When a record-breaking property deal needs to be pulled together in less than a month, one doesn't have the luxury of waiting to get back to the office to make an important phone call. A sidewalk in the middle of bustling midtown Manhattan will do just fine.
Such was the backdrop for a key moment in the deal-making process for The Blackstone Group and Wells Fargo's acquisition of a $23 billion commercial real estate portfolio from GE Capital Real Estate. Parent company, GE, is divesting its GE Capital platform to focus on growing its higher-performing industrial businesses and real estate is among the first parts to be offloaded.
The signing and announcement of the deal on April 10 was the culmination of an intense negotiation period that began in mid-March, when Jonathan Gray, Blackstone's global head of real estate, received a phone call from Alec Burger, GE Capital Real Estate's chief executive, about buying the latter's commercial real estate assets.
Gray, Ken Caplan, global chief investment officer for real estate, and Mike Nash, head of real estate debt, then met with GE at the latter's offices at 30 Rockefeller Plaza in New York. Upon exiting the building after the meeting, the first thing that Gray did was to call Tim Sloan, head of the wholesale banking group at Wells Fargo, on the sidewalk from his cell phone.
It is no coincidence that Blackstone was GE's first call on its portfolio sale, or that Wells Fargo was top-of-mind when Blackstone was considering a prospective partner on the deal. Both of Blackstone's relationships with GE and Wells Fargo go back to the beginnings of the private equity and real estate giant's business in the 1980s. Wells Fargo, in fact, was an investor in Blackstone's first private equity fund in 1987.
“The very strong relationships we've built with GE and Wells over many years were critical,” said Caplan in an interview with PERE . “That, combined with our position in the market and the certainty that we can give GE to get this done in one transaction, all contributed us to getting that phone call and us being able to do this.”
Over the years, Blackstone has been an active borrower from GE Capital Real Estate, and the two parties also have done a number of equity deals together. Last November, through its BREP Asia fund, the New York-based private equity and real estate giant announced its plans to acquire GE Japan Corporation's residential real estate business for more than ¥190 billion (€1.29 billion; $1.61 billion), and in February 2014, agreed to buy a 9.6-million-square-foot US warehouse portfolio from GE Capital for approximately $550 million.
Interestingly, Blackstone also sold nine US office buildings to GE for more than $1 billion in July 2007, according to New York-based data provider Real Capital Analytics (RCA). Those properties formed the Chicago sub-portfolio of Equity Office Properties Trust (EOP), the US office REIT that Blackstone took private that same year – and are now included in the portfolio that GE is selling to Blackstone.
As for GE, it only had one buyer in the mind for the deal. “The only company on the planet that could have executed in terms of the time, the complexity and the sheer different geographies was Blackstone,” said one person at the company.
All hands on deck
The GE portfolio acquisition represents the largest private real estate transaction since the global financial crisis, according to RCA data. The largest such deal of all time, however, remains Blackstone's leveraged buyout of EOP for approximately $39 billion in 2007.
However, as Caplan pointed out: “The transaction might not be as big as EOP, but it was far more complex and involved more parts of our business than anything we've done before.” Indeed, with four different Blackstone real estate vehicles involved in the purchase, the transaction required the participation of the firm's entire global property team. PERE understands that Blackstone's real estate business had never had so many of its people working together on a single transaction.
Moreover, as with most massive property trades, “there was a lot of back-and-forth and tough negotiations,” Caplan added. Unsurprisingly, the team didn't get much sleep from mid-March until the morning of April 10.
Time was of the essence in executing the deal. After its board made the decision to sell the company's commercial real estate business, GE only had three and a half weeks to find a buyer and reach a purchase and sales agreement. PERE understands that the company wanted to announce the deal – and its larger restructuring plans – ahead of the release of its first-quarter earnings results on April 17, since the transaction would have a material impact on earnings that quarter. Blackstone, for its part, was said to have been unaware that the transaction was intended to kick off GE's restructuring effort.
In a conference call last month, chairman and chief executive Jeff Immelt noted that GE planned to sell most of the GE Capital assets over the next 18 months to 24 months. “With the announced commercial real estate transaction, we have about half of our 2015 goals for asset sales already achieved,” he said.
During the call, GE also revealed that it had signed letters of intent representing an additional $4 billion worth of property exits that are expected to be announced this quarter. According to one source at the company, those transactions would involve the company's commercial real estate assets in Germany and Japan.
Prior to the sale announcement, GE already had been winding down its real estate equity assets, in favor of building its real estate lending business. In a December 2011 investor presentation, GE revealed that its real estate equity business had been reduced to $28 billion, down from a 2008 peak of $41 billion, and that it planned to further shrink the equity business over the coming years.
The initial closings of the GE portfolio sale are expected to occur during the second and third quarters of this year. In the meantime, the parties will continue to discuss additional matters, such as the potential move of personnel from GE to Blackstone and Wells Fargo.
Despite its hefty price tag, the transaction at its core wasn't all about size for Blackstone. “I don't think they go out and say, 'I want to get the biggest deal out there,'” said Kevin Swill, chief operating officer of The Carlton Group, a real estate investment bank that did not work on the GE deal. “They buy based on the value-add they can put there and the yields they can get for their investors.”
On the equity side, “the portfolio fits in very well with a number of areas where we are active in Europe and the US,” said Caplan. GE's European equity real estate assets, for example, will help to bolster Blackstone's European logistics platform, Logicor, as well as its European retail business, Multi. Meanwhile, the company's US equity holdings are potential candidates for lease-up and repositioning. The majority of the assets are Class B properties built in the 1980s and 1990s, with some showing high vacancies, according to the website of Arden Realty, an affiliate of GE Capital Real Estate. “We do think there's a lot of opportunities within the portfolio on the operations side,” Caplan said.
On the debt side, the GE deal is being viewed as a strategic move to significantly expand its assets under management. In a call with reporters last month, Blackstone president Tony James noted: “what's scaling our AUM is the creation of new products around new capabilities and new markets.”
The GE transaction, he said, will give the firm new capabilities through its debt purchases in Australia and Mexico. “There are teams in those places that are good teams that have done remarkably well that we didn't have before, and that opens up new product opportunities and new fund opportunities,” he said.
Given the size and speed of execution, the GE portfolio sale is certainly one for the books. And, much like the EOP transaction that preceded it, the deal is a story that is just beginning to unfold.
Divide and conquer
Blackstone and Wells Fargo are dividing GE's $23 billion commercial real estate portfolio in five ways:
Wells Fargo agreed to purchase performing first mortgages in the US, UK and Canada for $9 billion.
Blackstone Real Estate Partners (BREP) VIII, Blackstone's global flagship property fund, will inherit GE's US equity assets – 24 million square feet primarily consisting of office properties in southern California, Seattle and Chicago – for $3.3 billion. The investment is the inaugural deal for the fund, which collected a total of $14.5 billion of institutional capital in March.
BREP Europe IV, Blackstone's European real estate fund, will inherit GE's European equity assets – 18 million square feet mostly in the UK, France and Spain – for €1.9 billion.
Blackstone Real Estate Debt Strategies, Blackstone's real estate debt fund business, has agreed to buy performing first mortgages in Mexico and Australia for $4.2 billion.
Blackstone Mortgage Trust, Blackstone's publicly traded commercial mortgage real estate investment trust, will be the purchaser of $4.6 billion of performing mortgages, primarily in the US.