Schwarzman: “We can ride out any period of volatility”

Real estate contributed to Blackstone’s first quarterly loss since 2011, but executives say there is no cause for concern.

Despite a 98 percent loss in real estate income during the third quarter, Steve Schwarzman, Blackstone’s chief executive officer, said the investment prospects for the aspect class look strong going into the fourth quarter.

“The supply-demand characteristic of real estate in many places around the world is very good,” Schwarzman said on a call with analysts Thursday.

The world’s biggest money manager suffered its first quarterly loss since 2011 as a result of volatility in the stock market, but executives projected confidence going into the fourth quarter.

“We feel very good about current investments,” Schwarzman said on the call. “Volatility is, however, ultimately good for our business, though a little bit painful from time to time.”

One major area of opportunity in real estate was privatizations. Schwarzman noted a difference in the public and private real estate markets. He said public REITs were down 15 percent and lodging REITs declined 30 percent last quarter, so the firm pivoted to private transactions.

“We don’t need partners and we can move with speed and certainty to close the largest transactions in the world,” he said on the analyst call.

Tony James, the firm’s president, said privatization presented opportunities for Blackstone’s real estate division when public markets entered times of turmoil, such as the last quarter.

“Public value softened while private values grew,” he said on a separate call with media. “We are not dependent on public markets for realizations.”

Real estate fundraising was “robust” in the last quarter, up to $3.8 billion. Blackstone’s two-year-old core plus real estate strategy benefitted in particular from strong fundraising, bringing in $2.5 billion for a total of $8.5 billion in assets under management.

Schwarzman noted a few areas of particular growth for the real estate business: US housing and office, India office rentals and Chinese retail all boosted the real estate outlook.

“Our holdings are not reflective of the market,” he said on the earnings call. “We can ride out any period of volatility. We’re ready in the fourth quarter.”

James said Invitation Homes presents further opportunities. Blackstone’s housing landlord arm owns about 48,000 homes throughout the country, and announced plans to sell about 1,300 residences in Atlanta in July. He said the company, which is the largest US single-family homeowner, is still buying properties.

“The purchase rate has gone down a lot as values have gone up,” James said on the media call. “We’re not on a path to exit yet. We’re still building up the company.”

Blackstone manages a total of $93.2 billion in real estate assets, up 16 percent compared with the same quarter last year, according to its third-quarter earnings results, which were released Thursday. Its economic net income in real estate dropped 98 percent, to $10.5 million, from the third quarter of 2014. Market turmoil led to significant drop in Blackstone's hotel stocks and other real estate holdings.

The firm reported a total third-quarter loss of $416 million, compared with a profit of $758 million a year earlier, according to earnings results. Overall, its assets under management went up 17 percent, to $333.9 billion, compared with the same quarter last year.