By Eliot Brown
When Blackstone Group LP global head of real estate Jonathan
Gray met with General Electric Co. executives in mid-March, they
presented him with an urgent proposition: Buy our giant real-estate
business, quickly.
Mr. Gray obliged.
The $23 billion deal with partner Wells Fargo & Co.,
announced by the three companies on Friday, illustrates
Blackstone's position in the real-estate industry as the firm to
call when it is time to unload tens of billions of dollars of
property in one fell swoop.
The New York private-equity firm has long been friendly to big
deals, most notably the 2007 leveraged buyouts of Hilton Worldwide
Holdings and Sam Zell's Equity Office Properties Trust, the U.S.'s
largest office landlord. But in recent years it has seen
fundraising soar to the point where--before the GE deal--it had
more than $28 billion in cash at its disposal to spend on real
estate alone.
"Blackstone's scale in the real-estate space is unmatched,"
Stephen Ellis, an analyst at Morningstar Inc., said in a note to
clients on Friday. "This type of scale provides Blackstone with
deep insight into the market, letting it put more capital to
work."
Blackstone, formed as a small advisory shop for corporate
mergers and acquisitions three decades ago, has become enthralled
with property. Real estate is the single largest profit generator
for the firm, bringing in $1.9 billion of income in 2014 from
investment returns and management fees.
The business has grown rapidly under Mr. Gray, aided by its
relatively strong performance during the downturn, in part because
it sold a lot of property just before the real-estate market turned
and pumped in more money at its nadir. Given his record, Mr. Gray
is seen by observers as an eventual prospect to become chief
executive.
The GE deal comes just a few weeks after Blackstone finished
fundraising for its $14.5 billion flagship property fund, the
largest closed-end fund ever raised for real estate. Blackstone
also raised the second-, third- and fourth-largest funds, according
to industry tracker Preqin. Its closest private-equity competitors
include Carlyle Group LP and KKR & Co., which also invest in
real estate, but nowhere near the scale of Blackstone.
Aiding the firm is its wealth of specialized funds formed in
recent years for property investments around the globe.
Blackstone is taking GE's $5.3 billion portfolio of office
buildings and other properties spread through the U.S. and Europe,
paid for with its flagship fund and a European fund. Those
properties include a heavy concentration of suburban office
buildings in Southern California, where Blackstone has been
focusing, as well as midsize office buildings in the Seattle area
and western Chicago suburbs.
In addition, of the $8.8 billion in property loans Blackstone is
buying from GE, the firm's real-estate-focused debt fund is taking
$4.2 billion of the loans, while Blackstone Mortgage Trust, a
publicly traded company that Blackstone restructured in 2013, is
buying $4.6 billion of the loans.
The remaining $9 billion in loans will go to Wells Fargo.
Blackstone turned to the San Francisco-based bank, the largest
commercial-property lender in the U.S., soon after meeting with GE,
said people familiar with the deal. Wells has been eager to expand
in the industry and is helping to finance some of Blackstone's
purchase.
A decade ago, the landscape was more diverse, filled with
investment banks such as Morgan Stanley and Goldman Sachs Group
Inc. But they pulled back after their property investments plunged
in value in the downturn and regulators imposed tighter capital
rules on real estate.
Today, Blackstone's competition comes mainly from companies such
as Brookfield Asset Management Inc., a Toronto property giant that
often joins with pension and sovereign-wealth funds for major
deals, as it did in its recent buyout the Canary Wharf office
district in London when it teamed with a Qatari fund.
Publicly traded real-estate investment trusts, too, have a great
deal of firepower, including giants like Simon Property Group Inc.,
which recently tried to buy one of its largest competitors for more
than $16 billion.
"If you are so much bigger than everyone else, you can really
just write a check even with no financing to just make something
happen," Steve Schwarzman, Blackstone's chief executive, said at a
December investor conference. "If you're having a dialogue with a
financial institution, it's almost like, 'Tell us how much you want
to sell, we'll give you a price.'"
Real estate is inherently cyclical, and as the size of
Blackstone's bets grows, observers wonder whether it can keep up
its strong record in the next down cycle. In addition, Blackstone's
size doesn't mean it can always buy properties at bargain-basement
prices, however. The GE deal appears pricier than Blackstone's
standard fare, at least by a commonly used measure, meaning it
could be harder than usual to churn out profit or more likely to
bring a loss if the market turns.
The annual income on the properties Blackstone is buying is
about 6% of the purchase price, according to multiple people
familiar with the deal. Typically, Blackstone targets investments
with higher annual yields often running at least 7%--before taking
on debt--but the strengthening real-estate market has made such
deals harder to come by. As with bonds, prices of commercial
real-estate deals fall as their yields rise.
The firm saw opportunity in the relatively high level of vacancy
in the portfolio, which is more than 20%, as well as the vast size,
according to a person familiar with the deal. Blackstone's
shareholders appeared pleased with the deal. Its stock rose 2% on
Friday to close at a record $40.02 a share.
Ryan Dezember contributed to this article.
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