Blackstone to Close $20 Billion Real Estate Fund in Q1 2019
January 16, 2019 | James Sprow | Blue Vault
The Wall Street Journal reported on January 15 that Blackstone Group LP is about to finish raising $20 billion in the largest-ever real estate fund. The fund has raised more than twice the amount of capital as any fund ever raised by a competitor, by sourcing U.S. and foreign pension funds, foreign government and high-net-worth individuals, according to Preqin.
According to the article by Peter Grant, “The record size reflects both the New York firm’s history of double-digit returns and a herd effect, where pension-fund managers and other big investors tend to favor the same brand names with established track records.”
Taking into account Blackstone’s typical use of leverage, the fund’s buying power may be closer to $60 billion. “That $60 billion is more than the total value of all the commercial property purchased in New York, Chicago and San Francisco in the first 11 months of 2018, according to Real Capital Analytics.”
According to the firm’s filings, its “opportunistic” real estate funds take higher risks and deliver higher annual average net returns of 16%, placing them above the large majority of their peers over the past 27 years.
Size has its challenges, as it can be difficult to build a real estate portfolio that large without making larger scale acquisitions. Blackstone has acquired 11 public companies in the last 24 months including Gramercy Property Trust for $7.6 billion and BioMed Realty Trust for about $8 billion. The company has also “combined smaller deals into one large company, as it did when it combined over 50 European warehouse purchases into one company, named Logicor, which it sold in 2017,” according to the WSJ article.
“Blackstone’s fundraising success comes as peers struggled to raise funds. Last year, real-estate funds world-wide raised only $118 billion, the smallest amount since 2013, according to Preqin.”
According to the WSJ, Blackstone execs cannot discuss strategies for its fund while the offering period is open.
“In November, Blackstone executives told the New Mexico Investment Council, an investor in the new fund, that it was looking at distribution centers near population centers that are seeing high demand thanks to the spike in online retail.”
Skeptics who comment on the article on the WSJ website mention that the fund is a private fund and that Blackstone stands to collect at a minimum approximately $270 million in annual management fees. They also cite the fund’s targeting of last-mile distribution centers that have seen high demand due to the rise of online retail as an example of chasing assets that “everyone else wants.”
Blackstone’s Nontraded REIT
Blackstone Real Estate Income Trust, a nontraded REIT program that broke escrow on January 1, 2017, has raised an estimated $2.9 billion in 2018 and over $4.5 billion since inception, through December 2018. The REIT’s capital raise has dominated the nontraded REIT sector, with a capital raise market share in excess of 60%. The REIT’s portfolio was diversified (by fair value as of September 30, 2018) across multifamily (56%), industrial (31%), retail (2%) and hospitality (11%) properties. The REIT had acquired 351 properties with a total purchase price of $9.6 billion. It also held a portfolio of real estate-related securities with a fair value of $2.0 billion as of September 30, 2018, all with maturity dates beyond 2023.
The nontraded REIT pays its Adviser a management fee equal to 1.25% of NAV per annum, payable monthly. There are also “Performance Participation Allocations” equal to 12.5% of the total return, subject to a 5% hurdle rate, payable annually and accrued monthly. The management fee for the nine months ended September 30, 2018, was $28.1 million, and for Q3 2018 it totaled $11.8 million.
The REIT’s four common share classes had estimated net asset values ranging from $11.27 for Class S shares to $10.86 for Class I shares. Estimated net asset values are published monthly. Class S shares had an initial offering price of $10.00 per share as of January 2017, and paid $0.5356 in distributions per share in 2018. A shareholder who paid the estimated $10.52 NAV on December 31, 2017, would have an estimated rate of return of approximately 8.6% for 2018. By comparison, total returns for listed equity REITs over the same time period were negative 4.0% according to the FTSE Nareit All Equity REITs Index. It’s important to note that the estimated NAV’s per share are based upon independent annual appraisals of the REIT’s properties, and according to the REIT’s offering prospectus “the appraisal of properties is inherently subjective and our NAV may not accurately reflect the actual price at which our properties could be liquidated…”
About Blackstone Group
As of September 30, 2018, Blackstone had $457 billion in assets under management, of which $119.9 billion was in real estate equity and debt, making it one of the world’s largest real estate investors. The firm has nearly 2,500 employees in 23 offices worldwide. The firm was founded in 1985 by Stephen A. Schwarzman and Peter G. Peterson.
Sources: WSJ, S&P Global, FTSE Russell, Blue Vault, Blackstone
Learn more about Blackstone Group LP on the Blue Vault Investment Manager page
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