Blackstone’s James: RE offers “the best bid to sell”

Despite a record year for investments, the New York-based private equity and real estate giant anticipates realization activity will ramp up over the next two years, particularly in its property portfolio.

In its best overall year since going public, The Blackstone Group hit new highs on the real estate front last year. The New York-based private equity and real estate giant invested or committed a record $9.4 billion to real estate in 2012, including $8.5 billion that was deployed and an additional $923 million that was earmarked for investments.

“Real estate had a huge year in new investments,” said Tony James, Blackstone’s president, during an earnings call with reporters. For example, investments on behalf of the firm’s Blackstone Real Estate Partners (BREP) funds were up 3.7 percent for the fourth quarter and 14.4 percent for the full year 2012. The firm’s most recent global real estate fund, BREP VII, raised a record $13.3 billion in total commitments, of which $8.3 billion remained available at the end of the year, according to Blackstone’s fourth quarter and full year 2012 results.

Real estate reflected overall peak levels of investment at the firm. “In terms of capital deployment, we’ve been very active in putting capital to work,” said Blackstone chairman Steve Schwarzman during a subsequent call with analysts. “Our investment pace has been at record levels,” with more than $18 billion in total capital deployed or committed in 2012, including $8 billion in the fourth quarter alone.

Schwarzman anticipated deal flow to remain strongest in real estate, particularly in Europe. While Basel III will make it more challenging for financial institutions to shed real estate assets, “as those assets increase in value, it will make it easier for some of those assets to move because they’ll result in less write-offs. We have to make sure that, if we’re the buyer of those, we can improve them enough to make our returns.”

At the same time, however, he said that “it’s becoming increasingly evident that we’re reaching an inflection point in terms of realizations, assuming markets remain constructive.” Blackstone saw $12.6 billion of realizations in 2012, with half of that occurring in just the fourth quarter. Going forward, Schwarzman anticipated realizations to be substantially higher in 2013 and 2014 than in the past few years.

One major realization in real estate in 2012 was the sale of the Sunwest assisted-living portfolio to a healthcare REIT for $1.73 billion last fall. The $220 million investment, made on behalf of BREP VI, yielded a 2.4x multiple after a two-year hold period, he noted.

“When real estate works, it really works,” Schwarzman said. “Two point four times your money in two years? If we did that with every piece of real estate, we’d be managing most of the money in the world. But it does happen and it isn’t just an odd outcome.”

While James said he expects realizations to rise across the board in 2013, “the portfolio that is maturing the fastest and into which there is the best bid to sell is real estate at this point.” He noted that “there’s a very good bid” for Blackstone’s real estate assets – many of which the firm has held since 2007 – because of low cap rates and investors seeking the security of hard assets. Also, the lack of construction has yielded a stronger performance in the commercial real estate sector as compared to the overall economy. “We’re seeing stronger operating results in real estate than we are in our portfolio companies, which means we’re going to push those along further.”

Economic net income (ENI) for real estate remained essentially flat from 2011 to 2012, although it declined from $250.8 million in the fourth quarter 2011 to $246 million in the fourth quarter 2012. This was in sharp contrast to significant quarterly and annual increases in ENI for Blackstone’s private equity, hedge fund and credit businesses. Meanwhile, Blackstone reported a 30 percent increase in overall ENI to nearly $2 billion, its highest full-year result since going public five-and-a-half years ago.

Laurence Tosi, Blackstone's chief financial officer, attributed the decline in real estate ENI to an accounting “quirk” under GAAP that requires the firm to accelerate a portion of its performance fees after many of its real estate funds reached the threshold to earning full performance fees.

Total assets under management (AUM) for real estate rose 32 percent in 2012 to a record $56.7 billion, of which Blackstone’s acquisition of Capital Trust’s investment management business contributed $2.3 billion. This growth contributed to total AUM for the firm hitting a record $210 billion in 2012, up 26 percent from the previous year.