When Blackstone put its student housing portfolio up for sale, the firm worked behind the scenes to make the deal more attractive.
First, the company dangled the option for potential buyers to assume $800 million in debt that had already been negotiated at low interest rates, then, once bids came in, Blackstone came forward to provide below-market loans, bringing the total to about $1 billion.
KKR & Co. won the deal, agreeing to buy the property from $59 billion Blackstone Real Estate Income Trust. The sale was announced in time for a key shareholder call in April, with President John Gray saying the 7% premium BREIT got for selling the dorms was one of “an inconvenient facts for critics.”
The private negotiations, described by five people familiar with the process, underscore the extensive use of the financial toolkit by property owners to drive sales and demand the highest possible prices in today's exhausted commercial real estate market.
Across the industry, big asset managers are exploring financial strategies to facilitate deals and raise cash after surging interest rates squeezed revenues.
This is the only instance of seller financing in Breit's history. In such a deal, Breit acts as a sort of lender, waiving its right to full payment up front. Such loans are primarily used for distressed assets, but they also tend to encourage buyers to raise their bids.
The firm has said it is preparing for a potential turning point, saying real estate prices have “bottomed.” Capturing fast-growing sectors is key to Blackstone's reputation in real estate, and the firm has been eager to find ways for its giant REIT to profit in one of the worst real estate markets in more than a decade.
Tightrope walking
The challenge has been made even tougher as rising borrowing costs and plummeting property valuations have dampened investors' interest in real estate. BREIT had touted the ability for investors to withdraw cash within limits. But redemption requests have consistently exceeded acceptances every quarter since the end of 2022, and the company in May allowed investors to withdraw more than their monthly limits.
Blackstone called KKR's deal a win for BREIT investors, noting that the company received multiple offers that exceeded expectations even without seller financing.
“Selling properties at premium prices is fully consistent with delivering strong operating results,” Blackstone said in an emailed statement.
According to the statement, BREIT has sold $20 billion worth of real estate since 2022 at prices above market capitalization, and the majority of the transactions did not involve transferable debt.
“Blackstone has implemented a prudent capital structure for this portfolio that has benefited both parties and enabled a win-win outcome,” a KKR spokesman said in an emailed statement.
Tough market
REIT investors have been growing nervous ever since borrowing costs began to rise. BREIT had capped withdrawals for 15 months, before finally allowing investors to withdraw money without restrictions in February. But a larger rival, Starwood Real Estate Income Trust, tightened redemption limits even more last month, leading billionaire Barry Sternwright to assert that this will be better for investors in the long run.
Such tactics to control liquidity risk stoking panic. For REITs like Blackstone that own assets in demand, such as student housing, there are ways to raise cash through sales, even in today's tough market. That's where financing strategies like seller financing come in.
Seller financing, once used to liquidate some of the hardest-hit properties such as offices, is now becoming a common tactic to smooth out transactions.
Seller financing “can help you close deals that would otherwise stall or seem impossible,” said Nicole Schmidt, managing partner at investment bank Oberon Securities. “It helps make the deal easier to close and helps it close faster.”
But there are drawbacks. Blackstone is missing out on the opportunity for BREIT to receive all of the deal's proceeds up front. The company is also lending the money at lower interest rates than it might earn on other investments. For the student-dormitory deal, BREIT is providing the financing through preferred stock at 6.5% annual interest, lower than current bank rates, according to people familiar with the matter.
Blackstone weighed the cost of maintaining the seller's loans against the gains it would make to its investors in the deal (about $500 million) and decided the gains were worth it.
“You're seeing more and more below-market financing coming into the market to get that last dollar of purchase price,” Josh Zegen, co-founder of Madison Realty Capital, said of the various lending strategies widely available in the market. He declined to comment on BREIT. “What's the impact? Money isn't coming back into the system, and investors aren't getting their money out as quickly as they would have liked.”
Different Strategies
BREIT, which does not trade on an exchange and can limit redemptions above certain thresholds, is closely watched for its ability to preserve its cash and valuation during the toughest period for real estate since 2008. The largest of its kind, BREIT has invested heavily in a variety of properties, from data centers to warehouses to apartments.
But the trust has been dealing with redemption pressures for months.BREIT also pivoted from a net buyer in 2022 to a net seller in 2023, securing a capital infusion from the University of California in the process.The company said selling properties in “low-growth” sectors gives it flexibility.
Other rivals are taking different approaches to backing real estate trusts. KKR agreed to inject $50 million in new capital into one major real estate trust, supporting its net asset value per share. KKR said it was aiming to convince investors to stay invested as a commercial real estate recovery begins to pick up steam.
Starwood's move to further restrict redemptions from SREIT was a reminder that REITs of this type have different means of controlling their capital. The decision also had an impact on BREIT, where investors made a surge in withdrawal requests. Blackstone Trust fulfilled all withdrawal requests above the usual 2% limit in May. Blackstone said the decision was made by its board due to a general downward trend in the fund's liquidity and redemptions.
Internally, Blackstone executives have expressed concern that reimposing restrictions would undermine investor confidence, said people familiar with the matter, who asked not to be identified discussing the privacy of the firm. The firm is also concerned that people will think BREIT is in the same position as SREIT, the people said.
Blackstone said BREIT's structure is working as designed and it has no plans to change its share repurchase program. A Starwood spokesman did not respond to a request for comment.
Strengthening trading
In the multibillion-dollar world of REITs aimed at retail investors, which include Brookfield Asset Management Inc. and Ares Management Corp., appearances matter.
With $7.5 billion in ready liquidity, BREIT has avoided tapping into its credit lines. It also ramped up property sales last year, building up its cash base. Net sales proceeds more than doubled to $7.4 billion. New investments fell to just 1 percentage point from $35.9 billion a year earlier.
Blackstone has been focusing on trading BREIT shares on secondary exchanges. When BREIT had to implement withdrawal restrictions, it took an average of four months for investors to receive nearly all of the funds they had requested to withdraw. Some investors found other ways to exit, even at a cost.
When BREIT shares first began trading at a 15% discount on a startup platform called Rodas Markets in 2023, Blackstone executives conveyed their concerns to the firm.
“They were genuinely concerned about the perception of how BREIT was being valued,” said Rodas Chief Executive Officer Brian King.
Blackstone had previously let a BREIT deal collapse and then made it clear it was restricting transfers to only the largest share classes, the people said.
When Rodas proposed ways to speed up transactions this year, Blackstone insisted on a process to approve each individual step involved in the transfer, which King said effectively prevented the quick settlement of some of BREIT's share classes.The platform settles transactions for many other private funds within a few days.
King said that despite users wanting to buy $1 billion worth of BREIT shares, Rodas only processed $10 million in transactions because of procedures put in place by Blackstone.
Blackstone has maintained that it did not obstruct the deal, that it followed standard procedures and that it allowed the shares to trade as long as they converted into the largest share class. The firm said it “facilitated the onboarding” of the major share classes and treated Rodas' custodian the same as any other firm.