The Blackstone Group, headed by CEO Stephen Schwarzman, is well-positioned to take advantage of distressed properties as it looks for opportunities across the U.S. and abroad.
After sitting on the sidelines for the last two years, the Blackstone Group, the world’s largest private equity firm, is finally starting to go property shopping. And, as it begins to deploy its $12 billion distressed asset fund, many in the industry are watching to see exactly what kind of real estate it’s buying and what else it’s in the market for.
In November, the Manhattan-based firm agreed to pay about $191 million for a 60 percent stake in two malls owned by the Ohio-based Glimcher Realty Trust, a real estate investment trust with properties in 13 states.
That followed a deal in September giving Blackstone 50 percent of the Broadgate office development in London, the largest office complex in the city’s financial district, for about $127 million. Also that month, Blackstone agreed to buy 148 properties from assisted-living-home operator Sunwest Management of Salem, Ore. In the Sunwest deal, Blackstone offered about $270 million in cash along with the assumption of approximately $1 billion in bank debt, the Oregonian reported.
If those three deals are any indication, the firm — which famously bought mogul Sam Zell’s $39 billion Equity Office Properties portfolio in 2007 and successfully flipped much of it before the market soured — will be spending the rest of its $12 billion across multiple sectors of the market.
While Blackstone executives declined to comment on what kinds of investments they are looking for, when the firm announced the Glimcher deal, Jonathan Gray, Blackstone’s senior managing director of real estate, said in a statement that the company thinks “there should be regional malls available at attractive pricing during this cycle.”
Sources say the firm is looking for distressed properties in need of capital — the bigger, the better.
“Given Blackstone’s major presence in the commercial real estate market, its investment decisions will set the tone for how other players deal with the opportunities in distressed properties,” said Peter Hauspurg, CEO of Eastern Consolidated.
Those who follow Blackstone say it is unlikely to buy in New York City, but that in addition to looking for deals around the United States it is scouring sites internationally, especially in Europe and Asia.
“I don’t think there will be a ton of opportunities [in New York City],” said one industry insider, who asked to remain anonymous. “There may be some individual loans and leveraged hotels that may have suffered.”
Hauspurg said he believes Blackstone is likely to step up as property owners begin to get slammed by looming debt payments.
“There is $1.5 trillion of [commercial mortgage-backed securities] coming due in the next few years, and not enough debt to replace that,” he said. “There’s a need for equity, and an opportunity for big returns. Blackstone is well-positioned to take full advantage.”
One advantage the firm has is that many of its biggest competitors for real estate deals in the past — Lehman Brothers, AIG and Merrill Lynch, for example — are no longer in the business. So there aren’t as many parties vying for large deals.
The industry insider said Blackstone’s competitive advantage is its comfort in multiple sectors and its capital pool.
“They can write a check quickly and do large things,” the source said.
In the Glimcher deal, Blackstone bought into malls in Portland and Tampa. Glimcher needed an investor as it was trying to reduce a large debt burden.
The London Broadgate deal also involved a property owner, British Land Co., seeking to slash a big debt exposure.
“The Broadgate transaction has the potential to be a real momentum-changer,” said Dan Fasulo, managing director of Real Capital Analytics, which counts Blackstone as one of its clients.
“It’s the kind of mega-deal that was missing over the last 18 to 24 months. It’s an example of a transaction that will become more common, where you see big property owners that are undercapitalized or have too much debt needing a white knight with equity to recapitalize their properties.”
In the case of Sunwest Management, the company is restructuring, and some of the communities it manages have filed for bankruptcy.
Fasulo said he expected the private equity firm to employ much less leverage than it has in the past in upcoming deals.
“Many private equity funds will have to make deals work with much more equity than they got used to in this decade,” he said. “There is not the debt available like there was a few years ago to finance these transactions.”
But given the amount of capital Blackstone has built up, that shouldn’t pose a problem.
To be sure, success won’t be a slam dunk for Blackstone.
“One of the greatest myths now is that there are huge opportunities in commercial real estate — that people are buying for cents on the dollar,” said Barry Vinocur, editor of REIT Wrap, a daily e-mail newsletter.
Many lenders will be reluctant to shed real estate from their books without the government forcing them to do so. “Lenders are saying, ‘Why should I sell this asset when I can hold it on the balance sheet, and presumably as the asset recovers, I can reap the benefits for my institution?’” Vinocur said.
Still, that is not holding Blackstone back.
Blackstone’s CEO, Stephen Schwarzman, has said “he’s starting to see opportunities, and they’re going to try to take advantage,” said Vinocur.
And, as The Real Deal has reported, the company’s president, Tony James, recently vowed to “ratchet up the activity level in real estate.”
The hotel sector has been an active area for Blackstone. Over the last 15 years, it has committed $57 billion to lodging entities. But its track record has been mixed.
On the plus side, it sold Extended Stay Hotels in 2007 for $8 billion. That was about four times what it paid for the chain three years earlier, excluding $1 billion of debt it assumed and money it spent expanding Extended’s portfolio.
But Blackstone didn’t fare so well on its $26 billion purchase of Hilton Hotels in 2007. The firm is negotiating with its lenders to reduce Hilton’s $20 billion debt load.
Many analysts expect Blackstone to dump some of its stake in Hilton through an initial public offering.
“There is no question Hilton will need to be restructured in some way,” Fasulo said. “Blackstone is fortunate to have enough capital to extract value from its portfolio over time. I think they will try to hang on to Hilton. It’s a tremendous global brand that will recover with the economy.”
He said given Hilton’s woes, Blackstone is unlikely to expand its lodging holdings further. “But then again, there are great values in the hotel space, so you never know.”
