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Schwarzman Defends BREIT Returns As UC Unions Push Back On $4B Investment

Blackstone CEO Stephen Schwarzman

Blackstone CEO Stephen Schwarzman said his company's closely watched nontraded REIT far outperformed publicly traded landlords because of "all this wonderful stuff" it owns.

Schwarzman, speaking at the World Economic Forum Wednesday in Davos, Switzerland, said Blackstone Real Estate Investment Trust, known as BREIT, has managed to avoid the price correction real estate faced in public markets.

Schwarzman highlighted how BREIT returns rose 8% in 2022 while the FTSE All Equity REIT Index dropped nearly 25% in value. Schwarzman's comments came during a question-and-answer session with Barron's Editor-in-Chief David Cho, crediting BREIT's warehouse and apartment holdings in Sun Belt markets with generating returns even as interest rate hikes have wreaked havoc on property valuations. 

“It’s because we own all this wonderful stuff in the right places,” he said. “And most REITs own what you would call real estate, which is everything. So if you wanted to own warehouses and apartments, you’d want to own them in Texas, Florida. Those are our two biggest states. The location of where it is in the country makes a huge difference.”

He said BREIT's cash flow was up 13% over 2021, and 50% higher than the average public REIT.

“What you have here is a dramatically outperforming asset, so it should be no surprise that it earned a lot of money for its investors," he said.

While Schwarzman is supremely confident in BREIT's valuations, its investors are decidedly less bullish. Late last year, a wave of BREIT investors sought to redeem their shares, forcing the firm to halt those withdrawals to prevent a "liquidity mismatch."

As Blackstone was looking to restore confidence in BREIT, the firm struck a deal with the University of California for a $4B investment. If the fund doesn't exceed an 11.25% annualized return over six years, Blackstone agreed to make up the difference up to its $1B stake. If the venture does exceed the 11.25% hurdle, then Blackstone will receive an extra 5% incentive fee.

The deal “changed the narrative” and negative news around the fund, Nadeem Meghji, Blackstone’s head of Americas real estate, told PERE last week. But union leaders representing 110,000 of the university system's workers called for UC Investments to divest that funding, as well as $2B it previously invested with Blackstone.

A collection of union leaders sent a letter Jan. 13 to University of California Chief Investment Officer Jagdeep Bachher, blaming Blackstone and other institutional investors for worsening California's housing affordability crisis by buying residences, increasing rents and forcing evictions.

"The University of California’s current housing investment strategy combined with the bolstering of Blackstone’s BREIT will only further deepen a hostile housing market for millions across California," union leaders wrote in the letter. "As UC’s represented workforce whose salaries help fund these real estate investments, we reiterate our steadfast opposition to this partnership between Blackstone Inc. and the University of California. We call on the UC to divest its estimated $6 billion investment from all of Blackstone’s funds and instead develop an investment model that protects and expands affordable residential units in and around its communities."

Schwarzman didn't address the UC investment or investor withdrawal requests on stage in Davos, but he did opine about how to invest in a price correction and  on the different real estate asset classes.

“For office buildings this is really a terrible time and it's going to stay as a terrible time," he said, adding that the national office vacancy rate is 20%. “That is an area of real stress."