Wednesday 22 November 2017

Blackstone deal is latest evidence of its emphasis on property

Blackstone boss Steven Schwarzman
Blackstone boss Steven Schwarzman

Hui-yong Yu

Blackstone cemented its position as the world's biggest private-equity investor inp roperty with a buying spree that includes General Electric assets and a California-based shopping-centre owner.

The agreement to buy GE real estate assets valued at $23bn in a joint deal with Wells Fargo is the largest real estate transaction since the financial crisis and among the biggest for New York-based Blackstone, whose purchases include the record $39bn acquisition of Equity Office Properties Trust in 2007 and the $26bn takeover of Hilton Worldwide. the same year.

"This transaction clearly demonstrates the unique scale and reach of our real estate platform," Jon Gray, global head of real estate for Blackstone, said of the GE deal in a statement.

Also, the firm said it agreed to buy shopping-centre owner Excel Trust for $15.85 a share in cash, or about $2bn, in one of the two biggest investments to date in its expansion into stable, well-leased real estate. The purchase of San Diego-based Excel will be made with the firm's new Blackstone Property Partners fund. Four other units of Blackstone's real estate division are involved in the GE purchase.

Gray, 45, has built Blackstone into the largest global real estate investing business among private-equity firms. Its seven previous global property funds have doubled their invested capital, with annualized returns of 18pc after fees since 1994, according to the most recent earnings statement.

Blackstone's GE deal "is another forceful reminder of its unique ability to do large, complex, global deals that no one else could pull off as handily or at all," said Michael Knott, a managing director at property researcher Green Street Advisors. "Their impressive track record gives confidence in how they will perform, even if it looks like a top-of-market deal due to its huge size."

Real estate has been the company's biggest contributor to revenue and profit in recent years.

In the GE deal, Blackstone units will acquire the conglomerate's US holdings, mainly suburban office buildings in Southern California, Seattle and Chicago, for $3.3bn, along with a $4.6bn portfolio of commercial mortgages. The firm also agreed to buy European assets including office, industrial and retail for €1.9bn and commercial mortgages in Mexico and Australia for $4.2bn.

The US properties are being purchased with the firm's new Blackstone Real Estate Partners VIII fund. It's the first deal for the global pool, which is set to reach about $16bn.

Bargains have become harder to find as investors around the globe seek places to put money amid low interest rates, driving up property values. Commercial real estate prices in the US are 6.9pc above their 2007 peak, Moody's Investors Service reported this week.

Blackstone plans to integrate the European properties into its Logicor industrial unit and its Multi retail business. Those purchases are being made by Blackstone's European real estate fund.

The $4.6bn of commercial mortgages are being acquired by Blackstone Mortgage Trust, a publicly traded real estate investment trust. The portfolio, which will double the company's asset base, consists of 82 first mortgage loans backed by commercial property in the US, Canada, the UK and Germany, according to the statement. Wells Fargo agreed to provide $4bn in financing for the purchase.

The mortgages in Mexico and Australia are being acquired by Blackstone's roughly $4bn real estate debt fund.

Since the end of 2007, the year Blackstone went public, its real estate assets under management more than tripled. After scooping up US shopping centres and warehouses from distressed sellers in 2010 and 2011, the firm in 2012 started to buy up thousands of foreclosed homes to rent out, while also expanding in Europe and Asia. In December 2013, it began muscling into the largest province of global real estate, known as core property.

Core signifies high-quality, fully-occupied real estate with steady income and low risk.

Blackstone is buying what it calls core-plus properties, ones that require light renovations or leasing up to generate slightly higher returns than basic core.

By moving into the realm of core real estate, Blackstone is competing with established leaders in that strategy such as JPMorgan Chase and Morgan Stanley.

Blackstone in February agreed to buy a roughly 50pc stake in six New York-area office buildings valued at $4bn from RXR Realty in what was its biggest expansion yet in core- plus. Last year, when the firm began raising the core-plus fund, it estimated it would have about $4bn in the strategy by the end of 2014.

The growth in Blackstone's real estate business triggered executive changes at the division last December. Frank Cohen and AJ Agarwal, senior managing directors, moved to oversee the core-plus effort globally and in the US, respectively, from their previous roles co-heading American acquisitions for the firm's higher-return opportunity funds.

Tyler Henritze and Nadeem Meghji were elevated to co-heads of US acquisitions for Blackstone Real Estate Partners. In addition, Ken Caplan, the former head of European real estate, was promoted to chief investment officer for the unit, making him No. 2 to Gray. Anthony Myers took over Europe from Caplan.

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