Global real estate giant Blackstone Group reported a sharp drop in fourth-quarter transactions but said it expects economic challenges to be short-lived and that it anticipates future growth.
The market was the most testing it's been since the financial crisis of 2007-2008, said Chairman and CEO Stephen Schwarzman on the company’s fourth-quarter earnings call Thursday. Challenges have included rapidly rising borrowing costs, the highest inflation in a generation and stock market indices down as much as 37%.
Blackstone reported slower investor capital inflows into its real estate funds in the fourth quarter and an even steeper drop in the deployment of cash to buy real estate.
Nowhere were the challenges more evident than in Blackstone’s largest real estate fund, Blackstone Real Estate Income Trust, which held $118 billion in real estate investments as of Nov. 30.
Blackstone REIT saw a surge of investors wanting to cash out of the fund in the fourth quarter. Those redemptions were beyond a quarterly limit of 5% of net asset value, so the fund had to begin limiting requests. While it met redemption calls in the third quarter, Blackstone REIT, known as BREIT, allowed investors to withdraw only $1.3 billion in November. That represented about 43% of the redemption requests it received.
However, by the end of the quarter, Blackstone reported that the University of California’s public pension fund agreed to invest $4 billion. This week, UC Investments upped that amount by another $500 million.
Schwarzman predicted the trend of investor cash-outs won’t last.
“Moderate net outflows in the quarter of approximately $800 million was as one would expect,” Schwarzman said. “We believe we’re seeing a temporary decline and otherwise very positive long-term growth trajectory. I’m frankly quite surprised by the intense external focus on the flows for BREIT at a time of cyclical lows in stock and bond markets. For those of us who build and create businesses, what’s going on is highly predictable. It should be expected that flows from high-net-worth individuals would decline to nearly all types of new investments in this environment.”
UC Investments approached Blackstone after reading news accounts of the redemption calls in November, according to Schwarzman. The decision to invest was based on the belief that Blackstone REIT has one of the best-positioned real estate portfolios in the United States, he said.
“This investment provides theory and substantial additional firepower and flexibility and represents a powerful affirmation of the portfolio and its performance,” Schwarzman said.
Focus on Logistics
Companywide, Blackstone ended the year with $187 billion in cash, up $5 billion from the previous quarter. Chief Operating Officer Jonathan Gray highlighted where the firm is focusing its real estate investments.
“Given our concerns around rising interest rates and inflation, we concentrated over 80% of our current real estate portfolio in sectors where strong cash flow growth could help offset these headwinds, including logistics, rental housing, life science office, hotels and data centers,” Gray said on the call.
Logistics is the largest exposure across Blackstone, comprising approximately 40% of its entire real estate portfolio. Fundamentals globally have remained extraordinarily strong in recent months with increases in rents as expiring leases roll over, Gray said. At the same time, construction starts for warehouses, along with most types of real estate, are now falling sharply, which is further improving fundamentals for existing properties.
“Of course, these exceptional fundamentals do not apply everywhere,” Gray added. “In traditional U.S. office, for example, secular challenges have been exacerbated in a post-pandemic world. We’ve written down the equity value of traditional U.S. office assets dramatically since 2018. And fortunately, such assets represent only 2% of our global real estate portfolio versus approximately 50% 15 years ago.”
In its consolidated results, Blackstone reported net income of $743 million for the quarter and $2.99 billion for the year. That compares to net income of $2.94 billion for the year-ago quarter and $12.4 billion for 2021.
Total assets under management increased to $974.7 billion, up 11% year over year, with $43.1 billion of investor capital obtained in the quarter and $226 billion for the year. Real estate accounted for $14.2 billion of the investor inflows for the quarter and $90.2 billion for the year.
Blackstone deployed $3.7 billion for real estate investments in the fourth quarter and $47.9 billion for the year.