Amidst a challenging commercial real estate market, REITs are getting creative with their strategies to maintain investor interest and facilitate property sales. As detailed by Bloomberg News, Blackstone Inc.'s recent behind-the-scenes maneuvers highlight the rising pressure from mounting redemption requests and high borrowing costs.
When Blackstone decided to sell a portfolio of student dorms, it made the deal more attractive by allowing buyers to assume $800 million in existing low-rate debt. Additionally, Blackstone provided below-market financing, bringing the total deal package to about $1 billion. KKR & Co. emerged as the buyer for these properties from the $59 billion Blackstone Real Estate Income Trust (BREIT). This sale was strategically timed before a crucial April shareholder call, where Blackstone's President Jon Gray emphasized the 7% premium BREIT secured for the dorm sale.
The private negotiations, as described by insiders, underscore how real estate owners are using sophisticated financial tools to facilitate sales and achieve high prices. This was BREIT's first instance of seller financing, a tactic typically reserved for struggling assets, but increasingly used to boost bids in today's market.
Gray indicated that real estate values might be "bottoming," signaling a potential inflection point. Blackstone's ability to pivot and capitalize on growing sectors has been crucial to its reputation, and the firm continues to explore ways to leverage its massive REIT amidst a challenging market.
The commercial real estate market has been under strain from high borrowing costs and declining property valuations, impacting investor sentiment. BREIT has faced significant redemption requests since late 2022, and although it allowed withdrawals above its monthly limits in May, managing liquidity remains a priority.
Blackstone views the KKR transaction as beneficial for BREIT investors, noting multiple offers above valuation even without seller financing. "Selling real estate at great prices is entirely consistent with delivering strong performance," Blackstone said.
Seller financing, once mainly used for distressed properties, is becoming more common to facilitate deals. This method allows transactions to proceed that might otherwise stall, offering benefits such as quicker completion and potentially higher bids. However, drawbacks include not receiving full payment upfront and lending at lower rates than market returns.
Blackstone's decision to provide financing at an annual interest rate of 6.5% through preferred equity was a calculated move, weighing the costs against the $500 million profit potential for investors.
The broader market has seen other REITs adopt different strategies to support their property trusts. For example, KKR injected $50 million into one of its major property trusts, aiming to maintain investor confidence and support net asset values.
Despite the pressures, BREIT has maintained liquidity without drawing on its credit line, ramping up property sales to boost cash reserves. Blackstone's careful management of secondary market trades and adherence to transfer procedures have also played a role in navigating these turbulent times.
As the commercial real estate market grapples with economic pressures, REITs like BREIT are employing creative financial strategies to stay afloat and deliver value to investors. With a robust portfolio and strategic sales, Blackstone aims to navigate one of the toughest real estate markets in over a decade, positioning itself for future growth and stability.
they were not "dorms".