'Guaranteed' 11.25% Yield: Blackstone's Billion Dollar Deal This University Couldn't Refuse

The Office of the Chief Investment Officer of the Regents of the University of California announced a $4 billion investment in Blackstone Inc’s BX Real Estate Income Trust (BREIT) Class I common shares. The deal guarantees UC an 11.25% annualized return over a six-year hold period.

Blackstone says it will contribute $1 billion of its current holdings in BREIT to support the 11.25% return to UC Investments, which manages the university's investment funds.

"We are extremely pleased to have the endorsement of UC Investments, one of the most sophisticated institutional investors globally," said Jon Gray, president and COO of Blackstone. "This investment will further enable BREIT to deliver for our investors."

Because BREIT is a private REIT, appraisals of the underlying assets, in this case, properties, are periodical. Blackstone might appraise its real estate holdings at a less frequent rate than publicly-traded REITs, which are required to keep up-to-date estimates of their holdings to adhere to SEC rules. 

Read Also: Blackstone's COO Is Bullish On BREIT And This Could Be The Reason

Why It Matters: Blackstone’s BREIT has held up miraculously well throughout 2022 compared to public REITs. Although the if the value of the underlying assets in BREIT has dropped significantly more than its share price, investors may want out. This could force Blackstone to sell some properties, and in the current real estate market, those properties may sell at a loss.

So that’s where the University of California comes in. By raising $4 billion through the investment deal with UC, Blackstone may offset some of the selling pressure and the need to maintain capital. 

Stephen A. Schwarzman, Chairman, CEO and Co-Founder of Blackstone, said, "UC Investments’ commitment builds upon its 15-year partnership with Blackstone and gives BREIT increased balance sheet flexibility and capital during an opportune deployment period for all our investors."

Concern And Criticism: In December, Phil Bak, the CEO and founder of Armada ETFs, posted a Twitter thread outlining a potentially problematic situation he saw brewing at Blackstone. Bak called a potential shakeup in the private REIT space as being more significant to markets than the FTX collapse. 

Some users have taken to Twitter to criticize the UC investment in BREIT. Among the concerns is that the fund is private, and there is no easy way to determine the necessity of the deal or how badly the fund needed the cash.

Although UC officials have voiced confidence in their investment in BREIT. "In the current environment, investors can benefit from stable cash-flowing investments that can grow with high global inflation. 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," Jagdeep Singh Bachher, the University of California’s Chief Investment Officer said.