Blackstone's real estate arm fell to $309 billion as Jon Gray raised cap rates

Blackstone's real estate business ended September with $309.0 billion under management, down 4% from $320.5 billion a year earlier, according to the firm's Oct. 22 earnings release ^[1]. Its opportunistic BREP funds lost 3.2% of their value in the quarter, and The Real Deal reported that it was the only Blackstone strategy to decline ^[1][2].

President Jon Gray told analysts that Blackstone “increased valuation cap rates across our holdings” after base rates went up ^[2]. Chairman and CEO Stephen Schwarzman described the quarter as strong “amid a volatile external environment” ^[1].

Opportunistic funds lost value while core-plus funds gained

Blackstone's core-plus funds, which own steadier income properties, gained 1.6% in the quarter, while BREP was down 4.0% over 12 months ^[1].

Fee-related earnings in the real estate segment fell 9% to $499.2 million, and the segment's distributable earnings fell 10% to $553.7 million ^[1].

Blackstone took in $6.3 billion and has $37.7 billion of BREP capital to spend

Real estate inflows were $6.3 billion in the quarter, including $1.3 billion raised for BREIT and $2.3 billion for BREDS, the real estate debt business, mostly from insurance accounts ^[1]. The segment invested $6.1 billion and returned $7.0 billion to investors through realizations ^[1].

Across all BREP funds, Blackstone reported $37.7 billion of available capital on Sept. 30, including $20.1 billion in its global funds ^[1]. BREIT, the firm's $57.7 billion non-traded REIT, is covered in our look at non-traded REIT raises ^[1].

New leaders run the group, and a new feeder is on file

Nadeem Meghji, who joined Blackstone in 2008 and ran global real estate, has left, as reported in September, and David Levine and Giovanni Cutaia took his place, Commercial Observer reported ^[3]. Gray said the business has “an enormous amount of continuity and tremendous talent,” as quoted in the report ^[3].

Cutaia is one of 22 executive officers named on a Form D filed Oct. 30 for Blackstone Property Partners Feeder Vehicle, which reported no sales and no fixed offering size ^[4]. A separate Blackstone Residential Mortgage Loan Fund amended its Form D on Oct. 8, still with $0 sold ^[5].

How to use this

For investors in Blackstone's private real estate funds

1. Ask your adviser for the cap rate assumptions behind your fund's latest valuation, since Gray said Blackstone raised them across its holdings this quarter ^[2]. We calculate that a BREP position worth $1 million at the start of July would have been marked at about $968,000 on Sept. 30 after the 3.2% decline ^[1], before distributions.
2. Compare the strategy you own with the one you are being offered. Core-plus gained 4.3% over 12 months while BREP lost 4.0% ^[1], a gap of 8.3 percentage points by our math.
3. Request the feeder's own fee schedule before you invest through one. The BPP feeder's Form D names its general partner and officers but lists no fees or offering size ^[4].

For owners and developers selling to large funds

1. Expect bids underwritten at higher cap rates than in the spring, because Blackstone raised its own valuation cap rates in the third quarter ^[2]. On a building with $1 million of net operating income, we calculate that moving the cap rate from 5.5% to 5.75% lowers its value from about $18.18 million to $17.39 million.
2. Bring finished, leased product to buyers that still have capital to place. Blackstone reported $37.7 billion of uncalled BREP capital on Sept. 30 and invested $6.1 billion in real estate during the quarter ^[1].

For lenders

1. Plan for competition from fund-backed lenders on larger loans. BREDS took in $2.3 billion last quarter, mostly from insurance separately managed accounts ^[1].