Published February 13, 2013
Much of Blackstone Group LP's vast U.S. real estate holdings may be bought by, or turned into, real estate investment trusts over the next couple of years, the head of the private equity group's global real estate division said on Wednesday.
Jonathan Gray said U.S. capital markets, particularly the bond market, has opened its arms to real estate investment trusts, making it likely that much of its U.S. holdings of offices, homes and hotels will be bought by existing REITs or become REITs though initial public offerings.
"I think much of what we own will end up in the public markets," Gray said while speaking at the Credit Suisse Financial Services Forum in Miami.
Gray said the U.S. debt market, which provides loans that make it possible to finance real estate purchases, are improving. If this continues, Blackstone will sell much of its real estate held in funds in 2013 and 2014, he said.
Blackstone has a simple "buy-fix-sell" real estate investment philosophy, Gray said. Through its funds, it buys properties at a discount and below the cost of replacing them with new construction. It fixes them up, increases occupancy and sells them to investors looking for stable cash flows.
Blackstone, which took office companies Equity Office Properties Trust private in 2007 and Trizec the year before, said now that many of the office buildings are at least 90 percent occupies, it may pick up the sales of its properties.
"If the market stays conducive, I would expect to see the acceleration of sales," he said.
Some of those properties could end up in the hands of large U.S. REITs, which often buy well leased properties with stable incomes. Sovereign wealth funds, looking for safe investments abroad, may be the buyers of its shopping centers and office buildings in dense urban markets, such as New York, he said.
As for its large Hilton Worldwide Inc, which the company took private in 2007, Gray said the company may become a publicly traded REIT in a year or two. Blackstone has expanded Hilton overseas in the past five years, increasing the number of hotel rooms abroad to 70,000 from 5,000 and adding such brands as DoubleTree by Hilton and Hilton Garden Inn Hotels.
"The potential to grow the brand outside the U.S. is enormous," he said.
For the past two years, Blackstone has been buying thousands of foreclosed homes at deep discounts in places such as Florida, Arizona and California, where the housing bust was particularly severe. It has invested about 10 percent of the purchase price to fix them. It has teamed up with Dallas-based Riverstone Residential Group, an apartment management company to oversee them. But home prices are appreciating quickly in some of those markets, and Blackstone may soon stop buying them.
"For us, we think the investment window is this year," he said.
Gray said that the single-family-home-for-rent business may lend itself very well to eventually becoming a REIT.
Blackstone recently finished raising a $13.3 billion global real estate fund. Outside the United States, Blackstone is spending a fair amount of time in Europe, where banks have 2.4 trillion euros on their balance sheets, making its real estate loans up for sale very cheap, Gray said.
"We're buying now from Spanish banks, Italian banks... the Irish, they're going to come out of the crisis first," he said.
Blackstone is also active in India, where the demographic growth is fueling the demand for office buildings and other real estate.
(Reporting by Ilaina Jonas; Editing by Phil Berlowitz and Andrew Hay)