Shares of Blackstone (BX -0.34%) have plummeted nearly 40% over the past year, driving up its dividend yield. One of the factors weighing on the leading alternative asset manager is the health of one of its most popular retail investment vehicles: Blackstone Real Estate Income Trust (BREIT). Concerns about the non-traded real estate investment trust (REIT) spooked the market.
Blackstone recently received a huge vote of confidence in that entity after the University of California (UC Investments) agreed to invest $4 billion into BREIT. That investment will increase BREIT's balance sheet flexibility. It also entitles Blackstone to potentially earn more income it could pay to shareholders via its high-yielding dividend in the future.
A $4 billion vote of confidence
Blackstone created BREIT in 2016 to provide high-net-worth investors access to the private real estate market. Until recently, they had been pouring capital into the non-traded REIT to capitalize on its higher income yield, lower volatility, and higher total returns compared to many publicly traded REITs.
However, retail investors, especially those in Asia, have been requesting to sell their shares of the non-traded REIT as they sought liquidity amid a steadily declining market. Blackstone had to limit redemptions on BREIT after they exceeded the company's ceiling of 5% of the fund's net asset value last quarter. That spooked Blackstone's investors, who worried its strategy to tap the private high-net-worth market was backfiring.
Those market concerns led UC Investments, which has invested $2 billion in Blackstone funds for over a decade, to reach out to the company about deepening their relationship. It has agreed to invest $4 billion into BREIT, which it will hold until at least 2028. That will provide BREIT with more permanent equity capital from a cornerstone investor, giving it the additional financial flexibility to deploy capital on acquisitions as opportunities arise. UC Investments is purchasing shares at the same price and fee structure as other investors.
However, Blackstone and UC Investments also entered into a separate strategic agreement. As part of that deal, Blackstone will contribute $1 billion of its current BREIT holdings to support an 11.25% minimum annualized net return for UC investments over its six-year hold period for the BREIT shares. In exchange, Blackstone can earn an additional 5% cash promote payment on any return above that minimum. That's an achievable target given that BREIT shares have delivered a 12.7% annualized net return since their inception six years ago.
Built for the retail market
Blackstone believes that retail investors represent a massive market opportunity. An estimated $80 trillion of private wealth is under management, nearly all of which is in the public stock and bond markets. Blackstone believes that these high-net-worth investors would benefit from allocating a portion of their portfolios to alternatives like real estate, private equity, hedge funds, infrastructure, and credit.
Analysts expect retail investors to steadily increase their allocations to alternatives. Morgan Stanley sees alternative assets under management from the retail sector growing at a 12% compound annual rate over the next five years. That has high-net-worth investors doubling their allocation to 8%-10% of their portfolios over the next few years.
BREIT is a big part of Blackstone's retail strategy. It provides high-net-worth investors access to an institutional quality private real estate investment with a much more investor-friendly fee structure than other non-traded REITs. It has been a smashing success for Blackstone and its investors. BREIT has drawn over 200,000 investors who have enjoyed above-average dividend income and strong total returns of 14.9% annualized over the last three years. BREIT has also grown into one of the largest REITs in the world, with a net asset value of $68 billion. Blackstone earns recurring fees for managing those assets, which has helped grow its fee-related income and dividend.
However, one of the drawbacks of catering to the retail segment is that they desire liquidity, especially during periods of market stress. While BREIT offers them liquidity, it's limited to 2% of its net asset value each month and 5% per quarter. The company put those limitations in place so that it doesn't need to sell real estate during a market downturn to satisfy redemption requests.
Despite its recent troubles with the retail investor market, Blackstone remains committed to the space because it offers so much untapped growth potential. That's leading it to work with UC Investments to ensure BREIT can navigate the current period of high redemptions to continue delivering strong returns for investors. Those returns should eventually draw more retail investors back to the vehicle after the dust settles.
Blackstone's retail bet should continue paying big dividends
With Blackstone's share price sinking due partly to concerns about BREIT, its dividend yield has risen to more than 6.5%. While that payout will fluctuate each quarter with Blackstone's income due to its variable nature, it should head higher over the long term. Driving that view is Blackstone's bold bet on retail investors. While it recently hit a speed bump in the form of elevated BREIT redemptions, they represent a massive unmet market opportunity for the company. By stabilizing its core retail product, Blackstone can focus on delivering the attractive returns investors crave.
