Throughout its nearly 30-year history, The Blackstone Group has capitalized on distressed opportunities across its various businesses, including real estate. However, the best places to find distress have been changing rapidly, the firm’s top executives said during an investor call late last week.
“In the US, there’s obviously not a lot of distress left,” said Steve Schwarzman, Blackstone’s chairman. “There’s a little bit in Europe and, in Asia, some of that is going be coming in the future, if the emerging markets develop problems.”
Over the last six months, European banks have stabilized enough to be able to liquidate assets for the first time while still maintaining a decent capital ratio, Schwarzman said. Meanwhile, some distress situations has been emerging in Asian real estate, as banks in the region have pulled back on lending activity, which in turn has put greater pressure on local real estate developers and owners.
With the economy picking up in the US, there are few distressed opportunities in the country, with high pricing for such investments, added Tony James, Blackstone’s president. Meanwhile, in Europe, Blackstone had started to buy non-performing residential loans for 40 cents on the dollar, but those prices have now more than doubled, to the point where such investments no longer are yielding interesting returns, he explained.
“There’s starting to be a lot of capital flowing into Europe for distress, so I’m not necessarily sure how long there will be interesting opportunities, but they are interesting today,” said James. “Asia, with the pullback of credit in China, is really starting to pick up a lot of momentum. It has flowed from the US into Europe, and it looks like it’s flowing over to Asia.”
Whichever direction distress is flowing, however, it will be good news for Blackstone’s real estate platform. “The two businesses that benefit the most from bank sales are real estate and tactical opportunities,” James noted.
The first quarter of the year was a particularly active one for Blackstone on various fronts. The firm raised more than $1.5 billion on behalf of its real estate funds, including $1.3 billion from the final closing of Blackstone Real Estate Partners (BREP) Europe IV and $245 million in BREP Asia. Additionally, Blackstone completed two more transactions for its new core-plus business, bringing the total amount of investments in the platform to $1.6 billion. The new deals included the acquisition of a 49 percent interest in One Market Plaza, a 1.46 million-square-foot office tower in San Francisco, from Paramount Group for $1.2 billion; and the purchase of Alban Gate, a 382,000-square-foot office property in London, from The Carlyle Group for $500 million.
Blackstone also had realizations totaling $2 billion during the first quarter, of which $1.3 billion come from partial sales of its global office portfolio, including Broadgate Estate, Equity Office Properties, CarrAmerica and Trizec. Meanwhile, it continued to deploy record levels of capital, investing or committing $3.1 billion during the quarter.
For its global opportunity fund, BREP VII, Blackstone has invested approximately $8.2 billion of some $13.4 billion in commitments raised. Investments in the fund, which closed in 2012, so far have generated net returns of 28 percent, according to the firm’s first quarter earnings.
Despite already deploying a significant portion of Fund VII, Schwarzman maintained that a successor fund is not imminent. “Fund VIII is a ways away,” he said. “Even our people might need a breather every once in a while.”
Blackstone’s real estate business earned economic net income (ENI) of $320.92 million during the first quarter, down slightly from $352.94 million during the same period one year ago. Assets under management (AUM) in real estate surged 37 percent, from $59.48 billion to $81.33 billion, during the 12-month period, bolstered by the fundraisings for BREP Europe and BREP Asia, as well as Blackstone’s publicly-traded commercial mortgage REIT, BXMT.
Meanwhile, the overall firm generated ENI of $814 million during the first three months of the year, up 30 percent from the first quarter 2013. Total AUM hit $272 billion, up 25 percent year-over-year.