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Real estate problems drag down Blackstone’s profits – The Real Deal


Comparing BREIT to a great restaurant, Blackstone’s Jonathan Gray said, “There are not quite as many people showing up right now but the food is still really good.” (Blackstone, Getty)

The value of Blackstone’s real estate portfolio dropped in the fourth quarter, hurting profits as rising rates dragged down the investment giant’s asset values.

Meanwhile, the firm struggled to keep recession-spooked investors from yanking funds from its real estate income trust, BREIT. Executives said they were still sorting through a backlog of redemption requests but couldn’t put a finger on when the outflows would abate.

The firm’s fourth-quarter performance stood in stark contrast to its earnings a year ago when the appreciation of real estate investments fueled “the most remarkable results” in Blackstone’s history, CEO Stephen Schwarzman said at the time.

In the last quarter of 2022, the company’s Core+ and opportunistic real estate ventures depreciated by 1.5 percent and 2 percent, respectively. The year prior they had grown by 7.2 percent and 12 percent.

The declines stemmed from cap rate expansion as financing got more expensive, said COO Jonathan Gray.

That depreciation delivered a hit to net income. The firm reported profits of $558 million or 75 cents per share in the quarter, a 60 percent decline from $1.4 billion or $1.92 per share in the last quarter of 2021.

The firm is still working through withdrawal requests filed in November and December by investors who lost faith in BREIT.

A semi-liquid product, BREIT limits cash-outs to 2 percent of the fund’s net asset value each month and 5 percent for each quarter, according to Bloomberg. In June, BREIT redemption requests reached 1.96 percent.

Executives expected that the firm’s withdrawal caps would drive more redemptions in January, the start of a new quarter.

“We think, over time, we’ll be able to work down his backlog,” said Gray. “Predicting the timing of that is not easy.”

The C-suite, though, insisted that the uptick in outflows was to be expected during a market downturn.

“I’m frankly quite surprised by the intense external focus on the flows for BREIT at a time of cyclical lows in the stock and bond markets,” Schwarzman said during opening remarks on the firm’s earnings call Thursday.

Instead, he tried to turn attention to the trust’s long-term performance.

The CEO said BREIT had delivered 12.5 percent net returns annually since its inception six years ago, three times better than the MSCI REIT index. In 2022, the public REIT index plummeted by nearly 25 percent versus just 1.5 percent for BREIT.

Gray compared BREIT to a great restaurant experiencing a slump in demand.

“There are not quite as many people showing up right now but the food is still really good,” Gray said. “We think as the world reverts, as we work through the backlog of redemptions, we will see flows return.”

The firm pointed to the University of California’s $4 billion investment in BREIT this month as a sign of strength, adding that the school system then committed another $500 million to the trust.

Although UC Investments is locked into the deal for six years, the commitment has been targeted by activists.

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