The Regents' Investments Committee met yesterday afternoon, the opening session of the set of Regents meetings that continues today and tomorrow. As always, we capture the recording of that session for indefinite storage since the Regents, for no good reason, delete their recordings after one year. We have been highlighting the issue of the Blackstone investment in prior postings and those who have been following the story will not be surprised that there was considerable public comment at the beginning of the session devoted to it.
The comments focused on Blackstone as a landlord in raising rents and other complaints. We'll come back to those complaints below. Other issues raised were climate warming, hiring of DACA students, pay increases for nonunion UC employees, the Hawaiian telescope, divestment from the "war machine," and abolition of the Regents. There were other complaints about landlord issues of another firm, the CIM Group.
The Blackstone complaints were organized by a group known as the Alliance of Californians for Community Empowerment, ACCE (pronounced by participants as "essee"). Those speaking were tenants telling individual stories of their landlord problems. In the actual discussion that took place about Blackstone by the Regents, Kathryn Lybarger, president of AFSCME local 3299, speaking as an "advisor" to the committee, reiterated those landlord complaints.
Chief Investment Officer Jagdeep Bachhar began his presentation with the standard review of recent returns to the portfolio of the various funds managed by his office. Not surprisingly, he focused on the long-term which, of course, looks much better than recent results. He emphasized that his office has to focus on long-term returns for the pension of 6.75% per annum and 8 to 9% for the endowment, the targets set by the Regents. Reiterating those goals allowed him to segue into the Blackstone issue.
He noted that the 11.25% deal with Blackstone would help achieve those goals, given the lower recent performance of other assets. Bachhar again told the story that has appeared in the financial news media of just happening to hear about Blackstone's financial problems - essentially a run on the bank - and offering Blackstone the $4 billion in exchange for an 11.25% return.
Regent Leib, chair of the Board, then raised the landlord issue from public comments, of Blackstone and CIM, saying UC - as a public institution - had to be concerned with that issue. Bachhar said that the specific CIM buildings described in public comments did not involve UC. No one asked for clarification as to what that statement meant. Bachhar also said that UC's investment with Blackstone in certain buildings in San Diego, Leib's home area, amounted to only $3 million. It wasn't clear what that statement meant. Did it mean some kind of proportion of the $4 billion recently invested by UC? Investments in a real estate investment trust are not broken down building-by-building. But again, no one asked for a clarification.
It is important to note that all the discussion focused on landlord issues that and none of the discussion focused on the financial side of the transaction, the issues which we have previously raised. The financial side involves the risk-return trade-off involved. No one these days gets a guaranteed return of 11.25%. As we have noted, the closest thing there is to a guaranteed return, US Treasury securities even with the political risk from Congress over the debt ceiling, is nowhere near 11.25%. You don't get 11.25% without assuming risk. The day before the Investment Committee met, the financial news media was still reporting on the problems facing Blackstone. From Pensions & Investments of January 16:
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...
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.
Full story at https://www.pionline.com/real-estate/blackstones-breit-and-other-real-estate-funds-curb-investor-redemptions.
What this story suggests is that there is perceived risk by investors in funds such as Blackstone's. Bachhar said that in his view the risk was perceived rather than actual. And - we have to reiterate - no one asked any questions about that view.
Bachhar, as it turned out, had invited representatives of Blackstone who said that the company has a "residents first" policy and that for two years during the pandemic no tenants were evicted. Regent Pérez noted that state law prevented such evictions. On other landlord-tenant complaints, the Blackstone representatives said some recently-acquired properties had been in bad shape and were now being fixed, i.e., someone else had been the bad landlord and now Blackstone was doing the repair work as a good landlord.
Except for the Lybarger comments, the session then diverted into a discussion of how the problem of affordability of housing in California could be solved by adding supply. The Blackstone people characterized the $4 billion as a contribution to added supply. The session then diverted further to a discussion that had occurred at the November meeting of the committee as to whether pension and endowment funds could be used to build UC-related affordable housing and dorms. Back in November, the answer seemed to be that due to fiduciary responsibilities, UC's real estate investments couldn't be made in buildings that were not open to the general public and could not involve below-market rents. That is, as far as pension and endowment funds were concerned, UC had to operate as a commercial landlord. (UC, of course, can use state funds or other funds to build dorms or acquire properties for students and employees with below-market rents.)
Despite the November discussion, in response to a comment by Regent Hernandez, Bachhar suddenly offered to come back to the next committee meeting with a proposal to create a limited liability corporation that would do all the things that were said to be forbidden in November. And, beyond that, Bachhar would provide $1 billion in investment money for the new corporation. Blackstone would assist in some vague way in this endeavor. The Blackstone folks were no longer the bad guys; they were the good guys. No one was present from the general counsel's office to suggest any impediments to this plan for the next meeting or the new corporation. Whether there had been any discussion on the legalities prior to the session with the general counsel is unknown.
In short, what started as a potentially tense confrontation ended in a lovefest. Did all of this happy ending just happen? Or was there an element of scripting in what occurred, similar to what goes on in "reality" TV? Yours truly will leave it to you, dear blog reader, to judge. But he will say that he did have a sense that he was watching the Hallmark channel.
The session closed with a presentation on how UC's investment office was promoting diversity in its personnel.
You can see the entire session at the link below. The Blackstone discussion occurs at the beginning in public comments and within the committee starting at hour 1, minute 30, and runs for about 45 minutes.
https://archive.org/details/investments-committee-1-17-23.
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https://ia804704.us.archive.org/3/items/new-year-outlook/lovefest.mp3
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