by Charley Babb
Blackstone Group, the private equity giant, appears to be revisiting its pre-recession game plan of acquiring undervalued real estate assets and then selling them off. Well-known as an opportunistic investor in commercial real estate, Blackstone is signaling a shift in its view of the markets. According to Jon Gray, Blackstone’s global head of real estate, the company is accelerating sales of the real estate it has acquired since the early months of the recession to realize gains from the capital it has invested.
Just this month, Blackstone announced a deal to sell its IndCor Properties portfolio of industrial assets to sovereign wealth fund GIC for $8.1 billion. When added to the $13 billion in cash in its coffers, it will have over $20 billion for opportunistic buying opportunities. In addition, it is in the process of raising an additional $13 billion through the introduction of its eighth real estate fund, BREP XII.
In 2007 Blackstone acquired Sam Zell’s office REIT, Equity Office Properties Trust, for $36 billion. It made enormous profits selling off most of the portfolio at the peak of the office cycle prior to the recession. At a recent investor conference, Gray said that the company has nearly $21 billion in unrealized gains from existing real estate holdings. Over the next couple of years, Blackstone intends to divest itself of investments in Brixmor, La Quinta Inns and Suites, Extended Stay America, and Hilton Worldwide. This would indicate that it thinks the market is about to peak for hospitality companies and assets.
Furthermore, Gray indicated that Blackstone desires to acquire public companies that it can privatize to control debt and assets that require repositioning or recapitalization. Blackstone’s assessment of the U.S. REIT market is that companies are trading at a discount to their net asset value (NAV). Investors’ fears of rising interest rates have driven REIT prices down about 18%. Interest rates should begin actually rising in 2015, which will likely put further downward pressure on REIT prices. As such, one can expect Blackstone to employ a similar strategy to the 2007 acquisition of Equity Office and subsequent disposition of assets as it looks to acquire undervalued REITs and make them private.
So what does this mean for the rest of us, who might not have $21 billion to throw around? While past results are not necessarily an indicator of future performance, I am not sure that I would bet against Blackstone Group. If you can find true opportunistic real estate investments, now is likely the time to act. Look for global investors to be buyers, albeit at a smaller scale, who are seeking safe shelter in U.S. assets. Be careful of overpaying for hospitality assets. If you own them, consider selling in the near future as the market may likely be peaking. Finally, remember that all markets cycle. While it is difficult to predict the absolute top of any market, Blackstone Group might be an excellent leading indicator.
Metropolitan Capital Advisors seeks to assist clients with their commercial real estate financing needs, regardless of market cycles. Should you have a chance to take advantage of “value add” situations, we would welcome the prospect to evaluate your opportunities.
The author, Charley Babb, is a Senior Director and Principal in the Denver office of Metropolitan Capital Advisors. Charley can be reached at firstname.lastname@example.org