Blackstone's Gray Says REIT Buyouts Loom Amid Bearish Market

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  • Real estate chief sees `disconnect' in stocks and asset values
  • Private equity firm recently agreed to buy Strategic Hotels

Stock investors are too bearish on U.S. real estate, and the market’s decline probably will lead to more takeovers of publicly traded landlords, along with asset sales, said Jon Gray, global head of real estate at Blackstone Group LP, the largest private equity investor in property worldwide.

“There’s a disconnect, and that creates opportunity,” Gray said Thursday at a conference sponsored by the Pension Real Estate Association in San Francisco. The three-day event is taking place at the Westin St. Francis hotel on Union Square, one of 17 high-end urban and resort properties owned by Strategic Hotels & Resorts Inc., which Blackstone has agreed to buy in a $6 billion deal.

Real estate investment trusts are trading at discounts to the values of their properties on the private markets, enabling buyers such as Blackstone to sell off individual assets and reap gains that could exceed what they’re paying for the whole companies. In addition to Strategic Hotels, Blackstone is interested in buying BioMed Realty Trust Inc., a San Diego-based REIT that rents office and laboratory space to biotechnology companies, people with knowledge of the situation have said.

In addition to more REITs being taken private, Gray said he expects additional asset sales similar to a Macerich Co. plan, announced Wednesday, to sell stakes in eight malls for $2.3 billion to fund a special dividend, share buybacks and debt reduction.

The Bloomberg REIT index has fallen almost 7 percent this year, about the same as the Standard & Poor’s 500 Index. Blackstone’s shares are down more than 27 percent from their record close of $43.96 in May, hovering around their 2007 initial public offering price of $31.

Property Yields

Commercial property is still favored by many investors for its yields and perceived safety amid volatility in global markets. A slowdown in the Chinese economy and related plunge in commodity prices cut almost $11 trillion of value from global shares in the third quarter.

Blackstone’s returns from real estate are likely to moderate given that property values have rebounded from the distressed levels of three to four years ago, Gray said. “It’s hard to envision” investment yields going lower with U.S. interest rates poised to rise, he said. At the same time, “we don’t see a recession” coming in the U.S., he said.

Blackstone still plans to take its U.S. single-family rental landlord, Invitation Homes, public, Gray said.

“The business is working,” he said.

Hotel Stakes

Publicly traded hotel companies have been among the hardest hit during the market slump of the last several months. Blackstone’s holdings include stakes in La Quinta Holdings Inc., Extended Stay America Inc. and Hilton Worldwide Holdings Inc.

“The U.S. lodging cycle still has room to run,” Gray said.

While Blackstone might sell properties from Strategic Hotels, the market isn’t as frenzied as it was when the private equity firm bought Equity Office in 2007 and immediately flipped many of its assets to pay down debt. “Selling assets is always an opportunity,” Gray said, without specifying any properties.

Blackstone looked at investing in property types such as self-storage units and data centers and “mostly passed,” Gray said. Cellular-communications towers, on the other hand, “would have been great,” he said, and passing on some of those asset types “was a mistake.” American Tower Corp., a REIT that owns wireless communications and broadcast towers in the U.S., is the second-largest company in Bloomberg’s REIT index, with a stock-market value of $37.3 billion.

Tax Reform

During his talk, moderated by Bloomberg Television’s Betty Liu, Gray also addressed questions about management succession at Blackstone and the fees charged by private equity firms. Gray, 45, who has been with Blackstone since graduating college, often has been cited as a likely candidate to run the firm some day.

“I love what I do” and expect to continue “for a long time,” said Gray. “The status quo stays” with Blackstone’s leadership.

While “looking at corporate tax reform is a very good idea,” it’s unfair to target one industry, such as private equity, Gray said. Blackstone’s investors “are willing to pay our fees,” he said, adding, as attendees laughed, that “some clients want to pay us less.” Blackstone has delivered profits to its investors, in contrast to managers who lost money, Gray said.

“Our best defense is to continue to deliver for our investors,” he said.

(Updates with comments from Gray starting in first paragraph.)
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