Fortunes rise, dwindle for Blackstone buyers

Investors nationwide scooped up property from private equity firm at market's height

Nov.November 03, 2008 04:31 PM

Go to chart: Blackstone’s biggest buyers

Nearly two years after one of the largest leveraged buyouts in history, some of the real estate players who purchased buildings from the Blackstone Group have seen their fortunes dwindle, while others have received a strong return on their investments.

The Blackstone Group’s $39 billion purchase of the Equity Office Properties portfolio in February 2007 included nearly 543 buildings nationwide in a slew of major U.S. cities.

When Blackstone immediately turned around and began selling off its new portfolio in pieces at the peak of the commercial market, it left several winners and losers in its wake.

Its most high-profile victim was, of course, real estate titan Harry Macklowe, who famously bought seven Midtown towers from Blackstone in a highly leveraged deal before the bank seized them earlier this year. But Macklowe wasn’t the only one who got in on the action. And questions remain: How did the Blackstone Group do and what happened to the others who purchased from the private equity firm?

Since Blackstone made its big Equity Office purchase in 2007, it has sold just under half of the 543 buildings it bought, or 261 buildings. Those buildings went to 15 investors, including Beacon Capital, which bought 42 buildings; Maguire Properties, which bought 41; and Morgan Stanley, which snagged 10.

In total, Blackstone sales garnered $25 to $30 billion, say sources familiar with the company. All of those sales took place before last August, when the commercial real estate market began to tank.

“There’s no question that some of the spinoff buyers who used short-term leverage are running into some difficulties,” said Dan Fasulo, managing director of Real Capital Analytics. “Any major deal done at the top of the market in 2007 with short-term leverage is in trouble for the most part. Some folks got stuck without a chair when the music stopped.”

Given the timing of Blackstone’s sales and the fact that it intended from the beginning to hold some of the properties it bought from EOP, the firm made out swimmingly. The powerhouse private equity firm, which made hay in 2007 when it went public at the top of the market, is headed by colorful chief executive Stephen Schwartzman — who famously threw himself a multi-million-dollar birthday bash in 2007 and profited handsomely from the EOP acquisition.

“Blackstone did pretty well,” said Barry Vinocur, editor of REIT Wrap, a daily e-mail newsletter. “Some of the people it sold to flipped the properties themselves. How you turned out depends on where you were in the food chain.”

And, it goes without saying that real estate titan Sam Zell, who founded EOP, an REIT, and sold its massive portfolio to Blackstone for the inflated price of $39 billion, made out well. In addition to his real estate fortune, Zell, a billionaire who reportedly nicknamed himself the ‘grave dancer’ because of his knack for snapping up distressed assets, owns the Tribune Company. He is trying to unload the Chicago Cubs baseball team, one of the most profitable franchises in sports.

Beacon Capital of Boston, which bought 42 of Blackstone’s properties in the Seattle and Washington, D.C. area for $6.4 billion, the largest buyer of Blackstone properties in terms of number of buildings, was also apparently a winner.

It sold 14 of the 42 properties — all in the Seattle area — to Archon Group for $1.2 billion.

“Beacon culled down its holdings to what it wanted,” a source familiar with the company’s activities told The Real Deal. “It’s pretty conservative and financed the deal with long-term debt.”

Beacon budgeted to lease 1.9 million square feet of its property and through September had leased 1.7 million square feet, said the source, who asked not to be identified. The rents it has garnered exceeded its projections, and it was able to invest less capital than it originally expected.

“To date the performance has been very strong,” the source said. “Obviously you have to be concerned about what will happen to the economy … but little of the portfolio is coming up for refinancing over the next 12 to 18 months.”

Maguire Properties, which bought 41 buildings in Los Angeles and Orange County from Blackstone for nearly $2.9 billion in April 2007, on the contrary has suffered a bumpy ride. The purchase made Maguire the second biggest buyer of Blackstone properties.

Many of its southern California properties housed real estate-related businesses that ran into trouble after the property bubble burst. Maguire has sold eight of its Orange County properties for $650 million — five to Bixby Land/Mercantile RE Advisors and three to Muller/Rockwood.

Maguire loaded itself up with so much debt that it became the most highly leveraged of the 15 major office REITs. As of June 30, Maguire was scheduled to pay back 11 percent of its debt by the end of next year.

The company announced in September and October that it pushed back payment deadlines to 2010 for two construction loans combining for $49 million, that it secured a $100 million borrowing backed by a hotel, office and retail complex in Pasadena, and lengthened the maturity of an Orange County office construction loan until Sept. 28, 2009.

At Maguire, the issue was former chief executive Robert Maguire, Vinocur said. “He was a real estate deal guy who just couldn’t help himself. They were almost like junkies. He obviously hadn’t read the news that if a crash struck in the U.S., mortgage guys would get hit first.”

Thomas Properties, which took 14 of Blackstone’s buildings in Austin for $1.2 billion, also may face some problems, as it partnered with Lehman Brothers, which has since gone under, said Fasulo, from Real Capital Analytics. Thomas officials declined to comment.

Other large buyers of Blackstone’s EOP properties include Tishman Speyer, which bought seven buildings in Chicago for $1.7 billion, and Shorenstein Properties, which acquired 50 buildings in Portland for $1.1 billion. Officials from those companies declined to comment.

More recently, San Francisco-based Shorenstein went on another buying spree, acquiring two of the Midtown buildings that Macklowe bought but couldn’t hold on to. Shorenstein reportedly spent a combined $930 million for Park Avenue Tower at 65 East 55th Street and 850 Third Avenue. According to Robert Von Ancken, executive managing director and valuation consultant at Grubb & Ellis, Macklowe paid about $990 million for them in 2007.

While most of the EOP properties are of high quality, the fact that they were bought at the peak of the commercial market could clearly hurt their current owners.

“Nobody who bought real estate in 2007 around the time of the EOP deal and is honest would say it’s not worth less,” Vinocur said. “As a rule of thumb, for anyone who bought and is still holding, I would guess their property is worth about 40 percent less.” In New York, that decline might be smaller. Commercial real estate experts say that property is down about 20 percent.

But Sam Chandan, chief economist for research firm Reis, sees some bright spots for the commercial market that includes the EOP properties. “We don’t observe tremendous stress caused by rising delinquencies and defaults,” he said. “The downward pressure on asset prices relates to change in expectations. It’s not of the magnitude that would come from spikes in default rates like in the residential market.”

The new owners of Blackstone’s EOP buildings pray it stays that way.

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