Under Pressure: BREIT Redemptions Rise Again

When you hear the phrase non-traded REIT ("NTR"), most investors basically think of Blackstone's REIT ("BREIT"). BREIT is a $69 billion behemoth that makes up approximately 70% of the NTR market. Launched in 2015 and marketed to mostly high-net-worth ("HNW") individuals, BREIT contributes a whopping 17% to Blackstone's earnings (even though it makes up approximately 7% of its $991bn of AUM). 

It's popularity is not surprising, BREIT has generated 11.8% annualized net return and provided a 4.5% net yield. But Blackstone's crown jewel seems to be a victim of its own success...

NTRs invest in the largely the same types of stabilized commercial real estate properties that publicly traded REITs do. The crucial difference--as the name states--is that they are not traded on exchanges and have strict liquidity provisions that limit redemptions to 2% and 5% of net asset value ("NAV") per month and quarter, respectively. Which means they exhibit only a fraction of the volatility of public REITs, whose value tends to be driven as much, if not more, by market beta as real estate fundamentals. In 2022, REITs were down over 24%. By contrast, BREIT (Class I) was up 8.4%. Quite a bit of alpha? Or subjective marking of assets? Many investors felt the latter and saw an opportunity for a potential arbitrage--take profits by selling BREIT and invest the proceeds in beaten down public REITs.

As a consequence, BREIT has been facing massive redemption requests for the better part of three quarters. Chart A below shows monthly redemption requests and payouts by BREIT since October. There has been over $12 billion of redemption requests since 3Q22 and over $9 billion of payouts to investors. (Things were getting really desperate at one point before the University of California endowment stepped in with a $4 billion (structured) investment). However, after the first couple of months, BREIT's payout rate per month has fallen sharply and redemption requests (after pausing in December) have been steadily rising again.

Source: Reuters, Barron's, Mantabye

When redemption requests exceed the monthly and quarterly payout limits (2% and 5%, respectively), investor capital is returned on a pro rata basis and individuals need to keep resubmitting requests for the balance of their funds. We can back into new and existing (repeat) requests per month as shown in Chart B. What we see is that BREIT has paid out ~$6 billion in 2023 so far, but over the same period new requests to redeem capital has totaled over $5.4 billion.  Which means BREIT is barely staying ahead of new redemption requests. And since it has already provided liquidity close to 4% of NAV for the first two months of 2Q23, it can only provide about $900 million of liquidity in June, whereas the average redemption request rate is something like $1.5 billion per month, likely putting it further into the hole.

As of now, it is taking investors 8+ months to fully get their money out of BREIT. Many, if not most, thought they could get their money out in a month! To be fair, Blackstone's documents clearly state BREIT's liquidity provisions (that are designed to mitigate the type of forced selling common in public markets). Yeah, but who reads the prospectus? That's boring...and for nerds. People believed BREIT was the best of both worlds: access to the industry's premier private real estate platform with the liquidity (or almost) of public funds. And Blackstone was more than happy to let them believe. Well, now investors are unhappy and Blackstone stock is down 26% from last June. 

Oh, as for that deal with the University of California, it guarantees UC a 11.25% return per year with the difference to made up by Blackstone. YTD (through April) BREIT is down 0.33%. That's potentially $450 million less bonuses for Blackstone partners this year.