Blackstone says redemptions from REIT driven by market volatility

NEW YORK - Blackstone 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 discontent with the fund.

Since December 1, Blackstone shares have lost 15% of their value after the New York-based firm disclosed that it had 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.

The large redemptions have been seen at other such funds, with Starwood Capital telling investors last week that its $14.6 billion non-traded REIT has also raised the gates.

There has been a wave of redemptions at other non-traded Blackstone funds marketed to high net-worth investors. The private equity firm revealed earlier this week that it had reached its pre-set limit on redemptions, though no withdrawals were restricted.

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

If you are an investor who has a lot of 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 said that the investors were not happy with the REIT and its profits because of the redemptions.

Blackstone reported a 9.3% return on its REIT, net of fees, a contrast to the publicly traded Dow Jones U.S. The REIT Total Return Index 22.19% declined over the same period.

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

Schwarzman said that we're rooting for that.

According to the data compiled by real estate-focused advisory firm Robert A. Stanger Company, Inc., REITs backed by asset managers such as Blackstone, Starwood, Ares Management Corp., KKR Co Inc. and Brookfield saw an increase in redemption requests in the first nine months of the year.

When the Fed stops raising interest rates or some other triggering event, they'll put money into these types of products if they perform, Schwarzman said.