Blackstone REIT Still Draining - Part 12

As blog readers will know, from time to time we have raised questions about the Blackstone Real Estate Investment Trust, UC's chief investment officer put $4.5 billion as a kind of bailout as the BREIT was experiencing a slow-motion run on the bank. In exchange, we got a "guaranteed" 11.25% return, presumably at the expense of other BREIT investors. 

Usually, high returns come with risk, but there was very little questioning about this investment by the Regents, other than whether BREIT was a nice landlord. (BREIT's PR team testified at a Regents meeting that it was nice.) But now comes word that a year later, month by month, the slow motion run continued, i.e., there were more requests for withdrawals than the BREIT would permit:

BREIT’s returns fell short of the 5% annual gain threshold that enables the firm to take a share of profits, Bloomberg reports. For the first time, the trust missed the target to earn carried interest, which incentivizes deal-makers and rewards them for generating returns.

At one point, the nontraded REIT catering to affluent investors sat on $70B in value. It was a favorite of financial advisers and individual investors alike as it bet big on favored property sectors.

But the trust took a hit in December, posting a 1.2% loss due to hedges that dropped in value when borrowing rates declined in late 2023, according to Bloomberg. Blackstone deployed interest rate hedges to ease the pain from an uptick in borrowing costs...

Last month, the trust received $1.1B in redemption requests, down 41% from November and 80% from the redemption peak in January 2023. BREIT began limiting redemptions in late 2022 and kept those limits in place in 2023. 

Full story at https://www.bisnow.com/national/news/commercial-real-estate/breit-records-worst-annual-return-in-its-history-122438.

As we have said umpteen times, the issue is not whether or not eventually it will turn out that UC made money on the deal. The question concerns the methodology by which the risk-return trade-off was made and whether the set-up for making such evaluation is prudent. It appears that the "methodology" was that the chief investment officer heard about the run and, on his own motion, decided to put billions into BREIT after a chat with BREIT's CEO.