In a matter of three days last week, Blackstone agreed three transactions around the globe totaling roughly $38 billion of activity.
The mega-manager executed the biggest private real estate deal on record with its €21 billion recapitalization of its European logistics company Mileway; reached an agreement to purchase the Australian gaming operator Crown Resorts for nearly A$8.9 billion ($6.3 billion; €5.4 billion) and inked a deal to privatize the US REIT Preferred Apartment Communities for $5.8 billion.
The flurry of activity represents the firm’s highest volume of real estate transactions in such a short period in more than a decade. The last time it put so much capital to work within a similar timeframe was in 2007, when it acquired Sam Zell’s Equity Office Properties Trust for $39 billion. Because the EOP transaction included the assumption of the REIT’s debt, last week’s transactions represented a greater sum of equity, PERE understands.
Kathleen McCarthy, co-head of Blackstone’s global real estate platform, said the fact that the three deals came together in rapid succession was more coincidence than design. Still, she told PERE, the string of transactions demonstrates the capabilities of the firm to operate in the three major global geographies, across the risk spectrum and with both institutional and retail capital.
“It’s the whole power of the platform really coming together and delivering for each of our different types of investors,” McCarthy said.
The record setter
Blackstone was not short of options as it looked for a way to exit from Mileway, its 1,700-asset-strong European last-mile logistics platform. It looked at various sale options as well as a potential public offering.
McCarthy said the conclusion reached was that the best way forward was an all-cash offering, something that was available through Blackstone’s various core-plus funds. This led to a conversation about recapitalization with the limited partner advisory committees of the opportunistic funds that owned Mileway.
Most of the investors, she said, were eager to maintain exposure to the platform: “It’s the largest last-mile logistics portfolio in Europe and our investors were happy to have built this great company and have an opportunity to hold it for the long term, recognizing that it has a more stable cashflow profile going forward,” McCarthy said.
Existing investors were given the first crack at the platform and the rest of the capital was drawn from various core-plus vehicles managed by Blackstone. This makes the record-setting recap different than Blackstone’s $14.6 billion BioMed Realty transaction, which was used to launch a new open-end vehicle, Blackstone Property Partners Life Sciences.
Investors were given the option of rolling their existing investments into the new Mileway capital structure, increasing their exposure or cashing out. Having already secured a fairness opinion on the transaction, Blackstone is in the middle of a 75-day “go-shop” process, in which a third party will seek a better offer from an outside buyer.
The long process
Blackstone initiated its takeover bid for Crown Resorts nearly a year ago, offering to purchase all the company’s outstanding shares for roughly $6 billion last March using its opportunistic funds. The firm made multiple offers and fended off a brief challenge from Crown’s chief rival, Star Entertainment Group.
Travel and leisure have emerged as top convictions for Blackstone in recent years. Even before the pandemic it was scooping up properties along the Las Vegas Strip, where it has remained active over the past two years. Last year, it also teamed up with Starwood Capital to acquire the hotel chain Extended Stay America for more than $6 billion.
McCarthy said the firm has already seen the global hospitality industry bounce back as covid-induced travel restrictions around the world have been eased. Australia has had some of the strictest rules, all but closing its borders during the pandemic, which she said opens a runway for outsized returns moving forward.
“We see a recovery underway in hospitality,” she said. “In Australia, which has been hit hard and its borders had been closed, we believe there’s going to be a strong rebound. By having high-quality, well-managed assets, we can help drive that rebound in Australia and also benefit from it.”
Given the limited scale of the Australian gaming industry, McCarthy said the Crown portfolio, which includes locations in Sydney, Melbourne and Perth, presented an opportunity to enter the space with “exceptional assets.”
The acquisition comes at a time when Crown is in jeopardy of losing its operating license at its Perth casino and when the opening of its Sydney property has been delayed by a government inquiry into its business practices. Investigators found the company was engaging in money laundering and other illegal practices.
McCarthy said the company’s history presents an opportunity for Blackstone to add value by improving governance. “It’s important in any company but particularly this one, given what it’s been through, to bring that sterling approach to governance and management,” she told PERE.
The residential play
Blackstone’s third acquisition of the week, Atlanta-based Preferred Apartment Communities, is the third multifamily focused privatization the firm has undertaken in the past three months using its BREIT platform, a core-plus vehicle capitalized primarily by retail investors.
Previously, it agreed to buy Bluerock Residential Growth REIT for $3.6 billion in December, then followed that with a deal to buy Resource REIT for $3.7 billion in January.
The Preferred acquisition net the firm 44 communities for a total of roughly 12,000 units. The deal also included 54 grocery-anchored retail centers, primarily in the US southeast.
Of the $96 billion of assets within BREIT, 52 percent were residential as of January 2022, according to its monthly disclosure. McCarthy said the property type has been the vehicle’s top conviction, given its focus on stabilized assets with strong cashflows.
The firm has had success building its residential exposure through privatizations because of its ability to provide a lot of capital quickly, something that tends to bode well with the leadership of listed entities, McCarthy told PERE.
“A public company board has a responsibility to its shareholders, and a sophisticated buyer with certain capital ready to go, is immensely valuable to a board considering different options,” she said. “We are able to bring that and it’s hard to think of another buyer that can offer it to the same degree, particularly in the real estate space.”
Many of the firm’s recent acquisitions, particularly Bluerock and Resource, have been garden style apartments. Historically considered a second-rate property type, these assets have risen in popularity among institutional buyers as renters move out of dense city centers and into suburban locations.
While this has led to rising prices and capitalization rate compression for garden apartments, McCarthy said Blackstone is confident the growth dynamics will be enough to keep the sector profitable.
“We look at all sides when we’re evaluating a transaction, but we never want to lose sight of what we think is going to happen to cashflow growth and the broader market,” she said.
Across all three transactions, McCarthy said, the scale of Blackstone’s capital coupled with its operating expertise enabled it to bring an offer to the negotiating table that few competitors could match.
“We are able to bring something, whether it’s to a counterparty or our investors, that they recognize would be very hard for others to offer,” she said. “We feel this is emblematic of the business we built over a long period of time and the way we can generate differentiated opportunities for our various sources of capital.”