Blackstone Group LP expects to make at least a threefold return from its $39 billion buyout of Equity Office Properties Trust, the 2007 deal that came to symbolize the boom and bust in the U.S. commercial real estate market.
“Our investors are going to make more than three times their money,” Jonathan Gray, global head of real estate at the New York-based private equity firm, said at a talk Thursday evening at Georgetown University’s McDonough School of Business in Washington. While real estate investment trusts haven’t rebounded to their 2007 peak, “our investors did well.”
The purchase of Sam Zell’s Equity Office -- at the time the biggest office landlord in the U.S. -- was the first in a series of milestone deals that established Blackstone as the biggest private equity investor in real estate. The firm followed that same year with the $26 billion takeover of what’s now Hilton Worldwide Holdings Inc., which became the most profitable private equity purchase on record.
This month, Blackstone agreed to buy most of General Electric Co.’s real estate holdings in a $23 billion deal with Wells Fargo & Co. that’s the largest property transaction since the financial crisis.
Blackstone has been gradually unwinding its Equity Office holdings as real estate markets rebound from the 2008 crash. The largest recent transaction was in December, when the company agreed to sell 26 properties in Northern California to Hudson Pacific Properties Inc. for $3.5 billion. Blackstone still holds about 10 million square feet (930,000 square meters) of Equity Office buildings, mainly in West Los Angeles and Boston, that the firm has said it expects to sell by the end of the year.
When Blackstone bought Equity Office, the REIT was trading at a discount to private-market valuations based on cash flow, said Gray, 45. Amid a bidding war with Vornado Realty Trust, Blackstone negotiated agreements to sell hundreds of Equity Office’s more than 500 properties before completing its purchase, to reduce the firm’s cost. Cheap financing from the securitized mortgage market fueled a frenzy of deal making at the time.
The Equity Office transactions included the $7 billion sale of seven Manhattan office buildings to developer Harry Macklowe, and properties sold to a company led by Los Angeles investor Robert Maguire, both of whom foundered when credit markets seized up and they couldn’t refinance.
Blackstone hired Eastdil Secured LLC, the real estate investment banking unit of Wells Fargo, to broker those sales. Roy March, chief executive officer of Eastdil, moderated Gray’s talk Thursday.
“What looked like a very aggressive thing we did, buying $39 billion of real estate, thanks to Roy and his team, we had basically sold $30 billion of that, half of that $30 billion basically prior to closing, the rest within 60 days or so,” Gray told the gathering. “So we felt like we were match-funded and that the basis we kept in the remaining assets that we would end up holding through the storm, was reasonable.”
Equity Office and Hilton are Blackstone’s two largest deals ever by equity invested. Both were acquired when the market was frothy and both were marked down on paper after credit markets froze, Equity Office to about 65 cents on the dollar, and Hilton in 2009 to less than 30 cents on the dollar, Gray said.
Blackstone also has more than tripled its money in Hilton as the hotel market recovered and the company expanded globally. Hilton’s stock closed at $30.31 yesterday. Blackstone’s cost basis was about $8.60 a share, said Gray, whose firm still owns about 55 percent of the McLean, Virginia-based hotel company.
With Equity Office and Hilton, “one of the critical things we did was put in place capital structures that allowed these businesses to survive: five-, six-year terms on the debt, no amortization, mostly floating-rate debt in case the economy slowed down,” and no covenants on the debt, he said. Blackstone restructured the debt in both deals after putting in more money.
Blackstone manages about $93 billion of investor capital in its real estate unit. It recently raised more than $15 billion for the largest-ever closed-end private equity property fund.
The firm continues to make new U.S. office investments with potential for new leasing or other improvements, even as it sells the rest of Equity Office. In March, Blackstone agreed to pay $1.3 billion for Chicago’s Willis Tower, the building formerly known as the Sears Tower and the second-tallest skyscraper in the U.S. The company plans to upgrade the retail and observatory space, one of Chicago’s top tourist attractions.
“I grew up in Chicago so I always think of it as the Sears Tower,” said Gray, a native of the city’s Highland Park suburb.
“I gotta tell you, of anything I’ve done, my mom is most proud of this transaction,” he said, to laughter from the crowd. “All her friends called and e-mailed about that.”
Blackstone also has made a big push into distressed commercial and residential assets in Europe after prices fell and lending dried up, Gray said. The firm’s investments there include a “significant bet” on Spanish housing in expectations of a recovery, he said.
“We’ve bought now over $30 billion of properties, invested $11 or $12 billion of equity in Europe in the last three and a half years during a period most people were waiting for the all-clear sign,” Gray said.
Blackstone has also built the largest house-rental business in the U.S. with its Invitation Homes division. That company owns about 50,000 properties and may be ready for an initial public offering in the next two years, Gray said.
“I would guess at some point in the next 12 or 24 months, we’ll have a business that can come public,” he said. “I think public-market investors will like it, but the jury’s still out and there are still plenty of skeptics.”
Georgetown’s McDonough School on Thursday opened the Steers Center for Global Real Estate, with a $10 million donation from Robert Steers, chief executive officer and co-founder of investment firm Cohen & Steers Inc., and his wife, Lauren. The Steers Center will provide career planning for students.
“No one was asking me to do panels in 2009,” when Equity Office and Hilton looked like money losers, Gray said.
“You were doing funerals,” joked March.