Despite a backdrop of record-high inflation and the Federal Reserve contemplating a 50-basis point increase in interest rates, Blackstone has prepared its property business to navigate whatever frothiness is yet to come.
The New York-headquartered real estate giant has positioned its almost $300 billion real estate portfolio in areas it believes are best positioned to outperform in the face of volatility. Around 80 percent of the firm’s equity investments are in sectors where rental growth is significantly outpacing the rate of inflation, president and chief operating officer Jon Gray told investors on the firm’s Q1 2022 earnings call last week. These sectors include logistics, life sciences, rental housing and digital infrastructure.
“If you think about overall investing, there are only two things that drive asset prices higher,” Gray said on the call. “It’s either rising cashflows or rising multiples. In an inflationary rising rate environment, multiples tend not to go up.”
As a result, “owning things where cashflow will grow is super important,” he explained, adding that the firm has focused on property sectors with “really good fundamentals and short-duration leases.” The latter allows for a resetting of terms to higher rents, meaning you can “outrun that inflation” and “still deliver positive performance,” Gray said. He noted that the firm’s $6.2 billion deal for Australian casino company Crown Resorts, the firm’s planned recapitalization of European logistics platform Mileway and the $12.8 billion take-private of student housing REIT American Campus Communities, announced last week, all reflect this pursuit of cash-flowing assets.
“You have to think about how you deploy capital in this changing environment,” Gray said. “And particularly, if you think about the retail channel, what we’re doing there, it’s very reflective of that. The two main products are really positioned to be inflation-protection products.”
One of those products, BREIT, primarily is exposed to housing and industrial properties. The firm has raised between $4 billion and $5 billion of equity per month for its three retail perpetual vehicles, which also include the Blackstone European Property Income Fund and Blackstone Private Credit Fund, Gray said.
BREIT now has $63 billion in assets and generated 5.8 percent appreciation in the first quarter alone. “Investors recognize our products are well positioned for the inflationary environment ahead given BREIT’s focus on hard assets with short-duration leases,” Gray said.