Blackstone Group, with real estate assets that have surpassed $100 billion, is considering tapping individual investors as it expands its push into owning high-quality buildings with steady income streams.
"The prospects for growth in that business are huge," Chairman and Chief Executive Officer Steve Schwarzman said on the company's first-quarter earnings conference call Thursday. "At some point as we move into the retail chain of distribution with this, we should be able to create a really very large-scale business."
Blackstone, which under real estate chief Jon Gray became the world's biggest private equity property investor, is building up its bets on core real estate: high-quality, well-located properties that typically carry less risk than the firm's traditional focus of debt-laden, often distressed, investments. Schwarzman said in 2014 that the firm's core property holdings could reach $100 billion in 10 years. The company's investor capital under management for all real estate surpassed that mark for the first time in the first quarter.
Blackstone pursues what it calls a core-plus strategy — buildings that might require light renovation or leasing work to boost values. The firm last year led the $5.3 billion purchase of Manhattan's Stuyvesant Town-Peter Cooper Village apartment complex with its U.S. core-plus fund formed in 2014, Blackstone Property Partners. Core-plus outperformed all the firm’s other real estate vehicles last year.
Schwarzman's comments suggest individual investors may be able to put money in core-plus real estate through a new investment pool, such as a real estate investment trust. Blackstone Property Partners currently is an open-end fund available to institutional investors. The firm also invests in core-plus through separately managed accounts with institutional clients in Europe and Asia.
"Real estate core-plus is now $12 billion in only about two years with terrific returns so far," Schwarzman said. "I have extremely ambitious objectives for this area, which is actually about four times the size of the opportunity funds set, as an industry."
Schwarzman said the firm can have "major increases" in profits in the core-plus area. One of the advantages of having an open fund for core-plus is being able to hold investments in near-perpetuity, bolstering assets under management and eliminating the pressure to sell investments that exists in finite-term, closed-end private equity funds.
"The power of this business is holding the assets forever," Blackstone President Tony James said on the call. Typical private equity funds have three to four years to invest the money, then have to sell the investments and return capital to investors.
"The traditional draw-down funds are such treadmills," James said. "This, you don't have to do that, so it just layers and layers and layers and continues to grow AUM."
Blackstone's core-plus investments appreciated 18% to 19% last year, the most of any of its real estate funds, and gained 4.4% in the first quarter, James said.
Blackstone executives said they don't expect those high returns to be sustained. Debt on core-plus investments is limited to 50% and the return targets are lower than in riskier real estate deals, at closer to 10% to 12% rather than 15% to 20%.
The recovery in the equity markets has helped Blackstone sell investments this year, Chief Financial Officer Michael Chae said on the call. He said demand for high-quality real estate is "strong" in private sales, too, as exemplified by the firm's recent $6.5 billion agreement to sell Strategic Hotels & Resorts to China's Anbang Insurance Group Co.
"We have a comprehensive disposition plan for the year and quite an attractive pipeline of potential monetization opportunities around the world," Chae said.
