Bosses at two of private real estate’s biggest managers have gone on the defensive amid rising tension over their implementation of redemption limits after a surge in requests from investors in their biggest property vehicles.
Blackstone and Starwood Capital last week implemented proration redemption rules for their private real estate investment trusts, BREIT and SREIT, after investor buyback requests reached their mandated limits of 5 percent of net asset value for the quarter.
Fears among onlookers have arisen over dire prognostications for the performances of both vehicles amid a downturn in the broader real estate industry. The reality for the vehicles, which have almost $85 billion of assets between them, is nuanced however, said Blackstone founder Stephen Schwarzman and Starwood founder Barry Sternlicht last week.
The $69 billion Blackstone Real Estate Investment Trust was closed to redemptions after exceeding its 2 percent NAV cap for October and receiving further requests exceeding the monthly cap for November. The New York-based manager triggered a proration mechanism in line with its 5 percent quarterly limit to prevent a fire sale.
Starwood took action after its Starwood Real Estate Income Trust vehicle, which has $14.6 billion of assets, received redemption requests reaching 3.2 percent of assets in November.
Blackstone’s Schwarzman said he found concerns about what the redemption limit meant for performance “baffling” while on a panel at Goldman Sachs’ industry conference. The firm’s chief operating officer Jon Gray told CNBC meanwhile that “the structure we put in place is operating exactly as we intended six years ago.”
Barry Sternlicht, co-founder and chief executive of Starwood, warned not to compare the situation to financial storms elsewhere. “This isn’t FTX,” he said at NYU Schack Institute’s Real Estate Capital Markets Conference, referring to the cryptocurrency business which filed for bankruptcy in recent weeks. “There’s a huge asset base behind these companies.”
Blackstone averaged $2 billion a month of inflows in 2021. While early signs that this was slowing were acknowledged by the firm during its Q3 earnings call, Q3 net inflows to the vehicle were still $4.2 billion, according to supporting documents. It is estimated that Blackstone has cash reserves of $11 billion.
The New York-based firm has also been active, taking five companies private this year. Deals included the $12.8 billion purchase of American Campus Communities, which used capital from both BREIT and the firm’s private open-end fund Blackstone Property Partners; and the $5.8 billion acquisition of Preferred Apartment Communities, the entirety of which was done using BREIT.
That has meant BREIT now has a net asset value of $69 billion, significantly larger than its next closest peer, Starwood’s SREIT, which has an NAV of $15 billion.
SREIT’s inflows have been similar, despite the size of the fund. While in the third quarter, net inflows were $617.2 million, through September in 2022, Starwood has netted inflows of $4.23 billion.
Performance history
Both have produced strong performances too. SREIT’s top-end performance on its ‘I’ class of shares is 10.2 percent so far this year. BREIT is at 9.3 percent for the year.
However, a closer look at monthly performance data demonstrates a downward trend that could be a reason for increased redemptions. Starwood had its only negative month of the year in October, posting -0.04 percent, but every monthly return since May in SREIT has been under 1 percent after a high of 2.47 percent in March.
BREIT has not posted a negative monthly return through October this year, though there has been a similar trend downwards since May. BREIT in October posted its lowest monthly return of the year at 0.07 percent.
Nonetheless, these performances still far exceed that of NAREIT’s all-REIT index which produced a -20.86 percent return through November this year.
A major driver of both vehicles’ returns this year has been well appointed debt. Sternlicht said both his firm and Blackstone have fixed rates on a lot of the debt in their funds via caps, and the values of those caps are now “worth a fortune.”
Their asset bases have also played a part in retaining value and performance. As other sectors like offices and retail have faltered, both BREIT and SREIT’s compositions have overwhelmingly concentrated in the better performing residential and industrial assets. Both of those property types have, in many cases, seen north of 15 percent rent increases in most markets, offsetting some of the inflationary and interest rate effects on cap rates and debt spreads, Sternlicht said.
The concentration of properties makes the comparison to the more widely exposed public REIT index more difficult to square on the face of it, Sternlicht continued.
He also highlighted how the private REIT share price is much closer to the value of the underlying real estate than public REITs which often trade at large discounts or premiums to the property value because of factors outside of the real estate market.
That means when redemption runs happen, properties will likely have to be sold to fulfill requests. Blackstone, for example, already sold its 49.9 percent stake in two Las Vegas Hotels held a joint venture with manager VICI over to its partner. The firm recouped approximately $1.27 billion from the sale.
Redemption limits help soften the need to sell properties immediately. “We’re not a hedge fund,” Sternlicht said. “We can’t liquidate properties overnight.”
In Blackstone’s case specifically, many reports found that 70 percent of the capital redeemed from BREIT come from Asia. Schwarzman associated BREIT’s run on poor performance in Hong Kong’s Hang Seng index.
“If you are an investor who has got margin debt and your market goes down 40 percent, you can imagine what it was like to be one of those into the pools,” Schwarzman said. “You’re under excruciating financial pressure, and so they were just looking for liquidity.”
Gray expounded, defending the mandated actions for the broader set of global investors. “We set up the product with limitations on liquidity. We described it as semi-liquid because we knew at some point there would be a period of volatility and we didn’t want to sell assets at the wrong time under pressure.”
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