Blackstone’s Gray expects ‘new cycle’ for real estate market

Blackstone president Jon Gray. — Bloomberg

BLACKSTONE Inc president Jon Gray says that the world’s largest alternative asset manager is ready to pounce on a pickup in property markets.

“The cost of capital has begun to decline, which should be further helped by Federal Reserve rate cuts later this year,” he tells Wall Street analysts after the firm reported its second-quarter results.

This shift will set the foundation for “a new cycle of increasing values in real estate.”

Blackstone’s earnings were weighed down by mixed real estate results, as elevated interest rates crimped returns and investors pumped less money into the business.

The firm – which is the world’s largest owner of commercial estate – slowed the pace of real estate exits. Profit gains in credit and private equity weren’t enough to offset the drag on fee-related earnings, which fell 3% to US$1.11bil, New York-based Blackstone said in a statement.

Still, distributable earnings, or profit available to shareholders, increased 3% from a year earlier to US$1.25bil, or 96 US cents a share. That was two US cents shy of the average estimate of analysts surveyed by Bloomberg.

The firm confronted a spike in redemptions in the last two weeks of May after a real estate investment trust of rival Starwood Capital Group dramatically limited investors’ ability to cash out.

Blackstone’s US$57bil real estate investment trust (BREIT) held off on restricting outflows for two consecutive months even though withdrawal requests hit levels that would have allowed it.

In June, BREIT investors requested 50% less in redemptions than they did in May. The firm deployed nearly US$15bil in the first six months in real estate bets, some two-and-a-half times that of the first half last year.

The worst is over for the real estate market, with the exception of offices, Gray says in an interview. He says declining borrowing costs and a booming market for commercial mortgage-backed securities are fuelling deals.

Uncertainty about the November US election is unlikely to hamper dealmaking, according to Gray.

Blackstone, the world’s largest alternative-asset manager, is now a US$1.08 trillion financial superstore. It’s a buyout giant, a lender and a heavyweight investor across hedge fund strategies.

The firm’s private equity arm took in new inflows from its first fund for wealthy individuals during the second quarter, and grew fee-related earnings 1%. Distributable earnings climbed 16%.

Blackstone’s credit financiers delivered the biggest gains. At the credit arm, fee earnings rose 29% and distributable earnings surged 51% as it took in higher flows and cashed out of more bets.

The firm has set its sights on more than doubling its credit assets to $1 trillion in a decade.

Blackstone ploughed US$33.7bil into a variety of new investments during the second quarter, a 73% increase from a year earlier. It also committed an additional US$19.1bil to deals.

The firm says on the analyst call that executives expect “a material step-up” of fee-related earnings at year-end. That’s when key funds start generating full management fees or are poised to take their share of profits. — Bloomberg