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Blackstone’s BREIT, the UC System’s New Investment Darling, Faces Scrutiny

Everybody likes to talk about Blackstone, especially when it’s less-than-positive news about the world’s largest private REIT. This was the case with the release of Blackstone’s first quarter 2023 earnings report. The REIT’s Class 1 shares recorded a negative net return of 0.5 percent, belying the fact that BREIT has yielded an annual 12 percent net returns since its establishment as a REIT in 2017. It turns out, no one is impervious to the consequences of economic uncertainty and market turmoil. Excluding the $4.5 billion commitment from the University of California System, Blackstone reported $1 billion in capital raised in its non-listed BREIT in the first quarter of 2023, which is down compared to $2 billion of inflows in the fourth quarter of 2022.  When the big kid on the block logs lackluster numbers, everyone wants to know why.  

BREIT, which predominantly invests in stabilized income-generating commercial real estate across the United States, has come a long way in a short time. While one might assume a gargantuan player like BREIT would be limited to institutional investors, such is not the case. BREIT only requires a minimum initial investment of just $2,500, and its suitability standards call for an investor to have a minimum net worth of $250,000 or a gross annual income of at least $70,000. After an offering of up to $5 billion in shares of common stock in 2016, by the close of 2018 (a year after the company had elected to be taxed as a REIT) the publicly registered non-listed REIT had raked in net proceeds of $3 billion. Fast-forward to today and BREIT has raised proceeds totaling $10.3 billion from shares issued in the primary offering, and the company is offering up to $60 billion in shares of common stock on a continuous basis. 

In terms of assets, BREIT has made smart moves to protect its holdings in anticipation of the upswing in interest rates, having locked in low fixed-rate debt for the next 6 years on approximately 90 percent of its liabilities. The company’s portfolio, the net value of which totaled $71.9 billion at the close of the first quarter of 2023, is indicative of the fact that when BREIT buys, it buys big. One of its first acquisitions was the $1.8 billion purchase of the 22 million-square-foot Canyon Industrial Portfolio in 2018. In 2021, the REIT bolstered its residential rental footprint with the acquisition of Home Partners in a $6 billion transaction. BREIT’s asset holdings are dominated by residential rental investments, which account for 56 percent of its portfolio. It’s careful of the property types it invests in, as well as the locations. BREIT sticks with high-performing markets, focusing on the Southern and Western U.S., with large concentrations in Florida and Texas.

“Now more than ever, where you invest matters,” a Blackstone spokesperson told Propmodo.  It’s an oft-use refrain by Blackstone. During the alternative investment manager’s first quarter 2023 earnings call on April 20, Jon Gray, President & Chief Operating Officer of Blackstone, said it again. Where you invest matters. The spokesperson added, “Fundamentals in BREIT’s portfolio remain robust. BREIT generated 9 percent estimated cash flow growth in the first quarter because our assets are concentrated in the best performing markets and sectors.” After rental housing, which comprises 56 percent of its portfolio, industrial is the next largest sector at twenty six percent of its allocation. The rest of the assets are a long tail of net leases, data centers, hospitality, self storage, retail, and office. 

During the earnings call, Blackstone also had something to say about the endless buzz about BREIT. Much of the “talk” about the REIT began in December 2022, when BREIT announced it would cap redemptions after the total amount of requested withdrawals exceeded its designated monthly limit in October 2022 and surpassed its quarterly ceiling. April marked the fifth consecutive month of limitations on investor redemptions.

Addressing the redemptions, Blackstone noted that it expects investors to remain cautious, but that the issue will likely settle down once market volatility tempers and after the REIT can bolster investors’ confidence with consecutive months of positive performance. The outcry about BREIT’s lower inflows, however, elicited an even more transparent response from the company. “I’m frankly quite surprised by the intense external focus on the flows for BREIT at a time of cyclical lows in stock and bond markets,” Steve Schwarzman, Chairman & CEO of Blackstone, said during the earnings call. “What’s going on is highly predictable. It should be expected that flows from high-net-worth individuals would decline for nearly all types of new investments in this environment.”BREIT’s lower-performing quarter proves no one is too big or too successful to suffer the consequences of economic volatility. As the REIT patiently waits for investors to return to digging deeper in their pockets, it continues to carefully deploy its ample funds. And the months to come will tell if shy investors will be positively influenced by the UC System’s decision to acquire an additional $500 million in BREIT common shares, just weeks after announcing its $4 billion investment in the REIT.

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