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AMERICAS NEWS: Mass(ive) deployment

Blackstone’s $10.9 billion mega fund is roughly 90 percent invested in the wake of its $9.4bn acquisition of Centro Properties’ US assets. Was the mega deal evidence of a rush to close the fund or Blackstone simply exerting its unrivalled equity muscle yet again? PERE magazine April 2011 issue

When The Blackstone Group closed the $9.4 billion deal to acquire the US assets of troubled Australian shopping centre company, Centro Properties Group, it ranked among the firm’s largest real estate equity investments ever made.

Alongside Hilton Hotels and Equity Office Properties, Centro represented a multi-billion dollar equity commitment for the New York-based giant and its $10.9 billion Blackstone Real Estate Partners (BREP) VI fund.

For Blackstone, the Centro transaction was typical of many of its recent deals – large, complex workouts, not for the faint of heart. However, in acquiring Centro’s 588 shopping centres for a 1.3 percent discount to its 2010 year-end book value, questions immediately were raised about whether Blackstone had not only overpaid for the retail portfolio but also whether the firm was rushing to close BREP VI in anticipation of launching a follow-on vehicle.

Having invested $4.5 billion of equity across its real estate funds over the past 15 months, Blackstone undoubtedly has been one of the most active private equity real estate firms globally in the wake of the credit crisis. Indeed, just days before final bids were submitted for the Centro portfolio on 24 February, president and chief operating officer Tony James revealed on an earnings call that Blackstone was eyeing its next global fundraise amid expectations BREP VI would be fully invested “within a deal or two.”

With Fund VI now standing at roughly 90 percent invested post-Centro, according to people familiar with the matter, the prospects of a BREP VII fund launch could come sooner rather than later.

However, arguing that BREP VI is suffering from a case of “rushed deployment” is somewhat disingenuous to the alternatives firm. Bolstered by $10.9 billion of equity, BREP VI started investing in February 2007 with a large chunk of the fund’s capital deployed on partial interests in two of Blackstone’s largest property transactions ever, the $39 billion Equity Office Properties acquisition and the $26 billion privatisation of Hilton Hotels. BREP VI is understood to have invested approximately $1.5 billion of the total $3.3 billion of equity committed to the Equity Office deal, alongside BREP V, according to fund documents from high-net-worth advisory firm Lane Financial. A similar situation occurred with the Hilton Hotels transaction, with Blackstone splitting the $3.7 billion equity investment in the hotel group across BREP V, BREP VI and BREP International II, according to SEC filings.

Come 2008 and 2009, however, Blackstone’s real estate team significantly scaled back its dealmaking, investing just $968.7 million and $884.2 million per year, respectively, for all the firm’s property funds – a roughly 90 percent decrease over 2007 levels.

Heading into 2010, with $6.2 billion of dry powder in BREP VI alone, the firm was therefore well-positioned to act decisively, even aggressively, when opportunities emerged. And emerge they did. Today, BREP VI includes such deals as the £1.07 billion (€1.23 billion; $1.75 billion) investment to acquire a 50 percent interest in British Land’s Broadgate complex in London (ultimately split between BREP VI and Blackstone Real Estate Partners Europe III); an interest in the $2.7 billion deal to buy Anheuser-Busch InBev’s 10 Busch Gardens theme parks; the $3.9 billion recapitalisation of bankrupt hotel chain Extended Stay along with Centerbridge Properties and Paulson & Co., in which BREP VI invested $556 million; a $500 million equity investment in the Brookfield Asset Management-led recapitalisation of retail REIT General Growth Properties; and the $1.15 billion venture with Emeritus Senior Living and Columbia Pacific Advisors to acquire 134 senior housing facilities from bankrupt operator Sunwest Enterprise.

Just like the Centro acquisition, the focus of many of Blackstone’s deals has been to target leveraged public companies, as well as bankruptcy and distressed debt situations. However, what makes BREP VI unique to many of its peer group funds is the ability to take down some of the largest deals without the need for co-investment capital.

In the case of Centro, Blackstone fought off competition from two rival groups of investors – a consortium of Morgan Stanley Real Estate Investing and Starwood Capital Group and a partnership between NRDC Equity Partners and AREA Property Partners. Bidding $9.4 billion against rival offers in the mid-$8 billion range certainly helped Blackstone to secure the deal, but it also was selected in part because of the certainty of closure, as well as a negotiated contract and financing already in place, one person familiar with the matter said. As a result, the firm will invest billions of dollars from BREP VI, with the transaction representing a bigger share of the fund than Equity Office, and possibly even Hilton.

Although the price has been described as towards the “high end” by people close to the situation, even rivals conceded that Centro could be a “very good deal” or it simply just wouldn’t matter. “You will either make this into an $11 billion or $12 billion company or you will lose money,” a senior executive, who declined to be named, told PERE. “Whether you overpaid by $300 million, $400 million or $500 million isn’t going to matter as it’s a win or lose situation.”

For many of BREP VI’s deals, the key ultimately has to be scale – or at least the ability to achieve scale. In February, Blackstone acquired a majority stake in San Diego’s historic Hotel del Coronado in return for a cash infusion that that will reduce the hotel’s debt load by about a third. That deal followed Blackstone’s purchase in December of $18 million of junior mezzanine debt secured by the property for roughly 50 cents on the dollar.

Faced with a maturity deadline of January 2011, Blackstone started negotiations with the owners, a venture between Strategic Hotels, KSL Resorts and Kohlberg Kravis Roberts. According to sources, Blackstone was willing either to be taken out of its position or write a $580 million cheque then and there to pay down the property’s $580 million of senior and mezzanine debt. The firm ended up writing a cheque for $100 million, taking a 60 percent stake in the hotel alongside Strategic Hotels & Resorts, which continues as the hotel’s asset manager and will have a 34.3 percent interest, and KSL Resorts, the hotel’s operator, which holds a 5.7 percent stake.

“This is not Blackstone rushing to invest capital as it is wanting to do larger deals because it is more effective for them to put out $100 million than $25 million,” said a real estate consultant. Citing such deals as the recent Hilton debt restructuring, which saw lenders cut $4 billion of debt at the hotel chain, the executive added: “Is [Blackstone’s] value attributable to them getting people to write down debt and close deals like this? Yes, and that’s to Blackstone’s credit.”