Jonathan Gray: REIT buyout wave unlikely

Private real estate funds sit on record piles of cash, leading some observers to speculate that a wave of public-to-private real estate investment trust takeovers is on the horizon. But the Blackstone Group’s real estate head Jonathan Gray disagrees.

“What you need is a sustained period of underperformance,” Gray said at NYU’s REIT Symposium at the Pierre Wednesday. He argued that a large number of takeovers are only likely if REIT shares trade at a significant discount to underlying real estate assets for close to a year, and that the recent swoon in REIT shares was too short-lived. “Three months up, down, it goes away is like a bad dream,” he said.

Stock prices of major REITs like Boston Properties, Vornado Realty Trust and SL Green Realty fell significantly between December and February amid global stock market turmoil, but have since recovered somewhat. Boston Properties’ share price, for example, is up almost 20 percent since its Feb. 11.

Gray also provided a loose timeline for an IPO of Invitation Homes, the Blackstone Group subsidiary that owns 47,000 single-family rental homes across the U.S. The company will go public “probably not tomorrow, sometime in the next year or two,” Gray said. He argued it is unlikely an institutional investor will buy the company and keep it private. “With Invitation Homes, of the two scenarios, I think the much more likely one is an IPO,” Gray said.

Blackstone launched Invitation Homes in the aftermath of the housing crash to buy up distressed homes at a bargain and turn them into rentals. The company is often dubbed America’s biggest landlord. As a manager of closed-end private real estate fund, Blackstone is obligated to sell its real estate holdings after a certain period – either by finding buyers for the actual buildings or by turning portfolios into public companies and selling the shares.

Asked about the general health of the U.S. real estate market, Gray reiterated previous comments that price growth is slowing but that it is too early to call an end of the cycle. “Growth will be there, but just not as strong as in the past,” he said.