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Blackstone’s James: ‘We don’t think there’s a bubble’

The world’s biggest private equity firm saw its second-highest quarter of real estate realizations, buoying overall profits.

Blackstone president Tony James expressed optimism about the future of real estate after the world’s largest private equity firm saw near-record realizations last quarter.

On the firm’s third quarter earnings call Thursday, James told analysts that a lack of new construction coupled with strong population growth and other favorable market conditions will continue to strengthen the US real estate market.

“We don’t see any evidence that a real estate bubble is forming,” he said, noting specific exceptions, such as the office market in oil-dependent Houston and luxury housing throughout the country, the latter of which Blackstone does not invest in. “We think as long as the environment stays healthy – it doesn’t have to be hot – rising [cap] rates are what we’re expecting, and we’ll get our returns.”

In the last quarter, real estate realizations exceeded investments by billions. The firm realized $7.2 billion, its second-largest quarter for realizations since inception, driven by the $1.2 billion exit of Blackstone’s remaining public stake in shopping center real estate investment trust Brixmor; the $1.9 billion disposition of its Chinese retail platform to developer China Vanke; and the sale of most of Strategic Hotels & Resorts to Anbang Insurance Group. Blackstone had $3 billion in realizations in the third quarter of 2015. Its largest-ever quarter for realizations came during the Q1 2015, when Blackstone reported $9.1 billion of exits, including its $8.1 billion IndCor sale.

In addition to these large exits, Blackstone invested $4.1 billion during the quarter, including the closing of Irish retail complex Blanchardstown for about €950 million and $1.1 billion in investments for its US core-plus platform. In the same period in 2015, the firm invested $4.3 billion.

“We’re seeing great deal flow in our core-plus area, which is a bigger and deeper asset class than the opportunistic area,” Blackstone’s chief executive Steve Schwarzman said on the analyst call. The firm launched its core-plus platform, Blackstone Property Partners (BPP), in 2014, collecting $12.1 billion for the open-ended vehicle by the end of the third quarter.

The firm’s real estate funds continued strong performance during the third quarter. Blackstone’s flagship opportunistic fund, Blackstone Real Estate Partners (BREP) VIII, had a 20 percent net internal rate of return, while BPP had a 14 percent net IRR as of September 30. BREP VIII returned 19 percent during the previous quarter, while BPP generated 15 percent.

Blackstone’s total assets under management rose 8 percent year-on-year to $361 billion. Within real estate, Blackstone’s AUM increased 9 percent, to $101.9 billion, over the same time period.

The firm’s overall third quarter economic net income (ENI) was $687 million, up from a $415.9 million loss in the same quarter in 2015. Real estate generated $365.5 million in ENI, up from $10.5 million year-on-year.