Blackstone's BREIT and other funds curb investor redemptions

While open-end real estate fund managers are very publicly dealing with a flood of redemption requests from retail investors, clients of institutional funds are more quietly seeking to get their money out to take gains in advance of more potential write-downs or to rebalance their portfolios.

Managers of private REITs — a type of real estate open-end fund —have been struck by increasing redemption requests.

Blackstone Inc. and Starwood Capital Group in December reported putting up gates, meaning they slowed down redemptions to a trickle at the end of last year. And institutional real estate open-end fund managers are also being hit by an increasing number of redemption requests, industry insiders said.

Many open-end managers said they started seeing redemption requests in the summer as interest rates started to tick up and real estate investment trusts dropped, with a substantial increase in redemptions in the third quarter of 2022 as interest rates continued ramping up.

Across the universe of open-end funds, it is taking much longer for investors to get their money back, industry insiders said.

Redemptions have been building throughout 2022, said Christy Loop, Atlanta-based senior director at consulting firm Willis Towers Watson PLC.

These days, redemptions from open-end funds can take four to eight quarters, with timelines varying depending on the manager, from a quarter or two in more normal economic times, Ms. Loop said. "It can take longer contingent on the manager's ability to provide capital to investors," she said.

Open-end fund managers have had to put up gates or at least slow down the pace of redemptions and reduce the amount of capital that investors have been able to get back. Managers are doing this to avoid selling their best properties into a falling market in order to satisfy redemption requests.

There's a substantial amount of money on the line. Real estate managers ran a total of $339.4 billion in open-end funds for U.S. tax-exempt institutional investors as of June 30, a 21.5% increase from the year before, Pensions & Investments data show. In addition, $1.5 billion in gross real estate assets were owned by privately held real estate investment trusts as of Sept. 30, roughly 50% less than the $3 billion of the real estate assets of listed and non-listed REITs, data from Nareit, a Washington-based real estate investment trust trade group, show.

"Requests for redemptions have increased across the board whether private REITs or institutional," said Donald Hall, Boston-based managing director, head of research, Americas at Nuveen Real Estate, part of Nuveen LLC. Nuveen Real Estate has $156 billion of assets under management.

However, he added "real estate has done what it was asked it to do and more," providing uncorrelated positive returns when both stocks and bonds were way down.

The NCREIF Fund Index – Open‐end Diversified Core Equity net return was 20.96% for the year ended Sept. 30, outperforming REITs with the FTSE Nareit All Equity REIT index posting -16.27% and the S&P 500 down -15.47% for the same period.

On a quarterly basis, returns were down. The NPI-ODCE index showed a net return of 0.31% for the third quarter, down from 4.54% in the previous quarter and 6.59% in the year-earlier quarter.

Write-downs hit real estate hard in the third quarter, according to a Nov. 30 NCREIF Insight report by Jeffrey D. Fisher, NCREIF senior consultant. More than half the properties in the NCREIF Property index, an unlevered index, were written down, Mr. Fisher said. Real estate hasn't been written down since the third quarter of 2020, he added. (The ODCE index includes some leverage.)

Mr. Hall said that most investors sought redemptions because of the denominator effect, which means that the dropping value of their public markets investments pushed their private capital portfolios including real estate above their target allocations.

"Some investors have pretty strict guidelines" around their allocations, requiring them to take steps to bring their portfolios within their target allocations, Mr. Hall said.

"They can't wait for equities to rebound," he said.

Most of the large open-end real estate fund managers have been managing their redemption requests, despite those demands ramping up in the second and third quarters, he said.

"Frankly, investors will learn which (open-end real estate fund) managers are good at managing liquidity in a distressed time," said Faris Mansour, head of business development in the Americas and EMEA for PGIM Real Estate. PGIM Real Estate had $136 billion in assets under management as of June 30.

That means keeping available credit on hand, managing portfolios so to always have some cash available and managing your assets to keep ahead of loan maturities and end of tenant leases, Mr. Mansour said.

Managing liquidity is critical because "you don't want to sell your best assets," he said. However, typically a portfolio's highest quality assets have the most liquidity, he said.

At the same time, in this kind of market environment, inflows are not as strong and managers cannot rely on new investor capital flowing into their funds as a source of liquidity, Mr. Mansour said.

PGIM Real Estate executives try hard not to gate, which means cutting down the release of investor money to a dribble, Mr. Mansour said.

"When they ask for it (redemptions) we have an obligation, in a prudent way, to make sure investors can get liquidity," Mr. Mansour said. "It's not always as fast as some (investors) would like."

While a small number of investors are seeking redemptions due to a meaningful shift in strategy, such as moving a larger percentage of their real estate portfolios into non-core from core, most investors are seeking liquidity to bring their real estate portfolios within allocation targets, he said.

Within its PGIM's open-end real estate strategies, the vast majority of the redemption requests have been from core and core-plus open-end funds, Mr. Mansour said.

"We do have higher risk, higher returning open-end strategies and we have not seen redemption requests of any consequence" from those funds, he said.

"In this market, putting more risk on the table can actually yield higher returns now," Mr. Mansour said.

And so in a down cycle, the first dollars invested are for opportunistic, more risky strategies, he said.

Blackstone Inc.'s private REIT fund, BREIT, is a core-plus strategy using moderate leverage to invest in logistics, residential, office, life sciences office and retail assets in global gateway cities, according to Blackstone's website.

Blackstone's private REIT, Blackstone Real Estate Income Trust Inc., had effectively slowed redemptions to a trickle in December, with money to be returned to investors down to 0.2% of its $69.5 billion net asset value because the redemption requests were in excess of its limits. It had already cut the amount returned to investors under its policy.

In November, BREIT returned $1.3 billion to investors that asked for redemptions, representing about 43% of the total number of shares, BREIT said in a document filed with the SEC. In October, BREIT fulfilled $1.8 billion in redemption requests, the firm said.

On Jan. 1, BREIT got a large cash infusion in the form of a $4 billion investment in Class I common shares of BREIT from University of California Board of Regents, Oakland. UC Investments manages an $81 billion defined benefit plan and the $18.2 billion endowment of the University of California Board of Regents.

UC Investments' commitment will be locked up until January 2028.

In exchange for not having the ability to get its money back for that period, UC Investments will receive 11.25% minimum annualized net return backed by a $1 billion of Blackstone's current holdings in BREIT.

"We consider BREIT to be one of the best positioned, large-scale real estate portfolios in the U.S., managed by one of the world's top real estate investors," said Jagdeep Bachher, UC Chief Investment Officer in a written statement on BREIT's website.

Blackstone will make up the difference between BREIT's return and 11.25%, up to its $1 billion contribution. Blackstone will be entitled to receive an incremental 5% cash promote payment from UC Investments on any returns received in excess of the specified minimum, in addition to the existing management and incentive fees borne by all holders of Class I shares of BREIT.

"I think the UC/BX (UC Investments and Blackstone) transaction speaks well for both organizations and investors," said Stephen Nesbitt, chief executive officer of consulting firm Cliffwater LLC.

UC gets the real estate portfolio it wants managed by "a leading alternative investment firm" at discounted fees in exchange for giving up some liquidity, Mr. Nesbitt said in an email.

Blackstone's deal with UC Investments gives BREIT $4 billion "of additional equity, which provides increased balance sheet flexibility and meaningful capital during what we believe is an opportune deployment period," Blackstone said in its fact sheet.

BREIT executives indicated that it was not bereft of liquidity, reporting in a Dec. 15 document filed with the SEC that it had "immediate liquidity of $9.3 billion."

Blackstone officials declined comment beyond a news release and other documents on its website.