Blackstone’s apartment deal has only so much room

Apartment Income REIT

09/04/2024 13:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Jonathan Guilford
       NEW YORK, April 8 (Reuters Breakingviews) - Blackstone
 BX.N  President Jon Gray last month talked up capitalizing on
the moment in real estate. On Monday, he put the idea into
action: His investment firm unveiled a plan to buy Apartment
Income REIT  AIRC.N , or AIR Communities, and its 27,000 rental
units for $10 billion. Deep pockets and good timing won’t be
enough this time around, however. 
    The deal for AIR, which oversees luxe buildings in Boston,
Miami and elsewhere, will be done from Blackstone’s tenth Real
Estate Partners fund, the largest of its kind when it closed
last year. With some $30 billion, it’s understandable why Gray –
who used to run the firm’s property investing worldwide – would
be itchy. 
    He’s wary of being too cautious, but there’s also a risk of
moving too quickly. Apartment construction has been hot, with
new supply depressing rents in cities like Austin, Texas.
Interest rates also are elevated, and their path hazy. Expecting
borrowing costs to fall or incomes to rise, and getting it
wrong, is a dangerous game. 
    New apartment developments are at least easing, even as
completions rise for now. AIR offers some protection because
it’s harder to build in markets where it operates. Rent growth
in Boston and Washington, D.C. is among the nation’s fastest,
property data outfit CoStar reckons. AIR tenants, with median
household earnings of $170,000, are at less risk from economic
ructions. And the company’s 2023 net operating growth in
buildings it had owned the previous year hit 9.3%, above the 5%
industry average, according to credit rating agency S&P Global. 
    The price tag looks reasonable, too. At about 5.7%, the
capitalization rate, or operating income divided by valuation,
indicates Blackstone is paying slightly under the odds for each
dollar of income.
    If benchmark interest rates fall, and cap rates come down
with them, Blackstone essentially makes a buck automatically.
But the situation is different than when the firm gobbled up
foreclosed houses after the financial crisis and more than
doubled its money. Those Invitation Homes residences needed more
capital, but interest rates were low and stable. Money and
courage were the essential ingredients then. 
    Blackstone has plenty of both. The AIR deal alone costs four
times more than was spent by all buyers taking real estate
investment trusts private last year. But it’s also already a
well-run company and today’s economic variables are shakier.
Gray, of course, knows about weathering surprises. He led the
firm’s debt-larded acquisition of hotel chain Hilton Worldwide
 HLT.N  for $26 billion in 2007. After the investment was
written down by 70%, it later turned into one of the most
profitable private equity paydays ever. Those skills may come in
handy again.
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    CONTEXT NEWS
    Buyout firm Blackstone said on April 8 that it had agreed to
acquire Apartment Income REIT, or AIR Communities, for $10
billion, including debt, in an all-cash transaction. 


   
    

 (Editing by Jeffrey Goldfarb and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
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Jonathan.Guilford@thomsonreuters.com; Reuters Messaging:
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