How “third-grade math” led to one of Blackstone’s first RE deals

“That’s the lovely thing about real estate… It can’t talk to you”

Stephen Schwarzman (Credit: Getty Images, iStock)
Stephen Schwarzman (Credit: Getty Images, iStock)

It was the height of the 1990s when Stephen Schwarzman struck one of Blackstone’s first real estate deals — guided by little more than what he said was third-grade math.

At the time, the U.S. government was selling off foreclosed properties to firms like Blackstone, Goldman Sachs and Morgan Stanley. Blackstone and Goldman had teamed up to bid on a portfolio of garden apartments, but the partners disagreed on price.

“I looked at this transaction and having never done one, I priced it as a private equity deal,” Schwarzman said Thursday, at Inman Connect in Manhattan. Goldman was pushing for a lowball offer on what Schwarzman described as a deal with upside.

He figured he could earn 16 times EBITDA (earnings before interest, tax, depreciation and amortization) less capital expenditures. Or, if he financed the acquisition, he’d see 23 percent returns. Once the economy improved, he figured he’d get 45 percent returns and then 55 percent if he raised the rents. “I said, I don’t want to go cheaper. I’ll be earning 55 percent [returns] a year and I don’t need to be a pig,” he recalled saying.

After winning the bid, Schwarzman said his analysis was wrong. Instead, Blackstone made a 64 percent compounded annual return. “I didn’t know much about real estate but I did know something about an economic cycle,” he said. “You don’t need more than third-grade math cycles to figure out what I just told you.”

Decades later, the Blackstone chairman and CEO said his strategy is the same. “I’m always pretty comfortable when we buy something that the price is right if we figure out the trend,” he said.

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Blackstone has come a long way since that garden-apartment portfolio deal. It’s become one of the largest real estate and private equity firms in the world, with $163.2 billion in real estate assets under management, according to its latest earnings report. The giant deployed a record total of $22.5 billion in real estate capital in 2019, and in recent years has made huge multifamily plays including the $5.3 billion acquisition of Stuyvesant Town-Peter Cooper Village with Ivanhoe Cambridge.

Sitting on stage — in his trademark dark suit, pinstriped shirt and purple tie — Schwarzman riffed on his unusual path to banking. “When I was in college, I took a major you can only have in the 1960s,” he said. “It was called culture and behavior.”

But he said he’s relied on lessons in psychology and sociology from that time. “It’s pretty simple, doing deals, I think,” he said. “I always look at things and say, ‘What’s the zone of fairness for the people involved?’ If you start too far outside that zone, the other person loses interest and walks away.”

(The degree appears to have paid off. Schwarzman took home $583 million last year, according to a recent estimate by Crain’s.)

“I, myself, am not emotional about deal-making,” he said.

“That’s the lovely thing about real estate… It can’t talk to you, it just is what it is,” he said. “When we buy companies there are a lot of humans and they have needs. In real estate everything is transparent. It’s the only business I know where there’s complete transparency on supply and demand.”

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