Blackstone's RE dispositions to accelerate

The Blackstone Group is poised for a pick-up in real estate disposition activity in the second half of 2012 and into next year, as a substantial portion of its office holdings are nearing maturity. “You can expect disposition activity in general to be picking up in the second half of this year and into next year compared to the last couple of years,” said Tony James, Blackstone’s president and chief operating officer, during an earnings call today.

James acknowledged that the New York-based private equity and real estate giant owns “a very valuable portfolio” of office properties, with a large amount of office space nearing the end of the firm’s typical holding period. “In real estate, we are in the business of buying impaired properties,” he said. “As these portfolios mature and they’re fixed up, it’s our intention to resell them as part of the business. That time is getting closer.”

However, “I don’t think you’re going to see a big raft of stuff dumped on the market,” James said, addressing recent reports and speculation that Blackstone was looking to sell a 100-property office portfolio for $22 billion. “It will come out over an extended period of time.”

James noted that Blackstone’s office holdings have benefited from rising occupancies and rental rates, as well as high replacement costs. Indeed, the firm’s real estate values rose 2.9 percent during the second quarter as a result of improving occupancies across all of its property types, mainly due to supply constraints.

Despite this, revenues for Blackstone’s real estate business fell 48 percent from the second quarter of 2011 as a result of smaller appreciation gains in its real estate funds and a “catch-up” that led higher performance fees in the year-ago period relative to the second quarter.  “Last year was a huge quarter for real estate appreciation,” said James. “That was partly because it was a bounce off the bottom.” Indeed, while occupancies and property values have continued to increase, the rate of appreciation has been less significant.

Fee-earning assets under management for real estate were $38.5 billion during the second quarter, up 38 percent from the same period one year ago. This was driven primarily by fundraising for its latest global real estate fund, Blackstone Real Estate Partners (BREP) VII, which now has raised $12 billion in commitments. The firm is expected to complete fundraising for BREP VII, which is on track to hit its $13 billion hard cap, in the next few months.

Blackstone invested a total of $2 billion in capital and committed an additional $1.6 billion to real estate during the second quarter, with investments driven mostly by stressed and distressed owners with liquidity issues. With a total of $4.7 billion deployed and committed to the asset class year-to-date, “it’s on track to be a huge year for us,” said James.

Investment records – revealed for the first time in the second quarter earnings report – showed that, as of 30 June, BREP VII had realised investments of $122.6 million and unrealised investments of $2.5 billion, which yielded a realised net internal rate of return (IRR) of 81 percent and a total IRR of 33 percent.

With regards to earnings, real estate accounted for the majority of Blackstone’s overall earnings for the quarter. Economic net income (ENI) for the asset class contributed $197 million to the firm’s $212 million in total ENI. Still, economic income for real estate was down 57 percent from $545 million during the second quarter of 2011. The earnings decline was more dramatic companywide, with ENI plunging 74 percent from $804 million during the prior-year period. This decline was attributed to a significant drop in unrealised performance fees as a result of deterioration in the global stock and bond markets, as well as the weak euro, in the second quarter.