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Blackstone owes UCLA twice as much as it did last quarter as part of a complex deal to support its flagship real estate fund.
The world's largest alternative asset manager has promised UC an 11.25 percent annual return from its real estate fund, called Blackstone Real Estate Income Trust, or Breit, as part of a deal to attract $4.5 billion in new investment. But as the fund lost value last year, Blackstone's obligations to UCLA rose to $560 million.
It highlights the financial risks that Blackstone assumed would attract UC investments by promising high returns on real estate investments hurt by rising interest rates.
In late December 2022 and January 2023, Blackstone received a $4.5 billion investment from UCLA, helping Pret meet a series of redemption requests from other investors and shoring up its liquidity. The new money helped Brett avoid selling short to meet orders.
To entice UCLA, Blackstone promised that BRIT would achieve annual returns of 11.25 per cent over six years. The US private capital group has pledged $1.1 billion of Brit shares it owns to guarantee some of those returns. Since the UC investment, Breit's redemption requests have fallen by about 80 percent.
But Blackstone had to write down its liabilities to UCLA based on how much Brett fell short of the returns promised. In the fourth quarter, Blackstone doubled its commitments to UC, raising them from $260 million at the end of the third quarter to $560 million by the end of 2023, according to a securities filing.
Pret posted a 0.5 percent loss in 2023, its first annual loss since launching in 2017, putting Blackstone well behind its promised return. Brit's value declined when Blackstone reduced some real estate investments. In addition, some interest rate hedging instruments, which had made significant gains in value, lost ground amid growing expectations of interest rate cuts by the US Federal Reserve.
The annual losses, in turn, increased Blackstone's liability to UCLA. Although it is an accounting entry and no money or assets are changing hands, the liability reflects the increased risk that Blackstone may eventually have to surrender some of the Brit shares it holds to the California-based endowment. If Brett's performance rises in the coming years, the liability may be reversed or even converted into an asset.
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“Since its inception seven years ago, Brit has generated an annualized net return of 11 percent. . . . outperforming non-traded peers by [about] “Six percentage points in 2023, making it one of the best-performing REIT investments during the pandemic and period of rising interest rates,” Blackstone said in a statement.
Blackstone President Jonathan Gray said he expects property valuations to bottom out soon as real estate markets absorb the impact of rising prices.
“We are already seeing real estate bottoming out from a valuation standpoint,” Gray told the Financial Times last month. “The lower cost of capital combined with lower interest rates and lower spreads relative to mortgage borrowing is very beneficial.”
On a conference call with analysts in January, Gray said Britt had “weathered the storm” in real estate markets, but cautioned that Blackstone did not expect to see a “sharp rebound” in property values.
