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James: “We’re not in the business of playing the market”

The Blackstone Group’s president says accelerating disposition and investment activity is part of its “buy it, fix it, sell it” approach to its property business, not a timing of market cycles.

New real estate investment activity is booming at The Blackstone Group, which invested or committed $8.4 billion through its property business during the first nine months of 2013 alone, outpacing realizations by a margin of nearly 2 to 1. There is “speculation that we are somehow calling a market top in real estate,” said Tony James, the firm’s president, in an earnings call with reporters yesterday. He added that the firm’s robust investment volume, which exceeded year-to-date disposition activity of $4.6 billion, refuted that assumption.

“We’re not in the business of playing the market and market cycles,” said James. “We don’t have to do that because we have an easier business, if you will. It’s pretty obvious when assets are troubled and it’s pretty obvious how to fix them, if you have the capital and expertise to do it. And once they’re fixed, you sell them.”

Noting that investments and dispositions in real estate were fundamentally cyclical, James said that Blackstone’s real estate team has been aggressively investing money in real estate for the past two-and-a-half years, but it had invested very little in the years prior. Meanwhile, the firm had very few dispositions in real estate until fairly recently.

“Right now, I think the market is in reasonable balance,” James said. “We’re putting a lot of money out, but we’re also taking some off the table. So, I think that there’s value to be had on the buy side, and it’s a reasonable time to start exiting.” 

James, however, stressed that Blackstone’s plans to take a number of its real estate platforms – including the retail-focused Brixmor – public should not be viewed as exits in the near term. “You can’t look at IPOs as exits for us,” he said. “You can look at it as the appetizer before the meal.”  

Typically, Blackstone doesn’t sell shares at the IPO, retaining its ownership for a few years after the company is taken public. “So the actual exit, even when you have a spate of IPOs, is two or three years out,” James added. 

James explained that it was “inexorable” that high investment activity eventually would lead to high disposition activity, noting that the pace of acquisitions remained strong but had shifted somewhat. “Europe has been picking up and really has been very, very active,” he said. “We got active first in the US and Europe was pretty quiet, but now Europe has been ‘rockin’.”

Blackstone also has been pushing ahead in Asia, where it is raising its first real estate opportunity fund focused on the region. The firm collected an additional $300 million in a second closing for Blackstone Real Estate Partners (BREP) Asia during the third quarter, bringing its total tally for the fund to $1.8 billion. Blackstone held a first closing of $1.5 billion for the vehicle in June.

The fund, which made its first investment in July, currently is generating a net internal rate of return of 207 percent, according to Blackstone’s third quarter earnings report. James attributed the success of the vehicle thus far to the scarcity of other pan-Asian funds in the market and capital dislocations in the region.  “Capital has fled from these Asian countries, and lenders have pulled in their horns,” said James. “So all of a sudden, we can buy growing assets at less than physical replacement costs in economies that are booming, at least by Western standards.”

While investors typically experience a J-curve investing in funds, seeing negative returns while paying management fees on uninvested capital then seeing returns turn positive as the investments mature, that has been less of an issue with BREP Asia, James noted. “There’s much going on in Asia, that fund already is something like 30 percent invested,” he said. “The J-curve is evaporating fast.”

Blackstone’s real estate business recorded economic net income of $414 million during the third quarter, a 43 percent increase from the same period one year ago. Property accounted for nearly 65 percent of the firm’s overall economic net income, which was $640 million, up 49 percent from the same period last year on the back of strong growth in fee revenues and favorable performance fees. 

Total assets under management (AUM) in real estate grew 29 percent from $53.5 billion during the third quarter of 2012 to $69 billion during the third quarter of 2013. Meanwhile, firm-wide AUM hit a new record of $248 billion, rising 21 percent year-over-year.