“It’s a great time to sell,” mused Anthony Breault, senior real estate investment officer at Oregon’s state pension fund.
And Blackstone Group, the world’s largest “alternative investment” firm, is doing exactly that, feverishly, relentlessly, hand over fist, at peak valuations, cashing out, maximizing its profits. That’s how capitalism is supposed to work.
On the front burner: Brixmor Property, a REIT that owns 522 shopping centers, mostly neighborhood affairs anchored by grocery stores. Its IPO just priced at $20 a share, valuing it at about $6 billion – almost six times 2012 revenues of $1.17 billion. It starts trading on Wednesday. Blackstone will still own 73% of the common stock after the IPO, so the shares need to do well for a while before it can sell them. But it won’t be easy: last year, the REIT lost $61.4 million.
Another crown jewel Blackstone is selling: Hilton Hotels, which filed for a “much anticipated IPO” in September, as the Wall Street Journal called it in its way of hyping IPOs. It could be the largest real-estate IPO this year, and the largest hotel IPO ever. The roadshow might begin early December. Blackstone acquired it in 2007 with over $26 billion in debt. Its shares will be dumped at a hilariously inflated price while the Fed is still printing $85 billion a month to make that feat possible.
Next is La Quinta. Blackstone has already received a number of bids for the hotel chain, with a final round of bids expected in the next few weeks – though it might still get rid of it through an IPO if it brings more money that way.
Then there is Extended Stay America, now getting groomed to be slipped into your portfolio as well. One heck of a double-dip saga. Blackstone first bought it in 2004 for $3.1 billion, most of it funded with debt. In June 2007, at the peak of the prior credit bubble, Blackstone sold that over-indebted jewel for $8 billion. The buyer, Lightstone, had obtained $7.4 billion in funding from Wachovia, Bear Stearns, Citi, and other luminaries. The leveraged lending market had gone completely haywire.
With impeccable timing – because the smart money really knows what it is doing – the deal closed five days before Citi launched the roadshow for Blackstone’s own IPO. The $2.1 billion in “profits” from the sale became an inducement to buy into Blackstone’s IPO.
In June 2009, exactly two years later, Extended Stay filed for bankruptcy. Much of its toxic debt was shuffled from the collapsing banks to the Fed and ended up saddling all Americans with Blackstone’s detritus.
In May 2010, when Extended Stay was discharged from bankruptcy, the new owner was, you guessed it, Blackstone in partnership with John Paulson’s hedge fund, this time for $4 billion. Once again with nearly free money from the Fed, they leveraged it up to the hilt. And now, at the peak of the current credit bubble, Blackstone is dying to unload it, but this time via an IPO because they can get even more money for this jewel
Blackstone has more jewels in its crown that it’s getting ready to sell, including IndCor Properties, a warehouse REIT, and Invitation Homes, the platform Blackstone created that maniacally gobbled up 40,000 single-family homes – inflating home prices along the way – and then tried to rent them out. They might head for your portfolio early next year.
Blackstone isn’t the only seller. So far this year, there have been 14 real-estate IPOs, including the Empire State Realty Trust Inc., owner of the Empire State Building, and American Homes 4 Rent. But since May, REITs have hit rough water. Worst loser: since its IPO in May, Ellington Residential Mortgage REIT is down 18%.
So 2013 is shaping up to be a huge year for sellers: “Property-related IPOs, including REITs, real estate operating companies and mortgage trusts, have had their biggest year since 2004 by money raised,” Bloomberg reported, based on data it compiled.
Stephen Schwarzman, Chairman and CEO of Blackstone, didn’t make a secret of it during the earnings call on October 17: “So we’re moving into a cycle now … where the potential – nothing’s guaranteed obviously – is very high for large amounts of realizations and consequent gains,” he explained. But he preemptively denied that any of this “greater realization activity” would indicate “that markets have peaked.” No way. “Some people always think we’re just smart sellers,” he said. “It’s not the case.”
Which brings to mind Blackstone’s Extended Stay saga.
Slightly higher interest rates, slightly less abundant liquidity, or an economy that might sink slightly deeper into its quagmire would pose serious risks to these highly leveraged projects. So the pressure is on for the Fed to keep the bubble going long enough to let the “smart sellers” unload their remaining shares at peak valuations and slip them surreptitiously via conservative-sounding mutual funds or ETFs into the portfolios, retirement funds, and 401(k)s of the working folks.
And the Fed, perhaps seeing its handiwork incomplete with this many IPOs and so much smart money up in the air, decided to abandon its taper considerations in September. It might keep printing money until the great rotation from private equity and hedge funds to retail investors and retirement funds has been accomplished. Once tucked away in these portfolios – we’ve seen how that worked in 2000 and 2007 – some stocks will decompose slowly, others will blow up rapidly, which is not to say that there might not actually be a winner in that group that will make patient investors some money years down the road. That one stock will then be held up as example of why all of this always works out if you just hang on to it long enough.
“Real bubble-like markets” is what Laurence Fink, CEO of the world’s largest asset manager BlackRock called it today. He blamed the Fed. “It’s imperative that the Fed begins to taper,” he said. He referred to the “huge increase in the equity market,” with the S&P 500 soaring 25% so far this year while the economy languishes, while job creation is lousy and consumer spending feeble, while corporate revenue growth has trouble keeping up with inflation, and while earnings growth is stagnating. But if the Fed does taper, it will create a vicious downdraft for those folks who unwittingly ended up buying from the “smart sellers” at the peak of the market.