Carlyle, ready to shop

With $2.3B in its sixth real estate fund and a planned IPO, the equity firm is on the prowl

Apr.April 01, 2012 07:00 AM

The Carlyle Group’s three cofounders (left to right): William Conway Jr., Daniel D’Aniello and David Rubenstein, who reportedly received a combined $413 million in compensation last year.

The Carlyle Group may be a quiet buyout firm, but it cannot be ignored. The Washington, D.C.–based company — which has $12 billion of real estate worldwide, including in New York — announced its sixth real estate fund in January with $2.34 billion at its disposal.

The firm has said it plans to invest opportunistically in residential, hotel, senior living, retail and office properties in major U.S. cities, including the Big Apple.

The fund, which is called Carlyle Realty Partners, or CRP VI, is reportedly one of the biggest such funds to debut since Lehman Brothers imploded in September 2008.

It has already invested $320 million, or 14 percent of its committed capital, according to its most recent Securities and Exchange Commission filing. And, it’s reportedly made 30 investments from New York City to Seattle.

“Carlyle is a top-tier player in real estate, and this is a huge fund,” said Peter DeCheser, senior vice president of global capital markets at commercial firm UGL.

And, that hugeness is expected to be felt in New York as it unleashes capital here to pick up properties.

Meanwhile, still to come is Carlyle’s initial public offering, which could happen as early as this month, according to some reports.

But the road to the public markets has been a somewhat bumpy one. After the firm registered its proposed offering with the SEC last September, Wall Street bankers valued the company at $8.5 billion. That was around half the $15.3 billion enterprise value — which takes into account market capitalization, debt, minority interests and preferred shares — of its largest rival, the Blackstone Group, which is headed by Stephen Schwarzman. The lesser valuation came as a slap in the face, given that the two private-equity firms have roughly the same amount in assets.

At the time, analysts explained the conservatism by noting that firms like Carlyle, which are heavily focused on company buyouts, don’t offer the same steady stream of earnings as the more diversified Blackstone, which offers advisory services for corporate restructurings.

Buyout funds represent the largest share of Carlyle’s assets under management — at $47 billion. That’s followed by its “fund of funds,” or mutual funds that invest in other funds, at $30 billion, according to its most recent SEC filing.

At $12 billion, the group’s 10 real estate funds make up only 8 percent of its total assets under management.

Still, the Carlyle Group has been a major player in New York’s property market for a decade and a half.

And this latest fund, which reduced its fees late last year to entice more investors, only reinforces the company’s presence here, sources say.

“They’re huge. They buy all property types,” said Eric Anton, managing partner at Brookfield Financial. “They do distressed debt. They buy mortgages. They build, and they renovate. They do joint-venture deals for people who need capital.”

Carlyle bought 650 Madison Ave. with Ashkenazy Acquisition in 2008

Solidifying a reputation

The Carlyle Group’s latest fund is a testament to its solid real estate reputation, sources say.

The fund — the first one for the firm since 2007 — had to turn away a half billion dollars after it lowered its fees, said DeCheser. The oversubscribed fund had an original target of $2 billion.

“Strong investor demand, which enabled us to exceed our target, is commensurate with the opportunity we see for attractive property investments in select U.S. markets,” the head of Carlyle’s U.S. real estate team, Robert Stuckey, said in a company news release when the fund was announced in January.

Some of the early committers were public investors. The Pennsylvania Public School Employees’ Retirement System ponied up $200 million. The Florida State Board of Administration pledged another $83 million, while the Teachers’ Retirement System of Louisiana invested up to $75 million.

Meanwhile, the School Employees’ Retirement System of Ohio added another $30 million.

That, of course, is not unusual for a fund of this kind. “Typically funds like Carlyle’s attract state pension funds, insurance money, other real estate funds, hedge funds to some extent and very wealthy individuals who are interested in wealth preservation,” DeCheser said.

The company marketed a gross internal return rate of 20 percent over an eight-year holding period, the Ohio pension fund said in published reports. Other opportunistic funds advertise similar rates of return between 15 percent and 20 percent, according to investment documents from the Teacher Retirement System of Texas.

Carlyle’s first real estate fund, which launched in 2000, boasts a 44 percent gross IRR, the top performer of all its funds, according to its latest SEC filing. And only two of its funds — a European-focused fund from 2005 and a 2004 fund — have negative gross IRRs.

DeCheser said in addition to going after property portfolios in the major U.S. markets, he also expects the fund to seek the debt behind real estate portfolios. But Dan Fasulo of Real Capital Analytics said a key component of Carlyle’s success is its willingness to do one-off property deals, unlike Blackstone, which almost exclusively goes after portfolios.

“Carlyle will spend the time doing due diligence,” Fasulo said. “They look at opportunities on an asset-by-asset basis.”

In a statement to The Real Deal last month, Carlyle’s Stuckey said: “We have been investing in the New York market for many years and believe we have built a strong portfolio of premier properties such as 650 Madison Avenue and the retail space at 666 Fifth Avenue. While we invest across the United States, we see continued opportunity in this important market.”

Crown Acquisitions’ Stanley Chera

Tight squeezes

Created in 1987, the Carlyle Group is still headed by its three cofounders: David Rubenstein, William Conway Jr. and Daniel D’Aniello. According to Bloomberg News, the three received $413 million in compensation last year as company profits rose.

The firm employs more than 600 investment professionals worldwide, and has 33 offices across six continents. And the company has weathered all of the economic downturns that have transpired since it was founded — including the most recent.

There have been some tight squeezes, though.

Indeed, Carlyle scoured for a capital infusion in 2009 and 2010 for 650 Madison Avenue, an office building that it owned with Ashkenazy Acquisition, headed by Ben Ashkenazy and Michael Alpert, according to news reports. The two companies bought the building for $680 million in April 2008, one of Carlyle’s last transactions before commercial real estate began tanking.

But the joint-venture partners finally sold an unspecified preferred equity stake in the building to the China Investment Corp. and AREA Property Partners in June 2010, according to Real Capital Analytics. However, in a sign that the market had improved, late last year the venture was rumored to have sold a roughly 25 percent interest in the building to Century Plaza that valued the building at $925 million, according to Real Capital.

The group also came through a foreclosure scare last year. Shorenstein Partners started foreclosure proceedings on the mezzanine debt at 1180 Sixth Avenue, a midtown building owned jointly by Carlyle and Norman Sturner’s Murray Hill Properties, after the entities defaulted on their mortgage payment .

The joint-venture partners had purchased the 23-story office tower in April 2007 for $300.1 million, according to Real Capital Analytics. But the two firms sold the building last May to HNA Property for $274 million, skirting foreclosure. (Murray Hill retained a 10 percent stake in the building, while also holding onto its property management and leasing responsibilities.)

Now, after only two close calls during the Great Recession, it appears Carlyle is back on track.

DeCheser believes it’s an opportune time for the firm to launch a real estate fund, predicting that 2012 will be “the first year of the next great real estate cycle.”

A recent example of Carlyle’s real estate prescience is its highly successful leasing and partial sale of its stake in 666 Fifth Avenue. The firm partnered with Crown Acquisitions and the Kushner Companies to buy an interest in the retail portion of the building in 2008.

In April 2010, Japanese fashion retailer Uniqlo agreed to pay $20 million a year for a 89,000-square-foot lease to host its largest flagship store. Almost a year later, the parent company of Spanish apparel chain Zara bought a 39,000-square-foot retail condo for $324 million. The partners finished up by signing on Swiss watchmaker Swatch starting at $4 million a year for 15 years, for the remaining 2,000-square-foot storefront space.

The company isn’t shying away from development opportunities either. In September, Carlyle teamed up again with Crown Acquisitions along with Highgate Holdings and nabbed 170 Broadway, an 18-story prewar office building, for $55 million from AMG Realty. The trio plans to transform the building into a hotel with retail space.

The company is also combing through the best and final bids for two parcels in its Riverside Center development on the West Side, according to published reports.

The sites are saddled with affordable housing and community space requirements, and Carlyle, along with fellow developer Extell Development, is instead focusing on the three luxury condo towers it has planned for the project.

Meanwhile, Carlyle picked up another development in December, when it bought a $16 million warehouse in Chelsea from Metro Group International. The firm plans to raze the two-floor, 14,440-square-foot industrial property and develop residential.

No word on whether the project is slated for rentals or condos, but the property’s fate seems bright as it sits near the High Line, which has helped gentrify one of the last remaining underdeveloped parts of Manhattan.

“They look for aggressive returns, just like any other private equity firm,” said Fasulo. “And they are not afraid of development, like a lot of other money is right now.”

Murray Hill’s Norman Sturner

Lagging stocks

While Carlyle’s newest real estate venture appears optimistic, the firm’s looming IPO is more uncertain. In general, shares of private-equity firms have been lagging on the stock market, and the underperformance can’t be chalked up to volatile equity markets only.

Shares of Blackstone and Apollo are trading well below their IPO prices, making the stocks big losers for early investors, said Josef Schuster, founder of Chicago-based IPO research and investment house IPOX Schuster.

“Carlyle’s growth prospects are limited,” Schuster added.

Part of the issue is that private-equity firms loaded up on debt to make leveraged buyouts and other deals, and that debt still weighs on their balance sheets, said Scott Sweet, senior managing partner at IPO Boutique, a Florida-based IPO and equity-research firm. Right now, equity investors are avoiding debt-ridden firms, making IPOs less profitable than in years past.

“The only ones who make money are the equity backers, who pay themselves extraordinary dividends, while investors are left holding the bag,” Sweet said.

Investors came out winners last year, though. Carlyle brought in a record $19 billion for investors, much it from asset sales, according to a Reuters report on the firm’s year-end earnings released in March. The results wowed Wall Street and could help boost the valuation of the firm, which has yet to price its shares.

Still, Carlyle’s IPO doesn’t necessarily make or break its real estate deals, though it would allow the group to raise money and create more funds without needing to go to market, said DeCheser.

Still, its latest fund shows it has no problems finding investors for its real estate dealings.

“Carlyle is going to go where the opportunities are,” Fasulo said. “They are trading on their name, as most big funds do, to raise money.”

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