In early January of this year, Blackstone Inc. (BX) announced with great fanfare that it was entering into a venture with a large institutional investor, the Regents of the University of California (UC Investments) with UC Investments agreeing to invest $4.0 billion in BX’s flagship public, non-traded REIT via the purchase of class I shares. The agreement also called for BX to contribute $1.0 billion of its ownership stake in the REIT shares as part of the venture. UC Investments has a decade-long relationship with BX and has invested $2.0 billion with the investment manager. UC Investments is a sophisticated investor and surely appreciates that real estate values have moderated (capitalization rates have moved higher) in recent quarters from where they were in 2021 and early 2022 when the REIT did a substantial amount of its acquisitions.
The BX/UC Investments venture is a two-part transaction with UC Investments acquiring $4.0 billion of the REIT shares at the January 1, 2023 offering price, with an option to redeem their investment ratably over two years after January 2028, an effective six-year lock-up provision. The second part of the transaction consists of a waterfall structure with respect to the total return to be received by UC Investments. BX will contribute $1.0 billion of its current holdings in the REIT to support an 11.25% minimum annualized net return for UC Investments over the six-year holding period. In exchange, BX will receive an incremental 5% cash promote from UC Investments on any returns in excess of the specified minimum, in addition to existing management and incentive fees. [i]
Three weeks later, UC Investments and BX announced that they increased the size of their venture by an incremental $500 million with all terms consistent with the original announcement, and thus BX contributing an incremental $125 million of REIT shares to the venture for a total commitment from UC investments of $4.5 billion and the backstop commitment from BX of $1.125 billion, or 25% of the base investment.
The BX/UC Investments transaction was viewed with healthy skepticism by the investment community and the media when it was first announced, and over six months later, the jury is still out on whether the transaction met its intended objectives. The infusion of cash from a large institutional investor into a predominantly retail-oriented fund does not appear to have stemmed redemptions. In June, the REIT received $3.8 billion in requests under the repurchase plan, and fulfilled $628 million, or 17% of the shares submitted for repurchase. [ii]
This said, the $4.5 billion cash infusion, levered at roughly 50%, which has been the BX REIT’s average debt on cost over the last several years, equates to $9 billion ($4.5B x 2) in real estate assets that did not have to be sold to meet redemptions. This is a material “win” for the REIT in an environment where the investment sales market has deteriorated due to a substantial rise in borrowing costs associated with rising interest rates and a slowdown in broader economic activity across the U.S.
Cash Trumps Stock
While the UC Investments deal does not appear to have emboldened other institutions to invest in the BX sponsored REIT, nor halt redemption requests from existing shareholders, the injection of $4.5 billion of fresh capital was a boon for BX nonetheless given what is currently a highly challenging environment for capital raising and the cash goes a long way to enhance liquidity and fund future redemptions and the distribution.
While some may criticize BX for putting shareholder capital of $1.125 billion in a first loss position, we would point out that BX will at minimum generate their base management fee on the investment, which equates to $337.5 million ($4.5B * 1.25% * 6) over the required six-year holding period. This reduces the basis of BX’s “contribution” to $787.5 million ($1,125M-$337.5M). Perhaps more important, this incremental fee stream of $337.5 million is monetizable and in the current market would warrant a multiple in the range of 15x, for incremental value to BX shareholders of approximately $5.0 billion (15 * $337.5M).
Finally, we must further note that while UC’s contribution to the venture was in the form of cash, BX’s contribution is in the form of REIT shares, whose value is far from certain. One market commentator applied an analysis to the non-traded REIT using Green Street Advisors (GSA) valuation data for the various property sectors represented within the REIT and this analysis translated into a –34.6% revision to the REITs NAV. [iii] Applying a 35% discount to BX’s REIT share contribution of $1.125 billion would reduce the value of the stock by $393.8 million ($1.125B * .35). Netting the ’fee adjusted’ BX contribution (calculated above) of $787.5 million from the REIT stock value adjustment of $393.8 million reduces the BX contribution to $393.7 million ($787.5M – $393.8M).
In summary, we believe the BX/UC Investment deal looks to be a good deal for BX shareholders. The transaction resulted in a needed cash infusion for BX’s non-traded REIT which continues to see sizeable redemption requests, it also provides a monetizable income stream to shareholders and utilized the highly valued shares of its non-traded REIT as a currency to backstop its guaranteed return to UC Investments.
A recent Wall Street Journal article highlighted Blackstone’s Stephen Schwarzman as the world’s highest paid CEO in 2022 at $253 million…perhaps he is worth the money. [iv]
Lock-up provision – restricts an investors ability to withdraw capital from a transaction for some stated period of time.
Waterfall structure – a series of pools where cash flows from an investment fill a single pool, before spilling over into the next one.
Cash promote – the disproportionate share of cash flow the sponsor or general partner will receive for achieving return hurdles.
Backstop commitment – if one party fails to meet its obligation, the backstop commitment will ensure that there is enough money or assets to fulfill other aspects of the deal.
[i] Press Release: UC Investments Creates Strategic Venture with Blackstone to Invest $4 Billion in BREIT Common Shares – January 3 2023
[ii] Blackstone Income Trust: Notice to Shareholders – July 3, 2023
[iii] A Swing and a Miss – Hawkins Entrekin (January 9, 2023)
[iv] Wall Street Journal: Six of the Highest Paid CEOs Not in the S&P – Theo Francis (July 5, 2023)