Hernandez Approaches the Right Question on Blackstone-REIT

As blog readers will know, we have been catching up with the Regents' March meetings. Normally, we would take the second day (March 16) meeting as a whole and discuss it. But as blog readers will also know, we have been tracking the brouhaha raised by UC's investment in the Blackstone Real Estate Investment Trust (BREIT).

The Investment Committee of the Regents met on the second day. Apart from the usual reviews of what had occurred recently and then over the three years since the pandemic first arrived, there was more discussion of the BREIT matter. The meeting edged into the BREIT matter with Chief Investment Officer Bachher saying real estate was a good hedge against inflation since property values and rents would rise.

To recap on earlier developments, UC had a $2 billion investment in BREIT. As Bachher told it, he happened to hear that BREIT was experiencing a run on the bank. (BREIT - unlike commercial banks - can limit withdrawals - which is what it was doing.) Bachher talked to the CEO of BREIT and offered an additional investment of $4 billion, later raised to $4.5 billion, as a kind of confidence-building bailout. In exchange, UC got a "guaranteed" 11.25% return for a locked-in long-term investment. 

So, the question now is how much of a guarantee Blackstone can really offer since it isn't earning 11.25%. (Presumably, to give UC more than it is earning means taking away something from other investors - who might be unhappy about the deal.) In short, there is a potential financial and legal risk. And the Regents, as fiduciaries with regard to the pension and endowment funds, need to be asking about the risk-reward entailed. They might also be concerned about the casual way $4.5 billion suddenly got invested in, and locked into, BREIT, at least as Bachher tells the tale.

At the January Regents meeting, all the discussion was about whether BREIT was a good landlord. Tenant groups showed up to complain. PR folks from BREIT said all was well. And the Regents meeting turned into a lovefest for BREIT given the PR assurances. There was no risk-reward discussion. None!*

So what happened this time? There were a lot of contradictions. Bachher - as noted earlier - saw real estate as an inflation hedge. He said he had come to the belief that investing in real estate around UC campuses was always a good deal because campuses generated demand. He showed slides of various properties around UC campuses that he had bought. However, he cannot legally charge lower-than-market rents. And he cannot earmark buildings for students, faculty, and staff; he has to function as a commercial landlord. To the extent that he operates legally, and particularly if he buys existing properties, it is unclear how this activity makes housing more "affordable." (He mentioned that he had bought property around Stanford, but no one seemed to catch it or ask how that could benefit UC students, staff, and faculty.)

Bachher said that by direct investing in property, he cuts out the fees, etc., that would be charged by commercial middle men. But the Blackstone investment is effectively with a commercial middle man. He said BREIT has only 6% of its investments in California, so presumably whatever benefits are said to occur by near-campus investing don't come from Blackstone. 

The complaints about BREIT continued, particularly by Investment Committee "advisor" Kathryn Lybarger, the head of AFSCME Local 3299 at UC. Bachher said his door was always open to hear such discussions. He has been much better than his predecessor, Peter J. Taylor, at disarming critics, and he does bend with the wind on issues such as divestments in fossil fuels, if the wind is strong enough - although always finding some financial rationale for the decision.** However, open door or not, the BREIT deal would be contractually difficult to undo, so it would likely take a hurricane to pull out.

At the tail end of the discussion, Regent Jose Hernandez*** finally asked a question that began to get at the financial/fiduciary wisdom of investing in an entity which is experiencing a run on the bank and then "guarantees" 11.25% to get a bailout. He also noted that BREIT appears to be the type of middle man Bachher said he liked to avoid to hold down costs. Bachher said he would discuss the matter with Hernandez "offline," i.e., in private after the meeting.

You can see the Hernandez question and the response at the link below: [Be sure sound is on.]

Or direct to https://www.youtube.com/watch?v=3NSwZnI8P2I.

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*http://uclafacultyassociation.blogspot.com/2023/02/the-blackstone-matter-lets-have-real.html; http://uclafacultyassociation.blogspot.com/2023/01/more-on-blackstone.html; http://uclafacultyassociation.blogspot.com/2023/01/still-more-on-regents-blackstone.html; http://uclafacultyassociation.blogspot.com/2023/01/more-on-blackstone-lovefest.html; http://uclafacultyassociation.blogspot.com/2023/01/watch-regents-investment-committees.html.

**https://www.youtube.com/watch?v=ZTXbABD-3o4.

***Regent Jose Hernandez is the President and Chief Executive Officer at Tierra Luna Engineering, LLC, an aerospace company. Mr. Hernandez previously served as President of PT Strategies at PT Capital/PT Strategies from 2013 to 2016. Before that, he was the Executive Director of Strategic Operations at MEI Technologies from 2011 to 2012... He was appointed as a Regent in August 2021 by Governor Newsom to a term expiring in 2033.

Source: https://regents.universityofcalifornia.edu/about/members-and-advisors/bios/jose-hernandez.html.