Trigger Warning: We Reproduce an Article on Blackstone-BREIT

As blog readers who read our previous post will know, some anonymous critic is very upset about our coverage of the Regents' oversight of the chief investment officer. We noted in prior posts that a total of $4.5 billion was invested under unusual circumstances in Blackstone's real estate investment trust (BREIT) and that when the Regents' Investments Committee discussed the matter, all the questioning was about BREIT's landlord-tenant relations and no one raised any issues of risk - despite the fiduciary duties that the Regents should be performing toward the pension fund and the endowment. 

Some anonymous critic went combing through back posts of this blog to find something to object to and found a 2018 reproduction of an article, published in an investment newsletter and reproduced by an email clipping service of UC's own Office of the President (UCOP). He/she/then got a warning put on the 2018 posting.

Are we alone in wondering about BREIT as an investment choice - particularly after it needed a UC bailout to deal with a run on the bank? Apparently not. Here's a piece about BREIT published by Barrons - not exactly a scandal sheet - just yesterday: 

Blackstone Real Estate Income Trust, known as Breit, had a negative return of 0.2% in January, badly lagging publicly traded real estate investment trusts, which showed gains of about 10% in the month. This marks a change from the situation in 2022 when the $71 billion Blackstone Real Estate Income Trust was up 8.4% based on its largest share class, while comparable public REITs in the apartment and warehouse sector were down around 30%.

The January performance supports the argument that Breit was overvalued relative to public-market peers. Breit reports its performance monthly and the January figures were reported recently. BREIT had negative returns of 0.7% in the fourth quarter. In a statement, Blackstone said: “BREIT’s monthly return in January was 0.7% before the short-term impact of lower interest rates on the hedges that protect our investors.”

Blackstone said its “valuation multiples have been adjusted to reflect the higher rate environment” and that it “has sold more than $6 billion of property since 2022 at a premium to our carrying values.” Those sales represented about 5% of Breit’s total assets of $125 billion. BREIT had substantial debt of $65 billion at the end of 2022. The firm stated that “[public REITs] have enormous volatility often uncorrelated with underlying real estate values.”

Breit, which tracks the private market in real estate, has been less volatile than public REITs. Breit has had just five months of negative total returns in its six-year history. It has been a tumultuous several months for Breit, a nontraded REIT whose shares don’t change hands on an exchange. Like mutual funds, Breit meets redemption with its cash. That limited liquidity is a drawback, however, because Breit caps redemptions to avoid forced asset sales and protect its investor base.

In early December, Breit capped monthly withdrawals after investor redemption requests exceeded a 2% monthly limit of the fund’s net asset value in November. There also were redemption limits imposed in December and January. There were $5.3 billion of redemption requests in January and Breit met just 25% of them. Breit caps monthly redemptions at 2% of its net asset value and 5% in a quarter. Blackstone said that “repurchase requests in February are trending significantly lower than they were in January at this point in the month.“

In January, Breit got a boost and vote of confidence when UC Investments, a big pension and investment fund for the University of California, agreed to buy $4 billion of BREIT, an investment that was later boosted to $4.5 billion. The California fund got a favorable deal because Blackstone guaranteed a minimum return by pledging $1.1 billion of Breit stock over a holding period averaging six years to support a targeted annualized minimum return of at least 11.25%.

The UC Investments deal eased concerns about Breit’s outlook and helped lift Blackstone stock (ticker BX), which is up 27% this year to $94.44, topping those of most of its rivals. The stock dipped as low as $72 in late December. If UC Investments instead had put its money into a REIT index fund on Jan. 1, it would be up nearly $350 million in 45 days and wouldn’t be effectively locked up for about six years. When it made the investment, UC Investments said: “We consider BREIT to be one of the best positioned, large-scale real estate portfolios in the U.S., managed by one of the world’s top real estate investors.” 

Barron’s has written critically about Breit, arguing that comparable public REITs like apartment owners Mid-America Apartment Communities... and AvalonBay Communities..., or warehouse operator Prologis... are better bets. They have lower fees, less leverage, and greater liquidity than Breit. Blackstone has pointed to the strong performance of Breit, which has returned 13.3% a year over its six-year history, above REIT benchmarks. The Vanguard Real Estate  exchange-traded fund... which has broad ownership of REIT shares, has returned about 9% annually since the end of 2016. Blackstone also highlights its strong sector selection with Breit holding about 80% of its assets in apartment complexes and warehouses, which have performed better than such areas as office buildings. Breit’s same-property net operating income was up 13% in 2022.

Source: https://www.barrons.com/articles/breit-blackstone-january-return-b3c6ee8b.

We hope our anonymous critic wasn't too triggered by the above piece or found a safe space in which to read it. We thank him/her/them for triggering us to return to the BREIT affair. Without the reminder, we might never have found the Barrons article.