After writing down the values of some properties in its investment portfolio, Blackstone's returns on its Blackstone Real Estate Income Trust, or BREIT, have fallen below the threshold it promised the University of California.
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Blackstone owes UC Investment, the university system's investment arm, double what it did last quarter, according to the Financial Times.
BREIT recorded a 0.5% loss in 2023, "its first annual loss since its launch in 2017," and well behind its promised returns for the university system, FT reported. Blackstone’s liability to UC has swelled to $560M, according to FT.
For now, the liability is just an accounting entry, FT reported. Blackstone doesn't have to pay the UC investment entity anything yet because the firm's guaranteed return was annualized, or based on the average increase or change of an investment over a set period. In this case, that period is six years. If BREIT's returns were to bounce back enough it could mean that Blackstone owes nothing to UC. And if returns are high enough, UC could owe a bonus to Blackstone.
It's been a little over a year since the university system invested $4.5B in BREIT, doing so despite objections by union workers at campuses. Blackstone promised at least an 11.25% annualized return in the six-year investment period.
Blackstone pledged over $1B of its own shares to make up the difference if it fell short. Since its 2017 launch, BREIT has seen 12.7% annualized returns, The Wall Street Journal previously reported.
The deal came at a time when investors were making redemption requests from BREIT beyond what the fund had said it would pay out. The university system's investment was seen as a move that could instill confidence in those seeking to withdraw funds, and it seems to have worked. Since the university system's investment, redemption requests have dropped by about 80%, FT reported.
Blackstone CEO Jonathan Gray has said that he expects property values to bottom out soon, telling investors on a January earnings call that the firm had “weathered the storm” in real estate markets. But he also warned that the firm did not expect a “V-shaped recovery” in property values.
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