INREV conference: Blackstone boss reveals secrets of success

Blackstone’s focus on buying ‘hard’ real estate assets below replacement costs is one of the key factors behind its success, the US company’s global head of real estate Jon Gray told the INREV annual conference in Barcelona on Wednesday.

‘At some time the economy will turn,’ Gray noted during an interview with Johan van der Ende from Advisory and Supervisory Activities. He advised investment managers not to get caught up in consensus discussions either at the top or the bottom of the market. ‘If you wait for an asset class to become fashionable, it will be too late.’

Blackstone's formula, Gray said, was to buy very good real estate, fix it and sell it. ‘We also have a great management team that is able to identify transactions, manage them and execute them.’

In 2007, the US alternative assets giant made two mammoth - and daring - acquisitions in the US including the purchase of Chicago-based Equity Office Properties for $23 bn plus the assumption of $16 bn in debt. That deal was sealed in February of that year. A few months later in July, Blackstone swooped again in the US to buy Hilton Hotels Corp. in a $26 bn all-cash deal (including debt) that propelled Blackstone into the world's largest hotel owner.

Asked to revisit the EOP and Hilton deals, Gray agreed that they were both closed during a period that US REITs were trading at an all-time high. But, he argued, Blackstone made the acquisitions at a significant discount to the prices that they were trading at the time. ‘Operating at a really big scale also gave us a better price,’ he added.

Both deals subsequently took Blackstone on a ‘bit of a wild ride’ following the outbreak of the global financial crisis. ‘But,’ Gray added, ‘they both worked out nicely. I would do them both again.’ Blackstone pulled off a paper profit of $12 bn just four years after the Hilton deal.

In July 2007, hotels in the US were trading at 20-25 times cash flow whereas Blackstone acquired the Hilton group for just 13 times its cash flow, Gray pointed out. Moreover, the Beverley Hills-based group not only included the Hilton chain but some other hotel brands as well, he added. ‘It was not the most financially rigorous company, but it was a fundamentally good business. We brought in the right capital structure and reinvested during the downturn. That has paid off, especially in the context of the times.'