Surprised by Blackstone's limit on REIT withdrawals? Advisors shouldn't be

If advisors who directed clients to put money into Blackstone's real estate investment trust were doing their jobs, then the firm's decision to limit withdrawals shouldn't have come as a surprise.

Blackstone, a global investment firm, was always upfront that it wouldn't let investors collectively remove more than 2% of the funds held in its real estate investment trust in a single month or 5% in a given quarter. Rich Kahler, the founder of Rapid City, South Dakota-based Kahler Financial Group, said it was advisors' job to make sure clients were aware of those limits before they put their money into the Blackstone REIT, commonly known as BREIT.

So Blackstone's recent announcement that it would curb withdrawals after faster-than-usual pullouts in October and November should have been anything but shocking, said Kahler.

"It really behooves the advisor to explain that to them going in," Kahler said. 

Investors' withdrawal of $1.8 billion from BREIT in October — equivalent to 2.7% of the $69 billion fund's net-asset value — prompted Blackstone to announce in a Dec. 2 letter to shareholders that it would restrict further redemptions. Investors then pulled $1.3 billion in November, roughly 2% of the total fund. That left only 0.3% for investors to take out in December under the fund's 5%-per-quarter limit.

Another prominent non-traded REIT, the Starwood Real Estate Income Trust, has since announced that it too limited withdraws in November after it received requests that month equal to 3.2% of its $15 billion in net assets. Like BREIT, the Starwood REIT has a 2% monthly and 5% quarterly withdrawal limit.

BREIT and the Starwood REIT are of particular interest because they are the first and second largest non-publicly traded REIT now offered to U.S. investors. Unlike REITs listed on public exchanges, non-traded REITs are usually sold directly through financial advisors. Both public and private REITs are often touted as a means of giving investors a way of diversifying their portfolios with a wide variety of real estate, including apartments, office buildings and distribution centers. BREIT is primarily invested in multi-family housing and warehouse property, much of it in the South. 

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Despite the outflows, BREIT has produced strong returns even as publicly traded REITs have, like most exchange-traded assets, tumbled in value. BREIT's annual returns have averaged 13% since the fund's inception in 2017, and its year-to-date return is 9.3%. Blackstone has said its withdrawal limits are designed to prevent forced sales of its property assets.

In a statement, the firm said BREIT "was built on performance, not fund flows, and performance is rock solid."

Non-traded REITs have attracted heightened attention from regulators in recent years over complaints that they charge high fees, offer investors little transparency into their holdings and remain too hard to get money out of. 

Blackstone's announcement about withdrawal limits has not gone unnoticed. Bill Beatty, the chairman of the North American Securities Administrators Association's Corporation Finance Committee and Securities Administrator, said in an emailed statement: "We are always concerned when investors who may need to liquidate their holdings find themselves unable to do so."

NASAA — which represents state and provincial regulators in the U.S., Canada and Mexico — is considering a proposed statement of policy that, among other things, would increase the net income and net worth thresholds used to determine who can invest in non-traded REITS. The agency currently recommends that investors be barred from putting money into non-traded REITs unless they have both a net income and net worth of at least $70,000; or a total net worth of at least $250,000. NASAA, which is still considering revisions to its proposal after receiving dozens of responses during a public-comment period, wants those thresholds raised to $95,000 and $340,000.

Advocates of non-traded REITs argue their industry doesn't need further regulation. They say recent innovations, particularly the introduction of a new type of REIT knowns as a net-asset value REITs, have alleviated many of these concerns. Older types of non-traded REITs tended to be illiquid because they allowed investors to get their money out only when their property holdings were sold. The newer NAV REITs like BREIT are instead valued by looking at assessments and comparable sales data and come with guarantees that investors can get their money out at set times of the year.

Kahler said he had steered clients away from non-traded REITs, mainly because he thought their customer fees were too high. The Securities and Exchange Commission has warned these can range as high as 15% of an investment in a fund, "which lowers the value and return of your investment and leaves less money for the REIT to invest," although fees vary from one REIT to the next.

After expressing his doubts in a blog post, Kahler heard from representatives of JLL Income Property Trust, a non-traded REIT based in Chicago, who invited him to investigate their product a bit more rather than dismiss it outright. He spent nearly three years doing due diligence before concluding the JLL REIT was a solid investment. He now recommends it as part of a portfolio of alternative investments to clients who are looking beyond stocks and bonds.

The fact that the JLL REIT has risen in value this year — 21.6% by Sept. 30 —while most other investments have tanked has him "looking like a hero," Kahler said. He said he hasn't looked specifically into the Blackstone REIT but that he "doesn't doubt" there are at least half a dozen solid non-traded REITs in existence today. Advisors just have to be really careful to suss out the good bets from the bad ones before recommending anything to a client, he said.

Others see Blackstone's ability to meet the surge of withdrawal requests in October and November as a proof of the fund's solidity. Investors should not overlook the fact that Blackstone was able to provide more than $2 billion to investors over the course of two months, said Kevin Gannon, the chairman and CEO of the Shrewsbury, New Jersey investment-banking firm Robert A. Stanger & Co. That performance, said Gannon — whose firm produces reports on the performance of REITs — shows non-traded REITs are no longer necessarily the illiquid money traps of the past. 

"To me, we should be applauding this," Gannon said. "They've been able to provide a monstrous level of liquidity from something that's often criticized as a non-liquid product."

Gannon noted that Blackstone has agreed to sell its nearly 50% stake in the MGM Grand Las Vegas and Mandalay Bay casinos for $5.5 billion, part of which could be used to cover withdrawal requests.

An investor FAQ from Blackstone notes that 70% of the withdrawals are coming from overseas, in particular from Asia. Gannon speculated that investors who had seen their stock and bond holdings plummet in value over the past year might be looking for cash to shore up their portfolios.

"It's the end of the year, and people are thinking, 'I need to reshuffle some things,'" Gannon said. "That's probably what's going on here."

- This article has been updated with details on the Starwood Real Estate Income Trust's limits on withdrawals.