University of California, Blackstone complete deal on REIT

University of California, Oakland, has entered into a long-term strategic venture with Blackstone under which UC Investments will invest $4 billion in Class I common shares of Blackstone Real Estate Income Trust.

Under the terms of the deal, UC Investments will acquire the $4 billion of BREIT Class I shares at the Jan. 1 public offering price. UC Investments will then have the option to redeem its investment ratably over two years after the end of a six-year holding period in January 2028, according to a news release Tuesday. Typical BREIT Class I shareholders have the right to monthly redemptions subject to limits set by the private real estate investment trust.

In addition, under terms of a separate strategic agreement, Blackstone will contribute $1 billion of its current holdings in BREIT to support an 11.25% minimum annualized net return for UC Investments over the effective six-year hold period, the news release said. In exchange for the contribution, Blackstone will be entitled to receive an incremental 5% cash promote payment from UC Investments on any returns received in excess of the specified minimum. This fee is in addition to the fees paid by all Class I shareholders of a 1.25% management fee and incentive fees of 12.5% of BREIT's annual total return after the private real estate investment trust produces a 5% return, said Jeffrey Kauth, Blackstone spokesman in an email. BREIT's net asset value was $69.5 billion as of Oct. 31, according to documents the private REIT filed with the SEC. BREIT's Class I shares return was -0.9% for November and 10.6% for the 12 months ended Nov. 30, BREIT's website shows. BREIT has incurred $371.6 million in net losses in the nine months ended Sept. 30, according to BREIT's website.

Some industry insiders see this as a savvy move for both BREIT and UC Investments.

"I think the UC/BX (UC Investments and Blackstone) transaction speaks well for both organizations and investors," said Stephen Nesbitt, chief executive officer of consulting firm Cliffwater.

UC gets the real estate portfolio it wants managed by a leading alternative investment firm at discounted fees in exchange for giving up some liquidity, Mr. Nesbitt said in an email.

"Blackstone can use that liquidity to satisfy investors that want out beyond what BREIT is required to redeem ... without compromising existing long-term investors," Mr. Nesbitt said.

In December, BREIT drastically reduced the capital returned to investors requesting redemptions, down to 0.2% of its net asset value. 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, it said.

One gamble for UC Investments is that Blackstone will be able to provide the annual 11.25% annual minimum return over the six-year holding period.

"11.25% is attainable but no slam dunk," Mr. Nesbitt said.

BREIT's leverage ratio was 47% as of Nov. 30, according to a report on BREIT's website.

Real estate managers expect values of private real estate portfolios to fall in 2023.

Over the last 12 months, the drop in public real estate investment trust share prices implied a 15% to 20% reduction in real estate values, said Uma Moriarity, senior investment strategies and global ESG lead at REIT manager CenterSquare Investment Management.

Private REITs are valued like real estate funds, which is by appraisal, and not like publicly traded REITs, which is based on share price, she said.

"The private market is very slow to react to a valuation change like that," Ms. Moriarity said. CenterSquare executives expect private market real estate valuations to fall by around 7% to 8%, she said.

Right now, there are very few transactions that can be used to set valuations because sellers and buyers are at odds on what properties are worth, Ms. Moriarity said. Transaction volume isn't expected to increase until mid-2023, after there is more clarity on interest rates from the Federal Reserve and what properties should be worth, she said. In general, the transactions occurring now are ones that need to happen, Ms. Moriarity said.

Blackstone has $951 billion in assets under management.

UC Investments had assets under management of $152.3 billion as of June 30. UC Investments officials declined to comment, spokesman Stett Holbrook said in an email.