Blackstone explains how it’s beating inflation, rate hikes

Real estate assets drive second-best cash flow in firm’s 36-year history

From left: Blackstone's Stephen Schwarzman and Jonathan Gray (Getty Images, iStock)
From left: Blackstone's Stephen Schwarzman and Jonathan Gray (Getty Images, iStock)

Blackstone just reported its second-best quarter ever for cash flow, behind only the previous one.

The investment firm announced distributable earnings of $1.55 per share in the first quarter, a 61 percent jump from the same period last year. Net income slipped to $1.22 billion from $1.75 billion, attributable to the slower growth of its private equity portfolio.

Blackstone’s real estate assets drove much of its earnings growth, said CEO Stephen Schwarzman, as rents from a portfolio flush with multifamily, life sciences and logistics properties outpaced inflation.

Meanwhile, the value of opportunistic holdings, or new development, jumped by more than 10 percent, twice the appreciation reported in the same quarter last year. Blackstone’s “core-plus” investments — properties with high-quality tenants — grew by nearly 9 percent, compared to just 3.2 percent in the first quarter of 2021.

Schwarzman juxtaposed those gains with the losses seen across the real estate sector. The MSCI U.S. REIT index slumped about 4 percent in the quarter amid worries around inflation and rising interest rates.

The executive said that 80 percent of the firm’s real estate holdings are in sectors with shorter-length leases that will allow Blackstone to benefit from rising rents and stand up to those economic headwinds.

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Just this week, Blackstone bought American Campus Communities, the largest publicly traded owner and developer of student housing in the U.S., for $12.8 billion. The company sees sizable profit potential in the deal as students return to campuses, rents rise and supply chain issues and labor shortages constrain new development.

“We believe investing in companies with strong revenue growth is the best protection to generate outperformance in the future,” Schwarzman said.

On that same hunch, Blackstone acquired the multifamily REIT Preferred Apartment Communities in February in a $5.8 billion, all-cash deal. The REIT’s holdings are concentrated in the Sun Belt, a region that has seen rents jump 22 percent year-over-year, versus 17 percent nationally, according to Realtor.com.

The refinancing of a portion of the firm’s warehouse holdings accounted for the company’s largest realization in the quarter, said president and COO Jonathan Gray. The move accounted for $4.3 billion in profits, nearly half of the total $9.5 billion gain the sector notched.

Gray said Blackstone has also ramped up investments in hospitality as global travel recovers. In a deal with Starwood Capital Group, Blackstone said in January it would acquire 111 WoodSpring Suites’ extended-stay hotels for about $1.5 billion.

The firm added that its corporate credit business is “virtually” all floating-rate debt, meaning it stands to grow as interest rates move higher.

“Lots of our products are really well-positioned for the environment we’re going into,” said Gray. “If you think about owning hard assets like infrastructure, real estate, floating-rate debt … that’s really attractive.”