Jonathan Gray: Blackstone’s latest billionaire

How the assuming head of the firm’s real estate division amassed a fortune — and became a contender to take over the company

Jonathan Gray
Jonathan Gray

Jon Gray isn’t Warren Buffett, but he and the Oracle of Omaha do have a few things in common: Both are billionaires. Both are reportedly humble about their outrageous financial success. And both like to be in the thick of things.

But Gray, who heads up the Blackstone Group’s real estate division, is a far newer member of the billionaires’ club. The 43-year-old’s 40.6 million shares of company stock reportedly tipped over the $1 billion mark this year as the private equity firm’s stock surged some 40 percent. In August, Bloomberg News put his stake at $914 million and noted that he received more than $120 million in additional bonuses and other compensation in the past two years.

Gray’s wealth can be largely attributed to the real estate deals he’s pioneered. Indeed, sources say his real estate funds are now responsible for 60 percent of the private equity behemoth’s profits.

So it’s no surprise that observers have been pointing to Gray as the obvious choice to take over as Blackstone’s next leader. While his name has been bandied about as a possible successor to 62-year-old Blackstone president Tony James for some time, he’s now also being referred to as a contender to head the firm, replacing CEO Stephen Schwarzman, 66, whenever he retires. While Schwarzman has said he has no desire to retire, last summer reports surfaced that he was grooming six possible successors. It now appears that Gray is leading that pack.

Indeed, rumors are swirling that James doesn’t want Schwarzman’s job — earlier this year he was reportedly in talks with the Obama administration to take over as Treasury Secretary. But sources told The Real Deal that Gray is likely to shy away from the CEO post.

He “plans to run [the] real estate [division] for the foreseeable future,” a source close to Blackstone said.

Gray and Blackstone both declined to comment for this story, but a source inside the company said James, who sold about $88.6 million in company stock last month, as Blackstone shares traded at a near-six-year-high, “isn’t going anywhere.”

And Sam Zell, who has worked with Gray on many deals — Blackstone bought Zell’s Equity Office Properties Trust in 2007 for $39 billion, then quickly sold a portion of it at a profit — said Gray likes to get his hands dirty in deals. He said he didn’t think Gray would necessarily like being the public face of the company. “If it [is] an administrative-type job, I can’t imagine him trading what he’s doing for that,” Zell told TRD.

Gray, for his part, is “focused on his business,” not on his future role at the firm, said a source at Blackstone. And while he knows he’s often looked to as a possible leader for the company, attention to his success and wealth makes him uncomfortable, the company source added.

But players inside and outside of Blackstone say that even if Gray, a numbers guy with a reputation for being a straight shooter and a methodical decision maker, is reluctant, he’d still be the best person for the job.

One source, who asked to remain anonymous, said Gray’s squeaky-clean image would be an asset for Blackstone, which has sometimes been seen as a big, bad buyout firm. But that’s, of course, if he can be convinced to take the reins.

Nose to the grindstone

Since arriving at Blackstone from the University of Pennsylvania’s Wharton School in 1992, the unassuming Gray has engineered new ways to make the widely successful firm even more money.

A managing director by age 30, Gray helped pioneer the use of commercial mortgage-backed securities to finance debt — before it came to be in vogue during this most recent real estate boom.

He cut up and sold off debt, for instance, in Blackstone’s $3 billion acquisition of Extended Stay America, the long-term-stay hotel brand, in 2004. It was one of the first public companies taken private using CMBS, according to news reports.

And the deal was a success. Blackstone sold the company to the Lightstone Group for $8 billion three years later. (In a twist, Blackstone teamed up with two partners to buy Extended Stay again in 2009 for $3.9 billion after Lightstone filed for bankruptcy. The trio is now preparing for an initial public offering that’s expected to triple their profits.)

It’s easy to see how the Extended Stay deal set the stage for Gray to take over Blackstone’s real estate division in 2005.

And two years into running that division came Gray’s career-making Equity Office Properties deal. While in hindsight the deal may seem like a slam dunk, at the time there were plenty of industry observers who thought it was too risky a play, and warned that Blackstone could get stuck with overpriced properties with nobody to sell them to.

But Gray was proven right. Not only did his all-cash bid famously outmaneuver mega-landlord Vornado, but he was able to quickly flip many of the properties before the market crashed.

Blackstone, of course, did not come out of the crash unscathed. It reportedly had to restructure two deals: the Equity Office buy and the $26 billion purchase of Hilton Worldwide.

But the firm fared the best of its cohorts — real estate funds at Morgan Stanley and Goldman Sachs have largely fallen by the wayside. Gray, meanwhile, launched an expertly timed mezzanine lending fund in 2008, which loaned out $1 billion in high-cost capital to developers who were scrambling to finance projects. The firm launched seven more real estate funds after that; today, the still-active funds have a massive $69 billion under management, according to the company’s website. However, in the last few years, the size of the funds had prompted some analysts to warn that his operation has become too big, and might no longer be nimble enough to keep up its impressive returns.

“There was concern [he] could only buy things,” a source close to Gray said.

And Gray was, in fact, buying all kinds of new assets. Unlike large conservative investors, such as pension and insurance funds, that often only go after trophy towers, Gray often looked at the least sexy real estate assets. Case in point: the $2 billion in New Jersey industrial properties Blackstone bought in 2010 and 2011.

“He is obviously agnostic as an investor,” said Zell. “He looks at everything.”

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But by mid-2012, with internal rates of return of only 9 percent for its fifth and sixth real estate funds — its earlier funds had shown returns of between 14 and 40 percent — Blackstone needed to sell properties in order to keep investors happy, according to Bloomberg News.

Blackstone did just that in late October, with its IPO of Brixmor Property Group, the once struggling national shopping mall owner, which it bought in 2011 as part of a $9 billion deal that included a bundle of other assets. The IPO valued Brixmor at $5.9 billion and raised $825 million — the second-largest real estate IPO of the year, after Empire State Realty Trust, which was valued lower at $3.2 billion, but raised $929.5 million.

According to published reports, that success could pave the way for Gray and Blackstone to make similar moves with Hilton Worldwide and Extended Stay, situations where the firm is reportedly also looking to cash out at least a portion of its investment.

“You can’t look at IPOs for us as exits,” Blackstone’s James said on a conference call with shareholders earlier this year. “You can look at it as the appetizer before the meal.”

Indeed, the company still owns nearly 75 percent of Brixmor, and sources say it expects to sell off shares at a significant profit over the next several years. Meanwhile, Blackstone is planning to take Hilton public with a $1.25 billion IPO later this year — which is slated to be the largest ever for a lodging company. (See update.)

“They took [Brixmor] effectively out of bankruptcy,” and turned it into a performing asset again in just two years, said a top REIT analyst who asked not to be named.

“Blackstone has done an excellent job as sort of a macro bet on the housing recovery,” added Tom Shapiro, president and founder of GTIS Partners, a New York-based opportunistic real estate investment firm.

Modest mode

Despite Gray’s relatively low profile (for a billionaire, that is), his mind for numbers and analysis has helped him stay ahead of the pack.

A year and a half ago, Gray pushed Blackstone to create an entity called Invitation Homes, which bought up about $6 billion in single-family homes in troubled markets such as Phoenix, Las Vegas and Orlando with plans to fix them up, rent them out and securitize the revenue stream.

Zell — who went to the same suburban Illinois high school as Gray, though several decades before Gray — and others have been skeptical about the financial prospects for the plan, noting that owning real estate in too many locations makes it difficult to fully understand the ins and outs of each market.

But Gray was recently quoted by The Atlantic defending the practice. “The downturn created an opportunity to create a business,” he told the magazine, adding that Blackstone could “professionalize” landlord-tenant relations.

And the firm is already pioneering ways to monetize its new portfolio.

In October, Blackstone took steps to securitize its revenue from those investments when Deutsche Bank, Credit Suisse and JPMorgan announced a $439 million bond offering on behalf of Invitation Homes.

While securitizing income from rentals might be seen by some as a newfangled ploy, the securities offering is a good way to generate cash. Yet some bond investors are apprehensive about buying the AAA-rated products, as they don’t think Blackstone has enough skin in the game.

Others have said Blackstone might be artificially inflating property values. But Gray denied that, telling The Atlantic that home prices are also up in Salt Lake City, where Blackstone owns nothing.

A source who asked to remain anonymous said that the homes owned and operated by Invitation are currently 95 percent occupied.

Regardless of whether Invitation Homes is successful, finding distressed properties is becoming increasingly harder for private equity firms like Blackstone and others.

But sources close to Blackstone said the firm is ramping up investment in Europe, where Gray is shooting to raise $5 billion for distressed assets, and where the company has already begun snapping up underwater assets like apartment buildings in Madrid, according to the Financial Times.

Meanwhile, Gray, whose net worth was estimated at a mere $550 million last year by Forbes, has kept a low profile since his 40.6 million shares of Blackstone hit the billion-dollar mark.

One source said he finds the recent fanfare over his net worth “a little awkward.”

And rather than making headlines for deploying his personal wealth on high-priced homes around the world, he’s done so for donating to philanthropic causes. Earlier this year, Gray and his wife, Mindy, who have four children, gave $25 million to fund research on ovarian cancer at Penn.

That’s not to say Gray doesn’t live well, but compared to other billionaires, his personal real estate is actually modest. According to city records and published reports, he owns a co-op on Park Avenue that he bought in 2005 for $7.6 million, as well as a home in Sagaponack, which was purchased for $2.88 million in 2003.

Analysts say Gray is poised to continue racking up returns for a while.

Mike Kirby — a Green Street Advisors analyst who once told Bloomberg News that he had doubts about the real estate funds at Blackstone continuing to produce the best returns in the industry — said he now believes Gray will sell off assets at a significant profit. “They … are going to be wildly successful on the money they’ve deployed over the last four or five years,” he said.