Blackstone, comprised of management and incentive fees. Breit has earned incentive fees of more than $800 million this year because it has returned 9% despite a sharp decline in public REIT shares. Apartment and warehouse REITs like Prologis and Mid-America are off about 30%.
In August, Barron's wrote critically on Breit, arguing the REIT is overvalued relative to public peers. We also argued that it isn't covering its current 4% distribution based on key REIT financial measures and that it has significant leverage. Blackstone disputed that characterization, arguing its valuation methodology is appropriate, that BREIT earns its distribution from operating cash flow and that its leverage is moderate.
In his report, Katz noted that a "central bear case argument" centers on the valuation of Breit, but said he doesn't consider that bearish view to be valid.
The Katz report indicates that investor attention on Breit may not diminish and may continue to put a cloud over Blackstone stock. That would be ironic because Blackstone's huge success in attracting retail money became the envy of its rivals and a source of its premium valuation versus peers.