How Blackstone Made $7B+ on an Office Portfolio 👉 Plus a peek at their current investments!

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Today’s Snapshot:

In 2007, Blackstone bought one of the world’s largest real estate portfolios for $39B. While those holding large office portfolios right now are getting crushed, Blackstone recently announced they now have less than 2% office exposure. Not only that, they exited that portfolio asset by asset with $7B in profit! Today’s newsletter breaks down how Blackstone paid a premium for an office portfolio and unloaded before the “office apocalypse”, profiting 9 figures along the way.

The story of Sam Zell’s Equity Office Properties (EOP) REIT sale to Blackstone for $39B is often reported as a huge win for Sam Zell.

And it was!

But that wasn’t the end of the story…

Back in 2006, Sam Zell believed the office market was overheated and started looking at offers from major players like Vornado, Brookfield, and Blackstone.

Zell has said, “every day you choose to hold an asset, you are choosing to buy it”. His belief is that if you wouldn’t buy today, then you shouldn’t hold it in your portfolio.

For 30 years, Zell built built up a private office portfolio, took it public, and in doing so created the largest REIT with over 500 office assets in key markets across the US.

Since Zell’s EOP was a publicly traded company, his opportunities were limited. They couldn’t sell more than 10% of their assets in one year, and doing that would certainly spook the market.

In 2007, after a bidding war, Blackstone made an offer too good for Zell to pass up, 25% over market cap, at $55.50 per share, nearly $39B.

Many praised Zell’s market timing and the ability to sell at a premium in what was likely the market peak.

For Blackstone, paying a premium to the market at the peak would seem like poor market timing.

However, Blackstone had its own tricks up its sleeve.

Jonathan Gray, who had started at Blackstone as a fresh grad at the age of 22, was now leading the real estate division. With this transaction, he was leading one of the largest portfolio acquisitions of all time.

Fun fact: Blackstone also made another huge private equity deal in 2007, under Jonathan Gray’s real estate division, buying the Hilton brand for $26B.

Blackstone saw value in the deal that Zell and EOP were not able to extract.

As Blackstone was a private company, they didn’t have the restrictions in selling assets, and were able to trade freely. They saw the arbitrage opportunity in the market to buy the portfolio and sell off the assets.

They were also able to line up sales prior to their acquisition that would allow them to lower their debt right from the start.

Here are some highlights from their 2007 transactions:

• Macklowe Properties purchased 8 offices in the portfolio for $7B

• Morgan Stanley acquired part of the San Francisco portfolio for $2.8B

• Beacon Properties acquired Seattle and Washington DC assets for $6.35B

By the end of 2007, Blackstone had sold around 70% of the portfolio!

In 2019, they sold the final asset, 100 Summer St, in Boston, for $800M.

Here’s how the deal broke down:

Blackstone put up $3.2B in equity, or 8.3% of the total $38.7B acquisition. That’s less equity (%) than you’d need for a regular downpayment on a home, and they had tremendous upside!

Blackstone Equity: $3.2B

Equity Bridge Loan: $3.5B

Debt: $32B

Total Acquisition: $38.7B

Total Sale Amount: $46B

Profit: $7.3B

While we are glossing over transaction costs and all of the cash flow from the portfolio, this is a simple way to breakdown the overall structure and outcome of the deal.

What’s more amazing, after buying this 500+ office building portfolio in 2007, Blackstone was able to completely exit the portfolio, with most assets sold before the Great Recession in 2008, and all assets sold before the 2020 pandemic and office meltdown.

Blackstone has recently stated that their office exposure is less than 2%, down from 60% office in 2007!

It’s almost like they have a crystal ball… 🔮

Since Blackstone has "predicted the future” time and again, let’s look at their current strategy, to see where the world’s largest alternative asset manager is parking its capital.

Turns out, they recently raised the world's largest fund, with $30.4B committed.

They have stated that they are shifting the portfolio “away from assets facing headwinds such as traditional office and malls” and they are around 80% concentrated in the following:

• logistics

• rental housing

• hospitality

• lab office

• data centers

With Blackstone’s track record, I certainly wouldn’t bet against their current fund strategy and will take a closer look in future newsletters.

That’s all for today.

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