Blackstone Seeks To Capitalize on Market Weakness, Even as Profit Falls

CoStar News – Blackstone Group, billed as the world’s largest commercial property owner, posted lower third-quarter profit as values of its private equity and opportunistic real estate funds fell. But the firm said it can capitalize on a negative global economic outlook and other market wildcards by using some of the $182 billion it has yet to spend.

Third-quarter net income attributable to Blackstone, which also calls itself the biggest alternative asset manager, fell to $2.3 million from $1.4 billion a year earlier, the New York-based firm said Thursday. The value of its opportunistic real estate fund dipped 0.6%, compared with a 20.1% increase in the past 12 months, while its private equity businesses’ value fell compared with gains in the past 12 months. Blackstone’s private equity investments include such businesses as the Bumble dating website and Ancestry digital family history service.

The drop in those values and profit provide a glimpse into the state of the commercial real estate amid interest rate increases, relatively high inflation and concerns about a potential recession. Blackstone said it’s positioned well in part because of the $182 billion of what it calls “total dry powder,” or undrawn capital, that allows it to capitalize on an environment in which funding is getting tight, Jonathan Gray, Blackstone’s president and chief operating officer, said on a conference call.

“We have the ability to take advantage of dislocations,” he said.

For instance, with deal-making slowing as banks seek clarity on interest rates before they lend money and underwrite loans, Blackstone has opportunities to lend money in areas including a transition to green energy that Gray said could demand trillions of dollars in capital.

There were bright spots in its financial results: Among the segments that saw fund appreciation or higher gross returns, the value of its core-plus real estate fund, including properties that it holds on a long-term basis, rose 2.3%, even though the increase is also much slower than the 19.3% average rate in the past 12 months. Blackstone’s hedge fund and credit and insurance businesses also saw higher returns.

“Inflation, interest rate, slowing economy, combined with geopolitical [uncertainty] have created an extremely difficult environment,” Blackstone Chairman and CEO Stephen Schwarzman said on the call. The market is facing “one of the most difficult periods in decades.”

Fee Earnings Rise

Even so, “against the challenging backdrop,” he said Blackstone still outperformed the broader markets. Its fee-related earnings rose 51% to $1.2 billion, for instance. Total assets under management climbed 30% to a record $951 billion. Blackstone had $45 billion of inflows in the third quarter and $183 billion year to date.

“Our firm has prospered across many cycles the last 37 years,” Schwarzman said, adding Blackstone is “closing in” on $1 trillion of assets under management. We’ll “deploy capital at attractive prices. … Even though the investment climate is challenging, we have the confidence and resources. … We have no intention of slowing down.”

With inflation at a four-decade high, he said Blackstone will better weather the market environment as some 80% of its real estate portfolio is focused on sectors, including logistics, rental housing, life science and hotels, where he said “rents are growing above inflation.”

On the private equity front, travel and leisure investments “bode well for” Blackstone, Gray said.

Blackstone said on its website it expects to benefit from the “ongoing boom” in personal and business travel as the sector recovers from the fallout of the pandemic. Its travel investments include Extended Stay America and Applegreen, one of the world’s largest motorway service area operators, with over 150 motor service areas across Ireland, the United Kingdom and the United States.

“We will see a [market] slowdown,” Gray said. “It’s inevitable. … There’s a slowing coming here. … Something all companies have to think about is how severe it is?” Still, he said the current market environment is “much better” than the “global economic” climate during the Great Recession in 2008 and 2009.

Potential Opportunities

Meanwhile, Blackstone’s credit business, with big exposure to floating-rate debt, benefits in an economy with higher interest rates, he said.

As Europe faces an “inflation challenge driven by their energy challenge,” central banks need to raise interest rates further.

Blackstone has potential buying opportunities down the road in the “travel, technology, logistics and infrastructure” sectors, when pricing becomes “more attractive,” he said.

“We’ll be busy in Europe in the next few years,” he said on the call. “When there’s a period of dislocation, we find opportunities.”

Those opportunities may also include taking private some publicly traded real estate investment trusts as their stocks slumped in contrast to their business growth.

“It does create opportunities,” Gray said. The logistics space, for instance, has had a “phenomenal performance,” but investors don’t appreciate that, he said.