Blackstone CEO says financially distressed investors driving REIT redemptions

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NEW YORK (Reuters) – Blackstone (NYSE:BX) Inc Chief Executive Stephen Schwarzman said on Wednesday that redemptions in his firm’s $69 billion non-traded real estate income trust (REIT) were driven by investors roiled by market volatility rather than dissatisfaction with the fund.

Blackstone shares have lost 15% of their value since Dec. 1, when the New York-based firm disclosed it had for the first time limited redemptions from the REIT, which is marketed to high net-worth investors rather than institutional clients like pension funds and insurance firms. Blackstone relies on the REIT for about 17% of its earnings.

Large redemptions have been seen at other such funds, with investment firm Starwood Capital informing investors last week that its $14.6 billion non-traded REIT also had raised the gates.

There has also been a wave of redemptions at other non-traded Blackstone funds marketed to high net-worth investors. The private equity firm disclosed earlier this week that its $50 billion non-traded business development company, a provider of corporate credit, had reached its pre-set limit on redemptions, though no withdrawals were restricted.

Schwarzman told the Goldman Sachs (NYSE:GS) financial services conference that individual investors were hit particularly hard by a liquidity crunch in Asia, as the Hang Seng Index nosedived and many also had to cover positions they amassed with debt, causing financial distress.

“If you are an investor who’s got margin debt and your market goes down 40%, you can imagine what it was like to be one of those individuals … As the world is busy shrinking, people get scared,” Schwarzman said. He added the redemptions did not mean the investors were not happy with the REIT and its profits.

Blackstone has reported a 9.3% year-to-date return for its REIT, net of fees, a contrast to the publicly traded Dow Jones U.S. Select REIT Total Return Index 22.19% decline over the same period.

Schwarzman said the REIT’s returns were due to its portfolio of warehouses and apartment buildings in the southern and western United States which were supported by strong population growth and short leases that offer more opportunities to adjust prices for inflation. He added the fund had also generated $5 billion of profit from interest rate hedges struck ahead of the Federal Reserve’s rate hiking cycle.

“If the interest rates go down, the value of all the real estate will be worth much more. So we’re actually rooting for that,” Schwarzman said.

REITs backed by asset managers including Blackstone, Starwood, Ares Management (NYSE:ARES) Corp, KKR & Co (NYSE:KKR) Inc, and Brookfield, saw an uptick in redemption requests in the first nine months of the year, according to data compiled by real estate-focused advisory firm Robert A. Stanger & Company, Inc.

“When there’s more confidence, whether it’s when the Fed stops raising interest rates or some other triggering event, then they’ll put money in these type of products if they perform,” Schwarzman said.