Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on Main Street.

Daniel Creech: Good day, everybody, and thank you for tuning into the Wall Street Unplugged podcast on this Thursday, January 5th, 2023. I’m your fill-in, your transitory guest host, Daniel Creech, research analyst here at Curzio Research. Yes, I’m the one that works for, alongside, behind, and with the one and only Frank Curzio, who continues to be at the Consumer Electronics Show in Las Vegas, as he hinted at on Tuesday’s program. I filled in yesterday for the first time. Today is day two of that.

Daniel Creech: Always a pleasure. Email me, daniel@curzioresearch.com with your feedback, good or bad, daniel@curzioresearch.com. Got an update from Frank out in Las Vegas, as well as a couple of interesting news stories that I find intriguing. And I’ll explain why you should give a flying Florida about these as well, in the help to just shape us individual investors on how to think through what’s going on around the world around, us or in the world around us, related to the economy. First, we’re going to talk about Frank out in viva Las Vegas. He’s in meetings constantly throughout the day with all kinds of companies, big and small. Ones you’ve heard of such as auto manufacturers, Sony, et cetera, but also a lot of smaller companies.

Daniel Creech: And this year, he’s excited about a couple of things. He mentioned on Tuesday’s podcast about it being a huge year for the tech industry in general, because tech had such a down year, NASDAQ was down over 30% in 2022. A lot of those stocks have gotten hit hard, a lot of publicly traded companies. That transition, a lot of publicly traded companies have gotten hit hard. A lot of private companies are even in worse shape as funding dries up. The high cost of capital as interest rates rise makes it more difficult to gain investors as a whole. And then, the real kicker is when the market doesn’t reward just growth, but looks for fundamentals and value where you have to take those investor monies, work and improve your products to where they become profitable.

Daniel Creech: That’s a huge transition. That’s one of the reasons this is a really exciting time at the CES. Frank was telling me that one of the big announcements is Oorbit, spelled O-O-R-B-I-T, the company that’s building the technology platform powering the metaverse, which is your combination of reality, augmented reality, artificial intelligence, et cetera, better social media experience is what’s going to play out over years. But Oorbit today announced its first of its kind partnership with manufacturer LG, the smart TV maker. Now think about this. Smart TVs are a dime a dozen now. They’re amazing; they’re easy to maneuver around and click through for the most part. They’re light, they hang on your wall, they look great. Prices have come down. Everybody’s got a flat screen, almost. So, Oorbit says it’s behind technology powering the metaverse, LG Electronics, and they are bringing an interoperable virtual world to LG TVs.

Daniel Creech: Now through this partnership, Oorbit and LG will bring immersive games and experiences together and make it easy for consumers to interact in the metaverse. That last line from their press release is key to me because, as Frank often talks about, the big disruptors are usually cheaper and easier for consumers, at least over the midterm. And if you want to make it easy for somebody, why are cell phones so easy to use for people of all ages? Because you just look and click on apps. You just point and touch, point and touch. They make it very, very easy. I’m not a tech guy, even though, depending on my age and how you look at that, I should be. But the ease of use will help attract customers very significantly to this space in a magnitude that gets people’s attention on growth. If you can sit on your couch, you can be anybody and say, “Ah, the metaverse this, the metaverse that,” make fun of Facebook for changing its name, losing billions of dollars so far. The stock has gotten cut tremendously.

Daniel Creech: I think it’s over half, it’s down over 50% from its recent highs. Yet, if everybody through their living room can experience, join, communicate, or buy something through their TV, through the ease of either their regular clicker for their remote control or a different clicker for their headset or whatever or anything, that is not a big barrier to me. I think that will take off tremendously, and I think that that’s a huge deal for metaverse companies to be partnering with such a well-known and huge company like LG. And this is just the beginning. Not technically the beginning of CES, but this is just to show you the inner workings of what goes on behind the scenes even during bear markets. This CES, these companies have been preparing for this since last year.

Daniel Creech: Yeah, you’ve had a lot happen over the last year, but it doesn’t stop productivity, it doesn’t stop projects, all projects, all productivity going forward, and this is one of those examples. I’m impressed by LG and this company Oorbit as well, just because I love the aspect of entering into your living room on your TV. Maybe a lot of people just go there once, check it out, and then put it on the shelf for a few minutes or months or whatever and don’t go back. But getting everybody into this easy usage of trying to experience or see what the metaverse could be or is, even in the earliest stages, is very good for the space in general. Frank is also meeting with a company, Wave, which does virtual concert platforms or is a virtual concert platform.

Daniel Creech: And they just announced a huge concert with an artist many of you have probably heard of. I guarantee everybody listening to this podcast has heard of him, even if they don’t listen to a single song. Justin Bieber. There was rumors that he was going to sell his portfolio for… Was it 150? I believe it was over 100 million. Anyway, I saw it on CNBC over the last couple of weeks because they were comparing how young of a guy he is to other artists who sold portfolios and books of their music, rights, royalties, et cetera, like Bruce Springsteen or somebody. And how they have “more hits,” more years. They’ve been superstars for 30, 40 years.

Daniel Creech: Anyway, Justin Bieber, and a virtual concert was just announced, again, at the Consumer Electronics Show with virtual concert platform Wave. Now later on, remember, we have a… This is fun when I call Frank early in the morning, because there’s a three-hour difference between the East Coast here on Amelia Island, where I’m broadcasting from all the way to the desert in Nevada for Frank. So, I call him bright and early and tell him, “Listen, you can’t be adapted to the time zone yet. It’s still nine o’clock your time as well,” even though the clock says 6:00 this morning when I called him. But he’s meeting with Sony and Samsung. They’re going to have a big product reveal. He’s going to update everybody next week when he’s back in the saddle, of course.

Daniel Creech: But the excitement that I got from talking to him is just how the metaverse and the presence this year at the CES, its first time ever, is a huge theme, it’s a huge buzz. And he’s going to come out of this with a lot of great ideas. So, we’ll all look forward to a more in-depth, up-to-date analysis of Frank’s fun working vacation. I’ll give him a hard time because I’m still here in Florida while he’s out in Las Vegas, but that’s okay. So a lot of fun, Frank. We wish him safe travels. And a lot of big winners coming from the CES. All right, moving on, enough updates about Frank’s in Vegas. But related to Frank Curzio, at the end of last year, we were talking about Blackstone’s real estate investment trust, BREIT, B-R-E-I-T, and how they had limited redemptions from investors in this 68 billion-ish real estate fund all over the world.

Daniel Creech: And they were talking about how the slowdown in the Chinese real estate market and economy led to some investors wanting to ask for redemptions and get some of their money back. That caused a domino effect of other investors asking for their money back. In a sense, real estate is not a liquid asset. If enough investors, similar to a bank run, want all their money back, you can’t give it back in time, so they limit redemptions. Caused a lot of headlines and volatility in the stock. Although this stock, Breit, is private, there’s reports here that the value is down about $20 billion in market value since the beginning of December. However, Blackstone’s real estate investment trust just got a huge… What’s the best word here? Do we want to say investment, or bailout?

Daniel Creech: Somewhere in between. The University of California is putting four billion into Blackstone’s real estate vehicle aimed at individuals, investors, providing crucial ballast for a fund that has been beset by a wave of redemptions. Now, the interesting thing here is how this all come about. So, Blackstone president Jonathan Gray… Now, I’m going to tell you what is being reported here, and then I’m going to tell you what I believe actually happened. And I will leave it up to you, the smart individual, open-minded thinker that listens to this podcast for you to decide which way you want to lean towards and/or bet with. Blackstone president Jonathan Gray said the investment from the University of California came about as a result of his TV interview he did about Breit, B-R-E-I-T, on December 8th.

Daniel Creech: Mr. Gray’s… Again, Blackstone president… Comments on this December 8th interview prompted the University of California Chief Investment Officer Jagdeep Bachher, I’m butchering that, I apologize, who has a longstanding relationship with the firm, to contact Blackstone to see if there was a way to work together. Mr. Gray of Blackstone and the gentleman from University of California did a significant amount of due diligence before committing to the deal, crisscrossing the country to meet with the heads of all the portfolio companies and the real estate investment trust. All right, that sounds pretty legit. The investment will come in the form of common equity in the Blackstone Real Estate Income Trust and will be subject to the same fees and terms the vehicle’s other shareholders get.

Daniel Creech: Now, let’s get into some details here. University of California is investing four billion into common equity in this REIT. And they are going to hold it for six, 1, 2, 3, 4, 5, 6 years. That’s different because everybody else has the option, or had the option to sell and/or redeem up until last year. As part of the agreement, the University of California investments will put its BREIT shares into a strategic venture to which Blackstone will contribute one billion of its shares it already owns. The venture will have a 11.25% hurdle rate, meaning that Blackstone’s net annualized returns exceed that rate of 11.25%. If they exceed that, Blackstone will get an extra 5% incentive fee. If the vehicle’s performance falls short of 11.25%, the billion dollars that Blackstone is putting into the deal as part of this will help cover that. Now, they’re guaranteeing, to say it a different way, so that’s what’s being reported.

Daniel Creech: Blackstone was saying, hey, don’t worry about all these redemptions coming on. We’re going to limit redemptions. We’re not giving you your money back, but there’s no worries here. We’re a private company. We’re not marking down any assets anytime soon. And we’re still performing a lot better than every other publicly traded peer. Don’t ask any more questions or raise any more doubt. Then California comes in, just like Mr. Warren Buffett would or has in the past, and says, “Listen, if you need help, maybe we can work together. We got a long standing relationship, and we’ll do our due diligence,” because you got to say the word due diligence as many times as due diligence can be said because after the FTX and nobody did due diligence, we don’t want to look like fools. So, they did their due diligence, and they came up with a deal. This fund, this real estate fund, has posted 12.7% net annualized returns since its inception. If you are the University of California, this is a buyer’s market.

Daniel Creech: You step in with $4 billion, you’re getting guaranteed 11.25%, just shy of its annualized returns to date. You have zero risk for six years other than returning 11.25% on your billions of dollars. For Blackstone’s side, they’re going to do their best, as they should, to perform, because they got caught off guard, had to sell some properties, had to limit withdrawals and redemptions. And now, they’re signing this big deal. But notice that the four billion that goes in is still going to get feed just like all the other money. So, they’re going to get some off the top. They’re incentivized to do whatever they have to, pull whatever strings, move around other assets to beat this 11.25% because then they get another 5% in incentive deals.

Daniel Creech: This is a win-win for both Blackstone and University of California, but I think it’s a lot bigger win for the University of California. As far as individual investors’ take away from this, I would use caution when looking at real estate investment trusts right now, because we’ve had such a boom in rental prices, rents on a monthly basis and the amount of nice apartment complexes and/or housing starts, even despite the recent pullback over last year in real estate as the Fed has raised interest rates to the point where the 30-year mortgage more than doubled in 2022. My point to all this is you got big players just pushing each other around, bailing each other out for a lack of a better term. That’s fine. If you’re an individual investor in this, this should help you sleep better at night.

Daniel Creech: I still wouldn’t be so gung-ho about this. If you’re an individual investor in other publicly traded REIT, just pay attention and look at where their properties are. Are they in nicer areas? Are they in busy areas? Look at the balance sheets and be cautious on the sky high dividend payout rates right now, because if they’re so sky high, when you can go to a two-year treasury bond and get 4% plus, if they’re much higher than that, you have to ask, how are they generating those returns? What kind of leverage are they taking on? And do you want to expose yourself to leverage and uncertainty? As interest rates continue to rise, the economy continues to slow and the Fed is telling you unemployment is going to continue to rise, which at some point is going to cause a major impact on the ability of people to pay high rents, live in nicer apartment buildings and continue that trajectory of higher and upward in prices.

Daniel Creech: I would use any pops to get out of some of this stuff because if you’re in… And obviously, it depends on why you own what you own. If you’re in real estate investment trust because, A, you have a passion for real estate and you like the income, that’s fine. Again, just know your portfolio. If you’re strictly in it for the income, you can look all over the place, including bonds, bond funds, other well-run companies, SITE Centers. SITC is the ticker, but SITE Centers is a real estate investment trust. They own commercial properties in some of the best areas in the United States. They focus on buildings that have $100,000 in annual income per household in those areas. They want a lot of foot traffic, a lot of car traffic, et cetera. But that stock year-over-year is down, probably 10 to 15%, and it pays around a 4% yield.

Daniel Creech: 4% yield’s great except for the fact that you’re down 15% on your capital over the last year. If you sell, of course. I’m not saying that you should. I’m pointing out that don’t just chase yields in this because now in a higher interest rate environment, a higher inflationary environment, investors are going to be able to earn income through great dividend-paying companies that not only pay, but grow dividends, as well as the old boring bonds like treasuries and such. All right, ladies and gentlemen, day two is coming to a close. I appreciate it. So grateful to have the opportunity to fill in for the Frank Curzio, the one and only Frank Curzio. I’ll be back for all of our paying subscribers for our Frankly Speaking. Send any of your questions to me at daniel@curzioresearch.com. That’s daniel@curzioresearch.com. Cheers, everybody. We’ll catch you next week.

Announcer: Wall Street Unplugged is produced by Curzio Research, one of the most respected financial media companies in the industry. The information presented on Wall Street Unplugged is the opinion of its host and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.